International Coordination

International coordination can enhance the impact of fiscal packages. OECD simulations (Table 5 [ PDF 31.1KB | 1 page ]) indicate that a coordinated fiscal stimulus within the OECD area would have a larger impact on growth than any single country measure. Similar results can be found in IMF (2009). These results are not surprising. Given the generalized and large drop in demand on a global scale, an “international multiplier” is likely to be (possibly significantly) larger than any single country open economy multiplier. The global crisis has, in its initial and most acute phase, greatly reinforced international cooperation efforts. The issue, however, is whether incentives for cooperation in fiscal policy will remain strong enough to take full advantage of the benefits of coordination and to what extent such incentives will fade away once the pressure of the emergency disappears.

For a given “pressure to cooperate” coming from the global environment, national attitudes towards cooperation will vary according to a number of factors. Smaller, more open economies, as well as those with smaller fiscal space, will have fewer incentives to pursue expansionary policies and will tend to free ride on the action of larger countries. The latter, on the other hand, may be reluctant to expand if there is insufficient cooperation and burden sharing. Regional agreements may incorporate explicit or implicit incentives to cooperate. Trade and investment integration, which leads to the development of global value chains, may increase the incentives to cooperate. Different incentives may also be a reflection of differences in long-term growth mechanisms. Countries that are largely relying on export driven growth could face smaller incentives to expand domestically. Consequently, the fiscal response to the crisis also raises the issue of the appropriate international governance of national fiscal policies.

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