March 18 (Reuters) - A Canadian discussion paper obtainedby Reuters outlined the following possibly scenarios for theworld economy, depending on whether countries push ahead with aframework of economic reforms agreed at the G20 summit meetingin Pittsburgh last year.
Scenario 1: A return to "business as usual", where we donot make significant changes to our current mix of policies,could create circumstances similar to those leading up to therecent crisis. While in the short run these policies wouldprovide a fiscal boost, they would not be sustainable over themedium and long term. Interest rates would begin to rise inresponse to the fiscal burden, crowding out private investmentand lowering potential growth. Global growth would fallsteadily to 2.7 percent in 2013, much less than the averagerate of 4 percent over 2002-07. More alarmingly, globalimbalances would increase at an explosive rate. These paths forpublic and external debt are clearly unsustainable and couldlead to another crisis. The message is clear: advancedcountries need to engage in fiscal consolidation over themedium term, but we also need the cooperation of emergingmarket economies to help rebalance global demand growth.
Scenario 2: Another scenario is where there is fiscalconsolidation in advanced countries, but emerging markets donot allow for greater exchange rate flexibility and fail to putin place reforms to increase their domestic demand. In such ascenario, a deflationary spiral sets in, as monetary policyremains constrained by the lower bound. By 2011, deflationwould occur in advanced countries, real interest rates wouldincrease sharply, and growth would stall. Global imbalanceswould effectively be eliminated, but at the cost of a prolongedworld recession.
Scenario 3: Implementation of the Framework is our bestchance for achieving a return to strong and sustained growth.However, to achieve a positive outcome on the Frameworkrequires both advanced and emerging economies to implement thepolicy changes necessary to rebalance global demand. In thisscenario, output growth would rise to 3.6 percent in 2010 and4.5 percent in 2011. Current account imbalances would stabilizeat low levels. These reforms will cover fiscal, monetary, tradeand structural policies. The labor, social and developmentdimensions will also be considered in our global growthstrategies. A successful Framework process should produceglobally coherent policy frameworks across the G20, and thusshould accelerate movement towards a more resilient andefficient international monetary system.
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