Each country has designed its own package in accordance with its own fiscal conditions and the perceived and actual severity of the economic slowdown. China has had the largest package – benefiting from strong reserves and low debt, it was able to commit 13.3 per cent of GDP. India, on the other hand was fiscally more constrained so its efforts were on a smaller scale at about 3.5 per cent of the GDP. Since these packages are to be implemented over several years, however, even the apparently huge US and Chinese packages will amount only to 2 per cent of GDP per year. Having so many countries introduce such packages simultaneously should in principle deliver an economic boost to the whole world. But the global impact has to some extent been muted by protectionism. The bill authorizing the US package, for example, has a ‘buy American’ provision which stipulates that construction of public buildings and public works generally should use US iron, steel, and other manufactured goods – limiting the opportunities for global participation. France and Germany have taken a similar stance in their support for domestic auto industries. Estimating the multiplier effect The prime objective of the fiscal stimulus packages has been to restore economic growth. In Asia and the Pacific this has primarily meant compensating for the loss of export demand from the developed economies. What will be the effect? This will depend not just on the size of the packages but also on the ‘fiscal multipliers’ and the composition of stimulus measures. One of the key insights of British economist John Maynard Keynes was that government spending would not just create demand directly but also have a ‘multiplier effect’ – as workers employed on government projects, for example, in turn spent their income they would stimulate further demand which would ripple through the economy. Thus the impact of the initial stimulus could be multiplied two or three times. A more pessimistic view was that instead of triggering greater private expenditure, government spending would ‘crowd out’ private expenditure – in which case the multiplier might be much smaller, or even turn negative if government investment displaced a potentially larger volume of private investment.
There are two major techniques for estimating such multipliers. One, based on macroeconomic models, has concluded that multipliers tend to be higher in the short term than the long term. In Japan, for example, for the period 1977-1989, such modelling suggests that the short-term multiplier was 1.30 in the first year but dwindled to 0.86 in the third year perhaps because the crowding out effect became more significant later on (OECD, 2000). Another technique – using ‘reduced form equations’ – finds that the multipliers are smaller: one study has estimated that for US government spending in the post-war period the short-term multiplier was only 0.8. Another analysis for five OECD countries for the period of 1960-2000 concluded that the shortterm multipliers varied considerably from country to country – 1.3 in Germany but only 0.3 in Canada and the UK (Blanchard and Perotti, 2002) – and that in some cases they turned negative. The IMF (2009) provided a survey of fiscal multipliers for several countries based on past studies. The study indicated that the size of the fiscal multiplier is country-, time-, and circumstance-specific. According to the study a rule of thumb is a multiplier of 1.5 to 1 for spending multipliers in large countries, 1 to 0.5 for medium-sized countries, and 0.5 or less for small, open countries. The five crucial determinants of the fiscal multiplier are as follows: the size of the fiscal stimulus, its composition in terms of the balance between government expenditure and tax cuts, the magnitude of automatic stabilisers, the amount of fiscal space and the extent of taxation of the financial system, and the housing and equity markets (Chhibber and Palanivel, 2009). Government spending, which enters the economy straightaway, will tend to have a larger multiplier than tax cuts since the richer social groups may simply hoard the benefits of lower taxes by adding them to their savings. But there can also be differential impacts even within various forms of government expenditure. Investing in many large infrastructure projects, for example, takes time to organize so will benefit the economy only in the future. Another important consideration is whether the stimulus benefits primarily the rich or the poor. Expenditure for the poor is likely to kick in more quickly since the poor are likely to spend any income more vigorously. So a cash payment to poor
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ACHIEVING THE MILLENNIUM DEVELOPMENT GOALS IN AN ERA OF GLOBAL UNCERTAINTY : ASIA-PACIFIC REGIONAL REPORT