A cumulative debt of $9 trillion over the next decade might sound large (!), but servicing that represents a manageable 1 percent of gross domestic product (GDP), or 5 percent of federal revenue. The alternative solution of trying to balance the books was the very thing responsible for prolonging the misery of the 1930s Great Depression. Deficits, he writes, “saved the world” and argues that given the problem of mounting unemployment, Washington should be even bolder in spending its way to recovery.What is sauce for the goose, in this case, is not sauce for the gander. What works in America or in Western Europe will not work elsewhere. “Quantitative easing” is the comfortable euphemism the developed world has for spending what it does not have. Elsewhere it is called printing money and is looked on askance. If the world is to emerge from this recession, it is the consumers in the better-off parts of the globe who are being urged to spend, spend, spend. At the same time, those who were already the victims of rising commodity prices before the crisis hit are now tightening their belts. According to a World Bank estimate, lower growth rates in 2009 are expected to result in about 53 million fewer people escaping poverty (defined as earning less than $1.25 a day) in the developing world.
Not surprisingly when the World Bank and the International Monetary Fund (IMF) governors convene in İstanbul this October for the annual meetings, much of the discussion is going to be less than good humored. Many of those around the table believe they are grappling with the aftermath of a crisis of someone else's design. The developed nations that preached prudence and good governance instead designed a system to conceal extraordinary risk. The good habits they urged on the rest of the world are the very thing they neglected themselves.
This leaves the host nation in an ambivalent position. That such a prestigious meeting is happening in Istanbul is recognition of the city's emergence as a financial center. The last and only time the governors convened in the Turkey's commercial capital was in 1955, and a lot has happened since then. A nation that was on the fringe of the Western alliance is now at the center of interlocking zones. In more recent years Turkey became the poster boy for a successful IMF's intervention program. It is now being urged to go on a refresher course.
For the moment, Ankara is enjoying a period of grace. Interest rates and inflation are in decline despite a growing public deficit. But Turkey is not America. There, Krugman writes: Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don't seem to be worried about U.S. solvency.” The great fear is that markets will suddenly begin to suspect that Turkey is skating on not so thick ice. Regardless of whether governments sign up to a standby agreement or not, they will have to commit sooner or later a fiscal rule and reassure markets that the current deficit is under control. It is true, too, that the IMF is now more flexible in its lending criteria and has introduced a new facility (Flexible Credit Line or FCL) for countries with sound macro-indicators. A new program would act as an anchor for investors and would therefore be market friendly.
Yet the conventional wisdom is that until the government finds it difficult to borrow on the open market, it will be happy to entertain the IMF for a few days in October at a conference but will encourage it to pack its bags for Washington once the meeting is done.
