Keynesian multipliers and market economies with a human face

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Gearing up for the G20 summit on April 2, World Bank President Robert Zoellick made a speech this morning in London on the growth outlook for the developing world and what the G20 can do about it. Prospects look dim - newly released forecasts from the World Bank project growth of 2.1 percent in the developing world in 2009.

So what can be done about it? Among many other things, Zoellick has been calling for the creation of a Vulnerability Fund. Rich countries would place 0.7% of any stimulus package into this fund to support social safety net programs, infrastructure, SMEs, and the like in developing countries. This proposal has not gone without criticism - the most scathing (that I am aware of) comes from Bill Easterly:

President Zoellick does mention briefly the critical issue in both the NYT and FT: some “safeguards to ensure that the money is well spent,” which don’t currently exist. In the FT, he makes the inspirational call for an “Age of Responsibility,” but the Responsibility seems to apply only to rich donors, there is nothing about holding the World Bank responsible.

Something seems to be missing from the analysis of the aid critics, though. In rich countries, lengthy debates have been held over the question of Keynesian multipliers (see, for example, herehere and here). To put it very simply, will tax cuts be effective at stimulating the economy, or will frightened consumers and businesses simply save any tax windfalls? And if it's the latter, shouldn't the government step in as the consumer-of-last-resort? 

But the debate over the composition of stimulus packages in rich countries - tax cuts vs. increased government spending - seems to focus on something trivial in comparison to the difference in Keynesian multipliers between rich and poor countries. The poorest in the world simply aren't going to save any social safety net payments, which seems to me an additional big plus in support of a Vulnerability Fund.

In addition to reiterating his call for a Vulnerability Fund, Zoellick also called for "market economies with a human face." I think I understand what he is getting at, but the phrase made my stomach turn. Did no one tell him that the phrase comes from the Prague Spring - "socialism with a human face"? That one didn't end too well, with the Soviets rolling their tanks into Czechoslovakia shortly thereafter. Let's hope this call for a "human face" ends better than the last one.  


Ryan Hahn

Operations Officer

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