Dani Rodrik's weblog

The world of finance, briefly explained

From Michael Lewis' captivating essay on Iceland's financial collapse:

You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.

Getting the global stimulus numbers right

Sameer Khatiwada, a former student, writes in response to this, and it is worth highlighting it:

We at the International Labour Organization (ILO) have been keeping track of the stimulus efforts of 40 countries (including the G20) for our annual report and other work. While I agree with most of Gallagher's conclusions, there are factual inaccuracies in their work. Here is my quick response (I also posted comments on your blog):

1) The global fiscal stimulus effort as a percentage of GDP is 3.16 percent of the world GDP, not 5.5 percent. Our number is based on 30 countries that have announced stimulus packages. For your reference, I have attached a word file with two tables.

2) The BU spreadsheet has one main problem: it mixes fiscal and financial stimulus for several countries like Russia, Saudi Arabia, and South Africa and does not mix the two types of efforts (only reports fiscal package) for countries like the US and the UK. Moreover, comparing the US and UK plan of $787 billion and £25.6 billion (fiscal only) respectively to Gallagher's numbers (that combine financial and fiscal) for countries like Russia and South Africa and other developing countries, is like comparing apples and oranges.

3) The best way to keep track of stimulus efforts is to track financial efforts (bank injections, buying assets, loan guarantees etc.) separately from fiscal efforts (public spending on goods and services, tax cuts, spending etc.). We have done this and hence avoided confusions and mis-representations.

Briefly about our ongoing work on the rescue efforts: we have divided government efforts into financial, monetary, and fiscal. We talk at length about each efforts, but focussing more on fiscal efforts. We compare fiscal and financial efforts (quantitatively and qualitatively). Furthermore, we look at the labour market efforts (active and passive measures) by different countries in response to the crisis. Lastly, we have put together country boxes for the G20 that go into the details of each country's fiscal efforts.    

I agree that it is absolutely essential to separate the financial packages from the fiscal ones.  The former are essentially asset swaps, the spending effects of which, if any, are indirect.  The fiscal packages, meanwhile, are intended to spur spending directly.