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Trade and Development Report 2011

Post-crisis Policy Challenges in the World Economy

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Reforms of financial regulations are progressing slowly and only at the national level, monetary system reform is limited. After an interlude that some considered as a return to Keynesianism, the orientation of macroeconomic policy, especially fiscal policy, is back to business as usual. This will hinder a sustained recovery of the world economy and open the door for new financial crises. Thus, the rethinking of policies and reshaping the financial and monetary system remain an urgent task. This publication makes concrete proposals on how, and in which priority areas, to advance with strengthening regulation of the financial sector and commodity markets, reform of the international monetary system, and the reorientation of fiscal policy.

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Fiscal space, debt sustainability and economic growth

The global financial and economic crisis has raised important macroeconomic policy issues concerning the appropriate fiscal response, and its size, composition and duration. After an initial wide consensus on the necessity of proactive macroeconomic policies to support demand, many policymakers have now shifted their focus from fiscal stimulus to fiscal tightening. The policy debate today is about what measures should be taken to achieve the widely agreed objectives of recovery from the crisis and an improvement in fiscal accounts, as well as the sequencing of those measures. The debate reflects, explicitly or implicitly, different views on economic mechanisms and the role of governments. One view is that the impact of fiscal policy tends to be weak or ineffective, based on the assumption that there is a trade-off between public and private expenditure. According to this view, the private sector will adjust its expenditure in a way that counterbalances any change in public sector action. Those who oppose this view maintain that fiscal policy is the most appropriate tool for pulling an economy out of recession.

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