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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 aspects of the financial crisis and its impact on public debt

The global financial crisis once again brought fiscal policies and, more generally, the role of the State to the forefront of the economic policy debate. After many years of neoliberal policies oriented towards reducing the role of the State in economic management, governments in most countries came under pressure to undertake widespread and massive intervention to rescue the financial sector and compensate –at least partly – for the shrinking private demand. Previous obsessions with fiscal targets or balanced budgets were temporarily forgotten. Yet the virtually unanimous calls for public intervention started to subside when most countries returned to positive growth rates and their focus changed to the deterioration of fiscal deficits and public debt. Less than two years after the collapse of the large investment bank, Lehman Brothers, the financial markets came to view governments’ fiscal policy more as part of the problem than the solution.

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