Saturday, November 29, 2008

Who ultimately benefits from local fiscal stimuli?

Many governments are coming to realize that the most effective way to get their respective economies moving again is through a fiscal stimulus. With monetary policies and various central bank actions still proving insufficient in jumpstarting capital markets and inducing consumer spending, the only clear government action left is through fiscal action.

Fiscal stimuli can take many forms: tax refunds, transfer payments to consumers (stimulus checks), or direct subsidies to retailers.

There’s just one thing I am wondering about now. There is no denying that world is now more inter-linked and inter-dependent now than ever before. Global trade is deeper now than the last time a major economic stimulus was taken on the scale necessary today.

Given this, just how much of a local stimulus is likely to trickle away to a nation’s top trading partners. In other words, if the US undertakes a huge fiscal stimulus, so as to induce local consumers to consume, who are going to be its direct beneficiaries?

Sure, the local US stores will benefit. The local logistics chains will also likely pick up business. But the ultimate beneficiaries will likely be the manufacturers and high value-added producers that produce the goods that the consumers will buy. These would come from the biggest net exporting nations to the US. In short, a big US fiscal stimulus will likely also pick up the economies of these fortunate nations.

Is this the reason the Harper government in Canada is waiting for the Obama government’s plan before deciding to undertake on its own stimulus? If it is, and the Harper solution is similar to the preferred solution of governments the world over, then we are only going to propagate the unsustainable balance of the US being the consumer of last resort while the rest of the world over-produces. We need to have a new focus of economic development. It is long over-due.

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