G R O U P of T W E N T Y
G-20 Summit of Leaders
November 11−12, 2010
Seoul, Korea

G-20 Mutual Assessment Process—IMF Staff Assessment of G-20 Policies

Prepared by Staff of the International Monetary FundI N T E R N A T I O N A L

M O N E T A R Y

F U N D

G-20 Mutual Assessment Process—IMF Staff Assessment of G-20 Policies1
October 2010
Executive Summary
Key Messages:
Progress is being made, but important policy challenges remain to meet the objectivesof strong, sustainable and balanced growth agreed by Leaders.



Growth outcomes based on revised G-20 frameworks are broadly aligned with theobjectives, but remain distinctly optimistic compared to past recoveries.



Limited progress is being made towards external rebalancing, with current accounts
expected to widen again towards pre-crisis levels.



Fiscal projections are broadly on track to meet Toronto commitments, but there are
significant risks to the envisaged consolidation if growth falters.

Further collective action focused on priority areas would raise growth, lower
unemployment and reduce poverty. Priority areas include: structural reforms andgreater exchange rate flexibility to strengthen internal demand in emerging economies;
further fiscal consolidation in advanced economies based on “growth-friendly”
measures; and product and labor market reforms across the membership to boost
productive capacity.

G-20 Policy Actions, Commitments, and Challenges


Financial policies have made progress, mainly at the national level. Remaining core policy
challenges center around: (i) fully repairing the damage inflicted by the crisis, including
through recapitalizing or resolving weak banks; (ii) better managing systemic risk,
including through wider national supervision and stronger international frameworks toaddress cross-border issues; and (iii) developing macroprudential tools and frameworks toaugment financial stability frameworks.



Fiscal policies appear broadly on track to meet the Toronto commitments, althoughmedium-term consolidation plans rely on relatively optimistic growth assumptions forsome countries. Policy challenges are to formulate clear, credible, and ambitious mediumterm plans underpinned by commitments in critical areas—including entitlement and tax
reforms that are supportive of growth.

Monetary and exchange rate policy challenges include normalizing the policy stance inadvanced economies over time while remaining sensitive to the strength and pace of

1

The report was produced by staff from the IMF’s Research Department, in cooperation with (and inputs from) the ILO,
OECD, UNCTAD, and WTO. The IMF team was led by Krishna Srinivasan and Hamid Faruqee and comprised of
Douglas Laxton, Emil Stavrev, Eric Bang, Mitali Das, Vladimir Klyuev, Mika Kortelainen, Susanna Mursula, David
Reichsfeld, Shaun Roache, and Stephen Snudden.

2
recovery. To facilitate external rebalancing, key emerging economies need to followthrough on commitments to increase exchange rate flexibility.


There has been only limited progress on structural policies. Major challenges remain todevelop more ambitious and detailed reform agendas with specific roadmaps; to target
deeper and broader product and labor market reforms that strengthen competition, or
enhance flexibility in key market segments in advanced economies; and to boost
infrastructure investment and strengthen social safety nets in emerging economies.

Global Developments through the Eyes of the G-20


Revised G-20 frameworks project “strong” growth over the medium term, accompanied bya sharp decline in unemployment. Growth appears to be “sustainable,” since it isincreasingly tied to a rapid pick-up in private demand. Growth is projected to be“balanced,” in the sense of being broad-based across the G-20 membership.

Growth and unemployment projections remain distinctly more optimistic than what past
recoveries suggest, although G-20 projections are more conservative than in the April
submissions, reflecting the moderate pace of the recovery and higher downside risks.



Improvements in fiscal positions are based on favorable growth and interest rate
projections, underscoring risk to the envisaged consolidation if growth falters. Little
external rebalancing is anticipated, with current account positions expected to widen.

G-20 Upside Potential
Joint action on three fronts—structural reforms and greater exchange rate flexibility to strengthen
demand in emerging economies; further fiscal consolidation through “growth-friendly” measures inadvanced economies to put public finances on a sustainable footing; and product and labor market
reforms to enhance supply potential across the membership—suggests significant upside potential.
G-20 policy action that is sequenced and timed accordingly would deliver substantially
improved outcomes for growth, employment, and poverty. Simulation results show:The negative impact of fiscal consolidation in advanced economies on global growth iscompensated by positive spillovers from reforms in emerging economies;World GDP would be higher by about 2 percent by 2014, equivalent to more than 1 trillion
dollars;

The more broadly-based boost to incomes—including in developing countries—would lift
an estimated 37 million people out of poverty based on World Bank analysis; andAn additional 25 million jobs would be created in the G-20.

Collaborative action is also highly beneficial to the G-20 membership because it avoids
substantial costs from a breakdown in policy cooperation. By averting adverse market reaction,
loss of policy credibility, and recourse to fragmented or “beggar-thy-neighbor” actions, policy
cooperation would prevent substantial welfare costs to the G-20.

3
I. INTRODUCTION
1.
Building on their success with collective action to avoid a deeper financial crisis,G-20 Leaders pledged to mutually assess and adopt policies that would ensure a lasting
recovery and a brighter economic future. To this end, they launched a “framework forstrong, sustainable, and balanced growth” at their 2009 Summit in Pittsburgh, where Leaders
committed to clarifying key objectives, elaborating policies aimed at meeting those objectives,and a mutual assessment process (MAP) to track progress. The Fund—with input from otherinternational institutions—was asked to assist in analyzing how their respective national andregional frameworks fit together, and to develop a forward-looking analysis of whether policies
pursued by individual G-20 members are collectively consistent with strong, sustainable, andbalanced trajectories for the global economy.
2.
At the G-20 Summit in Toronto in June 2010, Leaders took stock of progress with
the MAP exercise. They concluded that decisive and unprecedented actions by the G-20 had
limited the downturn and spurred recovery, but that serious challenges remained. Leaders
welcomed the actions taken thus far and commitments made by G-20 members aimed atboosting demand and rebalancing growth, strengthening public finances, and boosting thestrength and transparency of financial systems. At the same time, however, they underscoredthat more could be done collectively to raise incomes, create more jobs (in line with therecommendations of the G-20 Ministers of Labor and Employment), lift more people out ofpoverty, and significantly reduce global imbalances. To this end, Leaders committed to taking
further concerted policy actions, tailored to national circumstances, aimed at achieving the
growth objectives they had agreed in Pittsburgh.
3.
This report assesses policy progress by G-20 members since the Framework waslaunched at the Leaders Summit in Pittsburgh. Section II takes stock of all major policy
commitments and actions taken since September 2009 by G-20 members, aimed at meeting the
growth objectives agreed by Leaders. Section III discusses how the global economy mightevolve as envisaged by the revised G-20 projections taken collectively. Section IV examines
upside potential of G-20 policies from strengthened collaborative action through alternative
policy scenarios and discusses risks of insufficient policy cooperation.
II. STOCK-TAKING OF G-20 POLICY ACTIONS AND COMMITMENTS
Securing strong, sustainable, and balanced growth over the medium term rests on two
rebalancing acts—internal rebalancing in major advanced economies through strengthening
private demand and a gradual reduction of public support; and external rebalancing through ashift toward greater reliance on growth led by domestic demand in external surplus countries
and by external demand in deficit countries. Thus, policy challenges and priorities will differ
across the G-20 membership. Against this backdrop, a brief summary of key commitments andactions taken by the G-20 since the MAP Framework began is provided below, with relevant
details relegated to Appendix 1 in the background document. Remaining policy challenges are
summarized in Box II.1.

4
A. Financial Sector Policies
4.
The G-20 has made progress towards a reformed financial system, better alignedwith its growth objectives. There has been a particular focus on enhanced coordination at thenational and regional level, including by establishing or enhancing the role of financial stability
councils or committees. Many countries are also in the process of widening the regulatory
perimeter. Other areas of progress on regulation and supervision include commitments topublishing regular bank stress tests; enhanced oversight of credit rating agencies; and measures
aimed at regulating more closely the activities and compensatory practices of banks.
5.
Macroprudential frameworks to address systemic risk are being introduced, while
shortcomings in financial crisis management exposed during the crisis have begun to beaddressed. At the forefront of multilateral coordination across the G-20 has been theagreement on the Basel III framework. Basel III aims to establish new capital requirements andbuffers for banks, improve risk management and governance, and strengthen banks’transparency and disclosures. G-20 members have progressed with developing macroprudential
frameworks, and many have introduced macroprudential elements in their regulatory andsupervisory measures. A few members have prioritized the development of enhanced early
warning systems. Some have begun reviewing and improving their crisis management
capabilities, including through new institutional arrangements and specific facilities andinstruments. Frameworks to minimize damage from the failure of systemically-importantfinancial institutions have also been proposed and begun to be implemented in many G-20
economies.
6.
In some emerging economies, reforms have also been targeted at broadening anddeepening the financial sector’s capacity to support economic growth. Specific measures
have been proposed to improve the efficiency and competitiveness of the financial sector, as
well as to enhance the access to capital markets for SMEs. In advanced economies, financial
sector measures have been focused on easing SME access to credit.
7.
Overall, G-20 financial policies have made some progress—mainly, at the national
level—but substantial policy challenges remain. This includes the need for further efforts
aimed at: (i) repairing damage from the crisis, including through recapitalizing or resolving
weak banks; (ii) better managing systemic risk, including through wider national supervisionand stronger international frameworks to handle failing cross-border financial institutions; and(iii) developing macroprudential tools and mechanisms to augment financial stability
frameworks.
B. Fiscal Policies
8.
Fiscal consolidation is an essential part of internal rebalancing. At the Toronto
Summit, G-20 Leaders in advanced economies agreed to halve fiscal deficits by 2013 and tostabilize or reduce public debt by 2016. Overall, G-20 fiscal policies appear broadly on track tomeet the Toronto commitments, but medium-term consolidation plans for some countries rely

5
on relatively optimistic growth assumptions and very few countries have thus far articulated
credible plans underpinned by specific measures in key areas.
Responding to severe market pressure earlier this year, notably concerning sovereignrisks, some advanced deficit economies have announced or brought forward fiscal
consolidation plans.2 Plans differ across countries both in magnitude and pace ofadjustment, reflecting the strength of economic recovery, the amount of fiscal space,
and the reaction of markets to the strength of public balance sheets. In many cases,
consolidation plans are accompanied by measures to increase transparency of thebudget process.

Many advanced surplus economies have also announced consolidation plans, but thedegree of specificity in identifying measures vary significantly. In many countries,
fiscal consolidation over the medium-term is to be achieved through entitlement and tax
system reforms and “pay-go” principles. In some cases, new measures to bolster thecredibility of public finances have been established or planned, including mechanisms
to identify risks in federal and state budgets and to reform the fiscal framework.

Some emerging deficit economies have begun fiscal tightening and announced
medium-term consolidation plans. In many cases, the broad measures are dependent
upon the pace and durability of economic recovery, and consolidation plans lacksufficient specificity to anchor credibility. Large oil-exporting economies have also
committed to some consolidation, though budgets retain an emphasis on public
investment. In these economies, increased non-oil infrastructure spending is aimed atrelieving supply bottlenecks and sustaining growth with less dependence on oil prices.

9.
Notwithstanding progress, central policy challenges are to formulate clear,credible, and ambitious medium-term plans. Medium-term plans need to be underpinned by
specific commitments in critical areas—including entitlement and tax reforms that aresupportive of growth. Stronger governance and budgetary institutions in many cases would
strengthen such efforts, which will need to be sustained. Beyond the MAP framework, longterm fiscal plans to restore sustainability of public finances will be required to rebuild policy
space and to address long-run budgetary pressures.
C. Monetary and Exchange Rate Policies
10.
Short-run monetary accommodation and central bank interventions have been
critical for alleviating the financial crisis and the recession. Almost all advanced economies
have kept their target policy interest rates constant at highly accommodative levels since theLeaders Summit in Pittsburgh. Some major advanced economies have also provided support
2

To maintain comparability with the previous report, theme-based groups of G-20 members are as described in the Mutual
Assessment Process–Appendices to the Report.

6through an expansion of central bank balance sheets. Normalizing the monetary policy stanceover the medium term in major advanced economies, while remaining vigilant to potential
threats to price and financial stability, and greater exchange flexibility in emerging surplus
countries are important for rebalancing global demand and sustaining growth. Several smaller
advanced economies have started raising policy rates from the low levels, reflecting their leadrole in global economic recovery; and, in a few cases with signs of overheating, someemerging economies have tightened monetary policy.
11.
Exchange rate adjustment is instrumental for global rebalancing, and while someemerging surplus economies have made progress towards increased flexibility, major
surplus countries have intervened to limit appreciation.
Strong recoveries, declining absolute and relative risk aversion, and wide interest rate
differentials vis-à-vis advanced economies have put upward pressure on the currencies
of most emerging G-20 members. Many of these countries have allowed theircurrencies to appreciate substantially in nominal effective terms, but some major
emerging economies have intervened in foreign exchange markets and increased theirreserve holdings to limit the strengthening of their currencies.

Despite large exchange rate fluctuations, advanced economies have largely avoided
intervening in currency markets, but some have intervened more recently both to stem
disorderly movements of their currency and to limit a rapid appreciation.

12.
Overall, the stance of G-20 monetary policies remains broadly appropriate given
members’ circumstances, but greater exchange flexibility in major emerging economies isessential for meeting the growth objectives agreed by Leaders. Key policy challenges
remaining in advanced economies will be to normalize the accommodative policy stance overtime without jeopardizing economic recovery while remaining vigilant to potential threats tofinancial and price stability. Exchange rates in major emerging economies will need to be more
flexible to help facilitate global rebalancing toward stronger, sustainable, and more balanced
global growth.
D. Structural Policies
13.
G-20 members have taken some limited steps toward demand rebalancing throughstructural reform. Structural policies, including a reform of entitlements, investments ininfrastructure, and enhancing competition and flexibility, are important for both internal andexternal rebalancing. G-20 policy frameworks, however, suggest that only modest progress
will be made in this critical area.
Some advanced deficit economies are considering measures that would encourage andfacilitate saving for retirement, while several advanced surplus countries haveannounced plans to increase labor market flexibility, pension reforms, and greater
investment in “green” technology. However, most countries do not identify specificmeasures to anchor such reforms. Product and services market reforms to boost

7potential output are also being considered by several advanced G-20 economies,
although the scope of reforms appears to be relatively modest.


Emerging surplus economies are also making modest progress towards supporting
private consumption through structural reforms, aimed at improving social safety nets.
Investments in infrastructure, education, and R&D feature prominently in plans acrossemerging (and some advanced) economies. Many emerging economies are also
considering measures, mostly unspecified—for enhancing the business environment.

G-20 countries have broadly succeeded in avoiding recourse to protectionist trademeasures. There has been some slippage towards increased trade restrictions, targetedlargely at the weakest sectors and industries that were already relatively highly
protected before the crisis began.

Overall, G-20 structural policies have made limited progress thus far in specifying
concrete and far-reaching plans for key reforms. Major reform challenges include
developing a more ambitious and detailed policy agenda (aligned with strategic priorities) witha specific roadmap (e.g., timetables) for reform. Policy challenges would include deeper andbroader product and labor market reforms that strengthen competition, or enhance flexibility
and mobility in key markets segments in advanced economies; and strengthening infrastructure
investment and social safety nets in emerging economies. G-20 members must continue
to respect their Summit commitments to avoid protectionism and engage as soon as possible inphasing out new trade restrictions that some have introduced since 2008. Without a crediblerollback, there is a danger of an accumulation of trade restrictions that will work against theefforts of structural policies to enhance competition and flexibility.
14.

8
Box II. 1. Key Policy Challenges for the G-20
Notwithstanding progress already made, significant policy challenges remain for the G-20. Based on staff’s
stocktaking of main policy achievements since fall 2009, remaining priorities in each area are listed below.
Financial Policies
To repair fully the damage from the crisis and to better align global financial reforms with the medium-term
growth objectives of the G-20, key policy challenges include the following:Supervisory frameworks should be made more proactive to identify activities on the fringe of theregulatory perimeter and broadened to better monitor systemic risks.

Commitments to publish regular bank stress tests. Commitment to undertake regular bank stress tests
should be accompanied by commitments to publish the results, and to allow prudential authorities to proactively intervene, restructure, or resolve weak banks.



Reforming cross-border resolution frameworks to enhance international cooperation for resolution
large, cross-border firms and to reach an international agreement on principles for burden sharing.

Augment financial stability frameworks by developing macro-prudential tools to safeguard against
volatile financial market conditions, including the effects of net capital flows.

Fiscal Policies
To put public finances on a sustainable path, promote internal rebalancing, and rebuild policy space, G-20
members—particularly, advanced economies—face the following challenges:To outline clear and credible medium-term consolidation plans that are ambitious in scope and timing tominimize the risks of significant fiscal slippages going forward, and underpinned by key commitmentsTo emphasize specific growth friendly policy measures aimed at reforming rapidly growing public
spending programs and making tax reform more concrete to reduce uncertainty.

To implement rapidly measures aimed at strengthening fiscal institutions to enhance their credibility andimprove the budgetary processes and governance and better monitor fiscal developments.

To sustain the fiscal consolidation effort, notably by developing long-term budgetary plans.

Monetary and Exchange Rate Policies
Remaining policy challenges vary across the membership:
 To normalize over time the current accommodative monetary policy stance in major advanced
economies without jeopardizing economic recovery, while remaining vigilant to potential threats tofinancial and price stability.


To enhance greater enhance exchange rate flexibility in emerging surplus economies to facilitate global
demand rebalancing and paving the way for a healthier, sustained recovery.

Structural Policies
More ambitious structural reforms are required to repair damage to supply potential following the crisisand to reduce high unemployment. Specifically:For advanced deficit economies, specify concrete measures to encourage and facilitate saving for
retirement.

For advanced surplus economies, provide concrete and ambitious plans for labor, product, and services
market reforms with specific timeframes.

For emerging surplus expand coverage of social safety nets to reduce high precautionary saving.

In oil-exporting countries, plans and timetables to enhance the productivity of the non-oil sector, including
through infrastructure investment, should be more clearly identified.

9III. GLOBAL DEVELOPMENTS THROUGH THE EYES OF THE G-20
Revised G-20 frameworks project growth outcomes that are broadly aligned with medium-term
objectives, but external rebalancing is projected to be modest. Overall, reflecting the slowdown
in the recovery and the escalation of downside risks since the April G-20 submissions, growth
projections are modestly lower and external imbalances wider in the revised frameworks.3
Comparisons with past recoveries, however, indicate that growth projections remain fairly
optimistic, signifying a vulnerability to weaker growth outcomes.4 Downside risks haveintensified since Toronto. The recovery remains fragile and uneven across regions. In
particular, downside risks stem from still vulnerable financial systems and sovereign risks inmany advanced economies that could lead to adverse real-financial feedback loops,
persistently high unemployment, and protectionism and currency instability.
G-20 MAP: Unemployment Rates 1/

A. Analysis and Assessment of G-20 Projections
15.
Taken together, the revised G-20 frameworks
project “strong” growth over the medium-term,
accompanied by a sharp decline in unemployment. G-20
output growth is projected at 5 percent in 2014. Prospects
are strong in both advanced and emerging economies, albeit
with regional disparities. Consistent with strong growth,
medium-term output losses relative to pre-crisis trends areprojected to be modest. Strong projected growth isaccompanied by a rapid decline in unemployment. Afterpeaking in 2010, unemployment in the G-20 is expected toreturn to its pre-crisis average level by 2014.
16.
Growth appears to be “sustainable” over the
medium term, in the sense that output growth isincreasingly tied to growth in private demand. The
frameworks project steady progress toward internal demand
rebalancing in the G-20, with sustainability prospects
contingent on a strong “crowding-in” of private demand as
fiscal consolidation gets underway. In 2014, thedecomposition of GDP growth at 5 percent reflects private
consumption which accounts for more than 2½ percentage
points (slightly higher than the pre-crisis average) and gross9(Percent)
G-20
G-20 Adv.
G-20 Emg. 3/

G-20 Avg. 2/
G-20 Adv. Avg. 2/

8

7

6

5
05

06

07

08

09

10

11

12

13

14

Sources: G-20 authorities and IMF staff estimates.
1/ 2005-2008 reflects WEO data; 2009-2014 reflects
MAP estimates and projections.
2/ PPP weighted average annual rate for 1998 - 2007.
3/ Excludes India and South Africa due to data
unavailability.

G-20 MAP: G-20 Contribution to RealGDP Growth 1/ 2/(Percent: yoy)
Gross fixed investment
Private consumption
Residual

Net exports
Government spending
6
5
4
3
2
1
0
-1

GDP
growth

-2
-3

00

02

04

06

08

10

12

14

Sources: G-20 authorities and IMF staff estimates.
1/ 2000 - 2008 reflects WEO data; 2009 - 2014 reflects MAP
estimates and projections.
2/ Residual includes inventories and statistical discrepancy.

34

For comparison between the latest G-20 submissions and the April 2010 G-20 MAP base case, see Box III.1.

Some G-20 country submissions were incomplete or had missing data for later years. Forecasts in such cases
reflect staff’s projections, taking into account the authorities’ known policies.

10
fixed investment which accounts for 2 percentage points (higher than in any year in the last
decade).
Consistent with progress in internal demand rebalancing, fiscal deficits in the G-20 are
projected to fall significantly between 2010 and 2014. In advanced economies, fiscal
deficits are projected to improve by 5.1 percent of GDP, while emerging economies
foresee an improvement of 2.3 percent of GDP. The G-20 membership envisages anoverall decline of 1.8 percentage points in the gross debt-to-GDP ratio between 2010
and 2014.

Projected improvements in fiscal balances are broadly in line with Toronto
Commitments, where Leaders agreed to at least halve deficits by 2013 and stabilize or
reduce debt ratios by 2016 (see Box III.2).

17.
Growth is projected to be “balanced,” in thesense of being broad-based across the G-20
membership. The pace of recovery in emerging
economies will be faster initially than in advanced
economies, although the difference is projected tonarrow between 2010 and 2014. Also, the dispersion
across countries of growth relative to potential is
projected to gradually decrease through 2014, at whichtime most economies are projected to grow at or around
potential.

G-20 MAP: Difference of Real GDP
Growth from Potential Growth 1/(Percent, yoy)

4
2
0
-2
-4

Advanced deficit-6

Advanced surplus-8

Emerging deficit-10

Large oil exporters-12

Emerging surplus

-14
09

10

11

12

13

14

Sources: G-20 authorities and IMF staff estimates.
1/ MAP estimates and projections.

18.
External demand rebalancing is limited in G-20 projections, with current accountpositions expected to widen. After narrowing substantially in 2009, global imbalances are
expected to resume widening through 2014. In advanced deficit economies, current accountdeficit positions are expected to nearly double between 2009 and 2014; net exports areprojected to makeCurrent Account Balances 1/(Percent of World GDP)
increasingly negative
G-20 Large Oil Exporters
ROW Deficit
ROW Surplus
G-20 Deficit Emg
G-20 Deficit Adv
G-20 Surplus Emg
contributions to growthG-20 Surplus AdvWORLD SUM
G-20
3
between 2011 and 2013,2
before making a modest
1
turnaround in 2014.
0Emerging surplus-1
economies are projected-2
to progressively reduce
-3
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
dependence on external
Sources: G-20 authorities and IMF staff estimates.
1/ 2000-2008 reflects WEO data; 2009-2014 reflects MAP estimates and projections for G-20 countries and WEO projections
demand in 2010-2014,
for ROW.
with net exports making increasingly smaller positive contributions to growth, while current
account positions remain unchanged. However, by 2014 the net export contribution to growthis projected to be almost at the pre-crisis average.

11
B. Risk Analysis
19.
The recovery remains fragile and uneven across regions, and downside risks haverisen. Uncertainty remains high and downside risks to growth have intensified since Toronto.
The speed and strength of recovery differs in important ways across and within regions. Manyemerging and developing economies, hit less severely on the financial side, are again seeing
strong output and employment growth. By contrast, most advanced and a few emerging
economies are experiencing a sluggish recovery, soft private demand, and high unemployment.
Financial sector weaknesses remain largely unresolved, restraining credit provision. On
account of a still fragile financial system in many advanced economies, sovereign risks andbank funding tensions could lead to adverse real-financial feedback loops. Additional risks
stem from weak real estate markets coupled with high unemployment as well as financial andtrade protectionism and currency instability.
20.
Against this background, while revised G-20 frameworks project growth moreconservatively than previous estimates, forecasts still remain distinctly more optimistic
than what past recoveries would suggest.
In advanced economies, compared to the pre-crisis trend, the projected per capita
output loss by 2014 (estimated at 3.6 percent) is
G-20 MAP: G-20 Real GDP Growth(percent, yoy)modest, and compares favorably with staff
7
MAP
WEO 1/
estimates of a projected loss of nearly 7 percent.
6
Average 2/
Potential 3/
5
The projections suggest that country frameworks
4
assume the deleterious effects of lower capital,
3
productivity and employment on productive
2
capacity to be reversed much faster than in1
50
previous crises.
-1



-2
Strong growth projections underlie rapidly
05 06 07 08 09 10 11 12 13 14
declining unemployment. The rate at which
Sources: G-20 authorities and IMF staff estimates.
1/ 2005 - 2008 reflects historical data; 2009 - 2014
unemployment is projected to decline over thereflects estimates and projections.
2/ PPP weighted average annual growth for 1998 medium-term, conditional on the projected growth2007.
3/ G-20 authorities' estimates.
of output, implies a significantly faster pace thanstaff estimates of the historical elasticity of unemployment to output in recoveries,
particularly following financial crises, where studies indicate a protracted impact ofbank strains on hiring in employment-intensive sectors.

21.
The interplay of strong internal rebalancing envisaged in advanced economies andabsent external rebalancing poses risks that could undermine the sustainability and5

Staff studies have found that in recessions associated with financial stress, lower productivity, employment andcapital investment result, on average, in an output loss of 9 percent six years after the crisis, albeit with significant
dispersion across country episodes.

12balance of G-20 growth prospects. G-20 growth projections are underpinned by a strong“crowding in” of private demand as public demand is being reduced, but with little external
rebalancing.
There is a significant risk that internal rebalancing may not occur on the projectedscale. Notably if the rapid normalization of financial market conditions (and stronger
pick-up in credit growth) implicit in the G-20 projections fails to materialize, private
demand would be weaker. At the same time, there is also a risk that fiscal consolidation
could weigh on demand more heavily than projected, particularly if there is a rush to
the exits. Under either of these scenarios, a “demand deficit” could emerge, which will
undermine recovery prospects.

A “global demand deficit” could in principle be alleviated by a strong pick of domestic
demand in the emerging surplus economies. However, policies—including those on
exchange rates—that could strengthen domestic demand in emerging surplus
economies are not adequately spelled out in their policy frameworks or lack followthrough in terms of action.

22.
The envisaged fiscal consolidation could fall short of G-20 commitments if growth
falters. Improvements in fiscal positions are based in part on favorable growth and interest rate
projections. If private demand and growth are weaker than projected in G-20 frameworks,
fiscal outcomes could fall short of G-20 targets and undermine the sustainability of publicfinances, particularly in advanced deficit economies.
G-20 MAP and WEO Projections of Key Fiscal Variables(Percent of GDP; changes 2014-10)

Overall Balance

Government
Expenditure

Government
Revenue

Gross Debt

Interest
Payments

MAP

WEO

MAP

WEO

MAP

WEO

MAP

WEO

MAP

WEO

G-20

4.1

3.4

-3.1

-2.3

1.0

1.1

-1.9

1.3

0.4

0.6

Advanced
High debt
Low debt

5.3
5.4
3.2

4.1
4.2
2.7

-2.9
-2.8
-2.7

-1.7
-1.7
-1.8

2.4
2.5
0.5

2.4
2.6
0.9

5.2
6.1
-2.2

9.8
11.2
-3.8

1.0
1.1
0.2

1.0
1.1
-0.2

Emerging
High debt
Low debt

2.4
2.7
2.1

2.1
1.2
2.5

-2.1
-3.1
-1.5

-1.6
-1.0
-1.8

0.2
-0.4
0.6

0.5
0.2
0.7

-4.0
-9.2
-0.5

-2.5
-1.7
-2.0

-0.4
-0.9
0.0

0.2
0.8
0.0

Sources: G-20 authorities and IMF staff estimates.
1/ For the MAP computed as: Historic revenue-to-GDP ratio (5-year average)* (growth rate - potential growth rate); for WEO
computed as: (overall balance in 2014 - structural balance in 2014) - (overall balance in 2010 - structural balance in 2010).
Note: Group averages computed using PPP weights. High (low) debt advanced economies are those with public debt-to-GDP
ratios of more (less) than 60 percent in 2009 (based on WEO data from March 2010). High (low) debt emerging market
economies are those with public debt-to-GDP ratios of more (less) than 40 percent in 2009 (based on WEO data from March
2010).

13

Box III.1. Comparison of Revised and Initial Projections
In revised frameworks, G-20 members have lowered projections of growth. The majorityof G-20 members have revised growth forecasts downward in 2012-2014. Advanced deficit
economies, advanced
G-20 MAP cumulative difference in 2011 - 2014 1/
surplus economies, and(Annual percent change)
emerging deficit economies
Real GDP Growth
Real Potential Growth
have revised growth
-0.5
-0.4
G-20 2/significantly down over the
G-20 Advanced Surplus-0.5
0.0
G-20 Advanced Deficit
-0.7
-0.1
projection horizon, while
G-20 Emerging Surplus
-0.1
-0.1
growth in emerging surplus
G-20 Emerging Deficit
-0.5
-1.9
economies is broadly
Sources: G-20 authorities and IMF World Economic Outlook October 2010.
unchanged relative to the
1/ Difference between October and April MAP submissions by G-20 authorities.
2/ See Appendix III in April report for groupings.
April submission. Potential
growth assumptions remained largely unchanged, with the exception of emerging deficit
economies, where potential growth was revised significantly downwards.
Downward revisions to projected growth have been accompanied by downward revisions
in unemployment rates. While both advanced and emerging economies have revised growth
projections downward, both have also revised unemployment rates downward. This is true inmany, but not all, individual cases as well. A less optimistic growth outlook and a more
optimistic employment outlook are not necessarily incompatible. However, policy frameworks
have not adequately explained the basis for better projected labor market outcomes against thedeterioration in growth outcomes.
Revised frameworks project a stronger fiscal outlook in advanced economies over the
medium-term. On balance, relative to April, fiscal deficit projections in advanced economies
have improved, lead largely by advanced deficit economies. Despite lower growth projections,advanced high-debt economies foresee no change in the growth in revenues-to-GDP between
2010 and 2014. The fiscal outlook for emerging economies has also improved relative to April,while it has deteriorated significantly for large oil exporters.
Revised projections for current account balances include significant revisions inadvanced deficit and advanced surplus economies. Relative to April, in advanced deficit
economies, current account deficits are projected to become larger, by as much as
0.3 percentage point by 2014, while among emerging deficit economies current accountprojections remain broadly the same. Projections for current account positions in emerging
surplus economies are broadly unchanged, while current account projections for advanced
surplus economies have increased by about 0.3 percentage point during 2011-14. The overall
impact of these revisions is to leave the 2014 G-20 current account position unchanged fromthat in April.

14
Box III.2. New G-20 Fiscal Commitments
G-20 members have committed to explicit fiscal consolidation targets. From the Toronto
Summit Declaration of June 26-27, 2010, G-20 Leaders agreed to the following: “…advanced
economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilizeor reduce government debt-to-GDP ratios by 2016.” These consolidation plans would need tobe credible, clearly communicated to the public, andG-20 MAP: Fiscal Deficit
based on country-specific circumstances.1(Percent)
G-20 projected fiscal balances appear to be in linewith these commitments (see chart). Based on G-20
macroeconomic policy frameworks and projections, thetrajectory for fiscal deficits and debt appear to be broadly
in line with the Toronto benchmarks (see dashed lines).
Deficits are projected to decline to meet thesebenchmarks by 2013 for G-20 advanced deficit
countries. Compared to the previous policy stance (i.e.,
April G-20 “base case”) in the first phase of the MAP,
fiscal positions for G-20 advanced deficit economies arestrengthened slightly (blue versus red line).

G-20
G-20 Toronto 1/
G-20 Adv. deficit
G-20 Adv. deficit Toronto 1/
April G-20 Adv. deficit 2/

12
11
10
9
8
7
6
5
4
3
2
1
0
09

10

11

12

13

14

Sources: G-20 authorities and IMF staff estimates.
1/ Toronto Declaration of at least halving the 2010
deficit by 2013.
2/ Based on G-20 authorities April MAP submissions.

These projections are predicated on the growth
assumptions in the G-20 frameworks. The revised G-20 fiscal policy baseline would be atrisk if GDP growth were weaker (as discussed in Staff’s first MAP report). Section IV provides
an assessment of current fiscal plans under the assumptions for GDP and potential output
growth in a multilaterally-consistent G-20 baseline.
For the budgetary gains envisaged in G-20 projections to materialize, consolidation willneed to be based on “growth friendly” measures. Weaker growth could make theconsolidations difficult to achieve both directly and indirectly. Tax revenues, for example, may
be weaker than envisaged if weaker growth were to materialize. Moreover, in a context of
weaker growth, fiscal consolidation efforts could be more difficult to sustain. Thus, thecomposition of consolidation would need to emphasize “growth friendly” measures tomaximize the chances of successful fiscal adjustment.
_______
1

To recognize country differences, the declaration added: “Recognizing the circumstances of Japan, we welcome
the Japanese government’s fiscal consolidation plan announced recently with their growth strategy. Those withserious fiscal challenges need to accelerate the pace of consolidation. Fiscal consolidation plans will be credible,
clearly communicated, differentiated to national circumstances, and focused on measures to foster economic
growth.”15
IV. ASSESSMENT OF G-20 POLICIES AND UPSIDE POTENTIAL
G-20 policies make progress toward achieving strong, sustainable, and balanced growth, butmore is required to attain the objectives agreed by Leaders. Collaborative action across the
G-20 with appropriate timing and sequencing of policies—reflecting inter alia the strength ofrecovery—will produce benefits. In particular, upside potential can be realized throughstrengthened joint action on three fronts—namely, structural reforms and exchange rate
flexibility to boost internal demand in emerging economies; fiscal consolidation comprising“growth-friendly” measures to put public finances on a sustainable footing in advanced
economies; and product and labor market reforms to enhance supply potential across themembership. In terms of policy risks, a breakdown in cooperative action could inflict
substantial welfare costs to the G-20.
A. Overview
23.
The purpose of this section is twofold. First, the analysis examines the scope forstrengthened collaborative action that can help realize more fully the upside potential of G-20
policies, accounting for policy plans and commitments made during the second phase of the
MAP. Second, the risk implications of insufficient cooperation among G-20 members are
discussed. To that end, the scenario analysis below is based on a multi-country model
framework, allowing assessment of G-20 policies in a multilaterally consistent fashion, with
due attention to policy spillovers (see Box IV.1).
24.
The upside scenario presented builds on the Toronto Report on Alternative Policy
Scenarios, but is extended in important dimensions to take fuller account of country
circumstances. Specifically,Additional policies announced since the Toronto Report have been incorporated into thebaseline to the extent possible.



The sequencing of “policy layers” has been modified to reflect the relative cyclicalpositions of G-20 advanced and emerging economies.6

The time profile of policies (e.g., degree of front-loading) has been modified andallowed to vary across the G-20 countries, to reflect differences in the state of cyclicalrecovery across the membership and the policy space available to individual countries
to address adverse outcomes from reforms.7

6

These policy “layers” provide broad guidelines for key priorities that G-20 members themselves would want toconsider when considering specific measures at the country level to further realize upside potential or to mitigate
downside risks.
7

In particular, recognizing demand- and supply-side implications of both fiscal and structural policies, theallowance for more gradual phase-in periods where appropriate are considered.

16A broader menu of policy actions—better tailored to individual country
circumstances—is considered. Policies are better targeted to account for differences incountry-specific conditions, adjustment needs, the structure of tax and pension systems,
and political economy considerations.8
B. G-20 Upside Potential from Collaborative Action

25.
To further realize the upside potential of G-20 collaborative action, strengthened
policies along three policy “layers” are considered.9 This includes: (i) further structuralreform and other policies to boost internal demand in emerging surplus economies, including
through strengthening social safety nets and sustained infrastructure spending, and increased
exchange rate flexibility; (ii) further fiscal consolidation with “growth-friendly” measures inadvanced economies; and (iii) enhanced structural reforms to boost supply potential inemerging economies and to tackle high unemployment and weaker potential following thecrisis in advanced economies.
Sequencing and timing of policy actions take into account the identified risks to therecovery and the cyclical position of each region. Key policies that should strengthen
growth in the medium term may nonetheless have dampening effects in the short run.
For instance, on the back of sluggish domestic demand in many advanced economies
and a still fragile financial sector, initiating certain product, services, and labor market
policies, may, through adjustment costs, increase unemployment and dampen private
demand further in the short term. This could exacerbate risks of adverse real-financial
sector feedback loops. Accordingly, the sequence of different policy layers is chosen
appropriately with this in mind.

Given relative cyclical strength and policy space in many emerging economies, they are
well placed to play a lead role. Accordingly, domestic policy actions aimed at boosting
internal demand in emerging surplus economies (first layer) should strengthen
outcomes from their own perspective given weaker external demand from advanced
trading partners. In turn, this action should boost net exports and facilitate fiscal
consolidation and structural reform (second and third layers) in advanced economies
that are in a relatively weak cyclical position. However, advanced economies would
benefit by formulating and announcing credible medium-term fiscal strategies as soon
as possible to forestall potential adverse market reaction.

8

For example, fiscal policies include a wider set of “growth-friendly” fiscal consolidation measures, includingchanges in public transfers and entitlement reform. Accordingly, the composition of fiscal adjustment as part ofdemand rebalancing is allowed to vary more extensively across G-20 members depending on the economic andpolicy context.

9

From the relevant policy “pillars” that are elaborated in this analysis, individual G-20 members would be able toidentify country-specific measures consistent under these broader headings that would be desirable and feasible
from a national perspective.

17
Structural reforms to strengthen internal demand in emerging economies
26.
Consumption as a share of GDP in emerging surplus economies, while rising,remains relatively low, suggesting a need for additional reform. Precautionary saving still
appears high in the G-20 baseline and rising consumption
G-20 Emerging Surplus 1/(Percent, share of Real GDP)65
ratios still remain well below averages for middle60
income countries. Thus, enhanced safety nets andReal Gross Fixed Investment
55
Real Private Consumption
targeted public transfers should be considered. Also,50
investment ratios in some economies (excluding China)
45
remain relatively low, suggesting that higher
40
35
infrastructure spending could be helpful.
30
25
27.
Accordingly, the first “policy layer” is20
intended to boost internal demand in emerging
09
10
11
12
13
14
surplus economies, given the weaker outlook for
Sources: G-20 authorities and IMF staff estimates.
1/ 2009 - 2014 reflects MAP estimates and projections.
advanced trading partners. While specific structural
2/ Dashed lines reflect Middle Income Country
averages.
reform measures will need to be tailored to individual
country needs and circumstances, the following (stylized)
reforms are considered in the analysis: (i) strengthening social safety nets, namely pension andhealth insurance, accompanied by increased exchange rate flexibility to facilitate rebalancing
of demand towards domestic sources in emerging surplus economies; and (ii) higher
infrastructure spending in fast-growing economies—including in large oil exporters.10

Specifically, the set of policies considered comprise: (i) a gradual increase ofgovernment investment of 2 percent of GDP, starting in 2011 and implemented over
3 years in the emerging Asia region of the model; (ii) targeted transfers to the poor tostrengthen safety nets—amounting to around 2 percent of GDP. The policy measures
are largely financed through higher deficits given available fiscal space.

Fiscal consolidation to meet budget commitments in advanced economies
28.
To reach the G-20’s fiscal objectives specified in Toronto, more fiscal effort isneeded in some countries. Real GDP growth in a consistent G-20 baseline is lower than thatassumed in individual members’ Additional Fiscal Adjustment Needed To Achieve G-20 Toronto Commitments1/(Percentage points of GDP)
submissions in some cases. This
2010
2011
2012
2013
2014
would result in higher fiscal
United States
...
0.3
0.6
1.2
1.4
deficits than otherwise (i.e., atEuro area excluding Germany
...
0.3
0.6
0.9
1.2
Germany
...
0.1
0.2
0.3
0.4
unchanged policies). In order toJapan 2/
...
0.0
0.0
0.9
1.2
halve the 2010 fiscal deficit bySource: IMF staff estimates.
1/ G-20 members committed to halve the 2010 fiscal deficits by 2013.
2013, added fiscal effort is2/ For Japan, adjustment based on difference between the authorities MAP projections for headline fiscal balance
and revised figures based on G-20 baseline growth projections, starting in 2013.

10

Other relevant policy areas (not modeled) include reform of corporate governance and financial market
development that could further lessen household saving by raising capital income distributions (otherwise held asretained earnings by firms).

18
required (text table). An ambitious implementation of the Toronto Declaration is assumed here
based on stabilizing net (rather than gross) debt ratios by 2016.
29.
Consequently, further fiscal consolidation in advanced economies is considered asa “second layer” to help restore soundness of public finances. The magnitude of theadditional fiscal effort is based on the path of fiscal balances that is consistent with growth in
the revised G-20 baseline (see Box IV.2). The improvements in fiscal balances are assumed tobe sustained to reduce public debt.11 Specifically, fiscal adjustment along the following key
dimensions are considered:

Scale of adjustment. In the scenario, the magnitude of additional fiscal consolidation
over the medium term is determined by the amount of short-fall relative to the Toronto
commitments in 2013 under baseline policies (see Box IV.2).



Composition of adjustment. Fiscal consolidation includes “growth-friendly” measures
such as tax reform to reduce distortions or entitlement reform to limit growth in public
transfers. Specifically, for the United States, the package comprises broadening of tax
bases, higher energy taxes and lower discretionary spending between 2011 and 2014.12
Further down the road, to achieve larger budgetary saving and to prevent sizable hikesin (distortionary) income or payroll taxes in the future, gradual entitlement reform to
restrain the growth of government spending in key transfer programs (e.g., Social
Security and Medicare reform) accompanied by additional tax reform relying more on
consumption taxes should be considered.13 For the euro area, Japan, and rest of theworld the composition of additional fiscal consolidation is assumed as in the June 2010
Report on Alternative Scenarios.14

Time path of adjustment. Specifically, given elevated downside risks to its recovery, thepath of fiscal adjustment for the United States is more back loaded than in othercountries. The consolidation begins in 2011, but the magnitude of the added adjustment
in 2011–12 is small, before increasing progressively in 2013–14. For the euro area
excluding Germany, fiscal consolidation begins in 2011 and steadily increases through11

G-20 MAP submissions do not include longer-term fiscal baseline projections (i.e., beyond 2014).
Consequently, fiscal consolidation effects on public debt beyond 2014 are necessarily available only as deviationfrom baseline (not in level terms). Countries with faster growing aging-related spending pressures will have to do
more to reduce debt to prudent levels. IMF staff analysis on longer-term fiscal consolidation needs can be foundin Fiscal Monitor (November 2010).
12

To close a potential fiscal shortfall of 1.4 percent of GDP for the United States, for example, measures include
increases in energy taxes (0.3 percent of GDP), broadening of the tax base (0.8 percent of GDP), and additional
cuts in discretionary spending (0.4 percent of GDP).

13(Parametric) reform of key entitlement programs to curb spending growth, while mitigating distributional
consequences and the impact on current beneficiaries, would include gradual tightening of eligibility criteria (e.g.,higher retirement age) or benefits (e.g., partial price indexing of initial pension benefits for upper income earners).

14

See for details http://www.imf.org/external/np/g20/pdf/062710a192014. Reflecting its circumstances, Japan does not embark on additional consolidation
until 2013, but subsequent fiscal adjustment is relatively larger. No fiscal consolidation
is assumed for emerging surplus countries, represented by emerging Asia in the model.
30.
Credibility of fiscal consolidation plans is a key element for successful adjustment.
Credibility is defined in terms of what the private sector believes about the likelihood of aparticular policy action. If economic agents gain confidence in policy implementation in the
future, the growth-enhancing effects (e.g., through lower interest rates and tax burdens in the
future) of the fiscal package would be realized sooner. Clear and effective communication ofcoherent consolidation plans and strengthening of budgetary institutions and frameworks
would help anchor credibility. Even if consolidation begins only gradually, credible medium
term plans should be developed now. In the analysis, fiscal policies are assumed to steadily
gain credibility over time. Simulations illustrating the role of fiscal credibility—i.e., bydelaying expectations of consolidation by 1 or 2 years and affecting the growth impact for the
adjusting country—are discussed in Box IV.3.
Product and labor market reform to enhance supply potential
31.
On structural reforms, there is scope for further G-20 action in key priority areas.
A cross-check of Fund staff assessments of the alignment of members’ structural reformbaseline, with strategic priorities identified by OECD in its “Going for Growth” Strategy,
identifies further policies that would move the G-20 membership closer to their growthobjectives. Plans more closely aligned with key reform priorities for a particular G-20 member
are judged to be more effective.15
32.
Thus, to gradually boost employment and enhance supply potential following thecrisis, product and labor market reforms across the membership are considered as a“third layer.” The following menu of stylized reform measures is introduced:16
Product and services market reform to strengthen competition in key sectors. The
analysis considers the effects of reducing barriers to competition in network industries,
promoting competition in professional services and retail distribution, and simplifying
product and services market regulation.

Easing the restrictiveness of product and services market regulation to appreciably
improve productivity. The effectiveness of such reform is derived from OECD analysis(for details see Boxes 4 and 5 in the June 2010 Report on Alternative Scenarios). For

15

Specifically, in cases where country plans were judged by Fund staff to be “well aligned” with OECD strategic
priorities, the scoring in terms of policy effectiveness would be higher (implying less scope for upside potential).
To the extent that plans or measures were “broadly” or “not well aligned,” the effectiveness of baseline policies is
progressively discounted. A summary of IMF staff’s qualitative assessment and scoring system of G-20 structuralreform policies and OECD staff estimates of the effects of reform measures on growth is provided in Fund Staff’s
Initial Assessment Report of the G-20 MAP.

16

See OECD Report for the G-20 MAP for further details on the stylized effects of structural reform, consistent
with the analysis presented here.

20
emerging deficit economies, policy efforts are focused on simplifying product andservices market regulation.
Complementary labor market policies to further enhance growth prospects and reducehigh unemployment.17 Labor market reforms that could gradually increase employment
include measures that lower hiring costs, reduce long-term unemployment (byfacilitating re-entry), and encourage job search, matching, and mobility, in line with therecommendations by the G-20 Ministers of Labor and Employment, which werewelcomed by Leaders in Toronto. To increase the effectiveness of the labor market
reforms, they should be accompanied by product and services market reforms that
could strengthen the employment effects by boosting labor demand and real wages aswell as fiscal actions that lower payroll taxes or other non-wage costs that could also
strengthen the employment effect.

33.
Across the different policy “pillars,” short-term factors are considered in thetiming of implementation. Similar to considerations to determine a helpful sequencing ofpolicies, the assumed implementation schedule (i.e., time profile) for each policy layer in theanalysis depends on specific economic conditions of G-20 members and the available policy
space to address any adverse short-term impact on demand.18
C. Scenario Results
34.
In emerging economies, enhancing social safety nets and improving infrastructure
increases the region’s welfare, while supporting global activity. By removing bottlenecks, agradual increase of government investment in infrastructure in emerging Asia gradually boosts
productivity of the region, while increasing domestic demand. In addition, strengthening ofsafety nets through targeted transfers to the poor (who tend to be cash and credit constrained)further increases domestic demand in emerging Asia. Higher infrastructure spending andenhanced safety nets in emerging Asia also improves growth outcomes in rest of the world, via
trade linkages, notably in its largest trading partners. Finally, increased exchange rate
flexibility in emerging Asia (with the real effective exchange rate appreciating around17

In the context of an incipient recovery and still weak job growth, ILO analysis, building on therecommendations of the April G-20 Labor and Employment Ministers in Washington, emphasizes the need forreforms that reduce the hiring cost of lower skilled workers, as part of an overall policy for raising the labor force
participation of low income households, employment subsidies in the form of broad cuts in social security
contributions; support skill improvements through education and better training to closely match skill supply tothe needs of enterprises and labor markets, facilitating worker mobility.

18

Specifically, on structural reforms, given strong cyclical positions of emerging economies, reforms are assumed
to begin immediately, i.e., in 2011; for Japan, which has been at the zero interest rate floor for several years,
implementation of structural reforms, beyond those already in the baseline, is assumed to be delayed by 2 years(i.e., starting in 2013). For other advanced economies structural reforms are postponed by 1 year (i.e., assumed tostart in 2012).

21
10-15 percent) facilitates rebalancing toward internal demand, while reducing current accountsurpluses and achieving higher growth (Figure 1).
35.
In advanced deficit economies, given their relatively weak cyclical position, fiscal
consolidation accelerates only when the recovery strengthens. Supported by credible fiscal
plans and helped by positive spillovers from the first layer, the scenario shows that the shortterm negative effect of fiscal consolidation on growth in advanced economies is smaller(Figure 1). Also, the negative spillovers from reduced public demand on growth in otherregions, except emerging Asia, are negligible. Over the medium term, as fiscal policy gains
credibility, private spending is increasingly “crowded in”; investment and employment
increase; and real GDP increases relative to the baseline. For emerging Asia, real GDP is lower
than otherwise over the projection horizon, given their high export dependence.
36.
Further structural reform boosts growth and jobs, particularly in advanced
economies with high unemployment. Accounting for policies that are already in the G-20
baseline, additional structural reforms were considered and yield the following:19
Effective labor market reforms improve growth and employment outcomes in advanced
economies over the medium term, particularly in Europe. Labor market reformcomprises three components: (i) front-loaded active labor market policies (ALMP)—
implemented in all regions, except Japan—to help reduce high unemployment throughworking retraining or matching programs (which is in line with ILO analysis);20 (ii) a
gradual reduction of the average replacement ratio (ARR) of unemployment benefits
typically through duration limits—implemented in euro area members; and (iii) a
phased-in increase in the eligibility/mandatory retirement age (beginning in 2012;phased in over five years in Japan and the rest of the world, and over 10 years in theeuro area and the United States).



The possible near-term dampening effects of labor market reform can be mitigated. The
potential negative impact of labor market reforms is partially eased by implementing
job-friendly ALMP beginning in 2011, while a gradual reduction of the ARR is
postponed to 2013. Positive spillovers from domestic-demand boosting policies inemerging economies and some monetary accommodation also help mitigate potential
short-term negative effects. Employment in some advanced surplus and advanced

19

In comparison to the OECD report, IMF staff analysis here focuses on the incremental gains from additional
structural reform beyond what is credited to G-20 baseline policies. The analysis in the OECD Report examines
the full gains. Both analyses draw from the same set of OECD estimates for the effectiveness of reform.

20

The level of ALMP expenditure is increased to half of the level of the average level prevailing in the “highARR and high ALMP spending” group as identified by the OECD. In countries with historically low structural
unemployment, such as the United States and the United Kingdom, areas where ALMP spending could mostusefully be raised include the public employment service (to allow staff to cope with the major increase in thenumber of caseloads), (net) hiring subsidies and targeted training, and apprenticeship programs for disadvantaged
youths.

22
deficit countries (euro area members) increases by around 2¼ percent; in the UnitedStates by about 1¼ percent, in the rest of the world by 1 percent; and in Japan by about¼ percent over time. Improved labor markets in Europe would have positive spillovers
on advanced deficit economies outside the euro area and in the rest of the G-20.
Complementary product and services market reforms that ease restrictiveness ofregulation and lower entry barriers significantly boost productivity and wages forworkers. Moving towards “best practice” regulation (based on OECD analysis) raises
overall productivity growth, notably in advanced surplus economies, in the range of¼ to over ½ percentage point per year. Strengthened competition in key sectors, higher
productivity, alongside tax reform in some countries (i.e., lower payroll tax wedge), in
turn, would boost real wages and disposable incomes for workers.

Along with appropriate timing of reforms, credibility is crucial. Credibility works
through expectations.21 With higher expected productivity, firms increase investment
and payrolls; and with higher expected incomes and better job and wage prospects,
consumption gradually strengthens. In emerging Asia and ROW, growth improves
appreciably due to their own additional product and services market reforms relative tothe first policy layer (Figure 1).

37.
There is appreciable upside potential from cooperative G-20 policy action that issequenced and timed accordingly across the regions. The simulation results show that by
beginning with reforms in the most cyclically advanced region, the potential dampening effectsof fiscal consolidation in advanced economies on global growth are mitigated, as the negative
impact of fiscal consolidation is compensated by positive spillovers from reforms in emerging
economies. Overall, world GDP would be higher by around 2 percent by 2014, equivalent tomore than 1 trillion dollars. The boost to incomes—including in developing countries—would
lift an estimated 37 million people around the world out of poverty according to the WorldBank’s companion report.22 In terms of G-20 employment, an additional 25 million jobs
approximately would be created if upside potential were realized more fully from strengthened
collaborative G-20 policy action.
38.
While the benefits of further trade liberalization are not included in the analysis,
there is likely to be significant upside potential from completing long-delayed Doha tradenegotiations. The more ambitious the result of those negotiations, and the sooner they can becompleted, the more upside potential they would deliver. Multilateral trade liberalization is aclear example of the benefits of joint action, since it leads to gains that are multiples of thosethat will accrue from countries acting alone. Strengthening the rules-based trading system

21

In the model, with insufficient credibility, structural reforms can temporarily dampen growth, often throughweaker demand. If the future employment or productivity benefits, for example, of reform are not internalized
sufficiently by the private sector, the boost to current consumption or spending plans is limited.
22

See Growth and Development in Emerging Markets and Other Developing Countries: Report prepared by Staffof the World Bank for G20 Growth Framework and Mutual Assessment Process.

23
will reduce the scope for future protectionism and support market-based structural adjustment
policies in other areas.
D. Risk Implications from G-20 Non-Cooperation
39.
Against the backdrop of a slower global recovery, downside risks—including froma breakdown in G-20 policy cooperation—are elevated. Key downside risks are:

The lack of credible medium-term consolidation plans. If major advanced economies
delay announcing credible medium-term plans, underpinned by conservative growth
assumptions and concrete policies and measures, there is a risk that confidence will be
undermined and bear upon recovery prospects.

Spillovers from renewed turbulence in sovereign debt markets, notably in Europe: This
could precipitate an adverse feedback loop with the financial sector, and may spill overto the real economy and across regions through higher funding costs, tighter lending
conditions, and retrenchment in capital flows.



Capital flows and risks of overheating in emerging economies. Large capital inflows
into major emerging economies—owing in part to accommodative monetary policies inmajor advanced economies, coupled with insufficient policy levers in some emerging
economies—pose risks of overheating and asset price booms, with attendant spillovers
that could undermine a sustainable recovery.

Financial and trade protectionism and currency instability: A recent wave of foreignexchange interventions to limit appreciation in some emerging and advanced
economies, predominantly in Asia and Latin America, has raised the specter ofprotectionism, which could derail the global recovery.

40.
Delaying credible fiscal consolidation could push policies into a reactive mode andrender them ineffectual. Take the example where follow-through on fiscal adjustment inadvanced deficit economies was not forthcoming (see Box IV.4). Specifically, in the event ofdeteriorating market sentiment, higher sovereign risk premia would push up interest rates, withadverse feedback effects on growth and confidence. Forced fiscal consolidation would
ultimately need to be stronger and more front-loaded to reassure markets but would be lesscredible and less “growth friendly.” With a lack of cooperation, G-20 policies could be pushed
into a reactive mode, becoming less credible and ineffectual. Also, many structural reforms
may not be politically feasible in the downside, such as key entitlement reform to raise
retirement ages in line with life expectancy or shortening the duration of unemployment
benefits to encourage job search.
41.
Similarly, capital flows to emerging economies pose risks of overheating and asset
price bubbles if not managed well, underscoring again the importance of policy
cooperation. Capital inflows can help promote external rebalancing, but much depends upon
how countries manage such inflows.

24Given fragile recovery, an accommodative monetary policy stance remains appropriate
in advanced economies, since it can help counteract some of the contractionary effectsof fiscal consolidation. At the same time, however, policymakers in these countries
should be mindful of the spillovers.

More generally, capital flows should be viewed as an opportunity to start down the pathof correcting global imbalances, not as a hindrance. However, managing large inflows
will be a challenge, and the task becomes more onerous in the context of limited
exchange rate flexibility in some major emerging economies.

42.
A breakdown of policy cooperation, involving capital inflows and firm resistanceto currency appreciation, or competitive depreciation, could hinder global rebalancing
and be damaging. Much depends on how capital flows are put to use and—perhaps more
importantly—the extent to which they are accompanied by exchange rate appreciation. For
surplus economies that exhibit symptoms of domestic overheating and facing capital inflows,
efforts to firmly resist currency appreciation could exacerbate overheating pressures or capital
account pressures through expectations. This could lead to booms (and busts) in asset prices,
growth, and inflation. Moreover, the threat from rising trade protectionism would be serious
given the tendency for perceived non-cooperative policy actions to be met with noncooperative policy responses (i.e., retaliation). Higher barriers to international trade would
dampen growth and have adverse welfare implications for all G-20 members, particularly thosemore dependent on trade.
43.
Thus, collaborative action is highly beneficial to the G-20 membership because it
avoids the substantial damage caused by a breakdown in G-20 policy cooperation. By
significantly reducing such downside risks, collaborative action increases the effectiveness ofpolicies in key areas and avoids significant welfare costs to the G-20 members associated withfragmented or “beggar-thy-neighbor” policies.

25

Box IV.1. Multilateral Framework to Assess G-20 Policies

Staff analysis and assessment of G-20 policies are derived from a consistentmultilateral framework to address shortcomings from aggregating individual
members’ projections. As identified in Section III, there are some potential inconsistencies
or tensions across the macroeconomic projections derived from (different) nationalframeworks of individual G-20 members.
The scenario analysis is conducted using the IMF’s Global Integrated Monetary and
Fiscal model (GIMF). The model contains 6 stylized countries or regions—the UnitedStates, Germany, the rest of the euro area, Japan, emerging Asia, and rest of the world(ROW). While the analysis of policies and their effects are necessarily stylized, thisframework provides a useful tool to analyze and illustrate the benefits of G-20 collective
action and alternatives policy options within a rigorous and consistent analytical structure
for the global economy. Several features of this approach are worth highlighting:

The common analytical framework can help address tensions across G-20 members’
macroeconomic projections. A particularly useful feature of the model is that it
produces multilaterally- and model-consistent measures of key variables such as theoutput gap or the unemployment gap. This provides a sounder analytical basis forthe policy assessment.

The multi-country model also provides estimates of the cross-border spillovers of anindividual member’s policy actions. The framework explicitly examines themultilateral implications and interactions of policies that are missing from anaggregation of individual G-20 submissions.



The analysis is based on harmonized assumptions for key macroeconomic variables.
The model structure provides the necessary discipline for internal consistency of key
variables such as exchange rates, interest rates, and partner country growth.

26
Box IV.2. Multilateral Consistency of the G-20 Baseline
A multilaterally consistent G-20 baseline was derived using the IMF’s Global Projection Model(GPM).23 A particularly useful feature of GPM in the context of the G-20 MAP exercise is that it produces
multilaterally and model-consistent measures of key unobservable variables such as the output gap or theunemployment gap. The model also incorporates recent economic and market developments and accounts forthe impact of new policy measures in the derived baseline in a multilaterally consistent way, including
spillovers. Thus, the multilaterally consistent G-20 baseline incorporates the latest G-20 commitments andpolicy plans; features greater multilateral consistency of output gaps to better anchor simulations for theassessment of upside potential; and, reflects in a timely fashion market and economic developments.
On the back of weak data in the second half of 2010, near term growth was marked down in the refinedbaseline. Recent data suggest that the global
Multilaterally Consistent MAP Projections of Real GDP Growth 1/2010 - 2014
recovery continues to lose momentum, while
2010
2011
2012
2013
2014
Averagethe strength of incoming data has varied acrossDifference from "base case" (percentage points)
0.0
-0.6
-0.4
-0.1
0.0
-0.2
World
regions. Heightened fears about the
-0.6
-1.1
-0.8
-0.8
-0.8
-0.8
United States (20.7)
-0.1
-0.7
-0.6
0.6
-0.2
-0.2
Euro Area (15.4)
sustainability of the U.S. recovery, along with
-0.3
-0.9
0.0
0.0
0.1
-0.2
Japan (6.2)
negative developments in Japan and
0.4
-0.7
-0.2
0.3
0.9
0.1
Emerging Asia (23.7) 2/
0.1
0.0
-0.2
-0.2
-0.4
-0.1
Rest of World (34.0)
contractionary policy actions in China, haveRefined baseline (percent)Memorandum
combined to reduce equity prices, dampen
4.7
4.0
4.5
4.9
5.0
4.6
World
sentiment in many economies, and reduce
Sources: G-20 authorities and IMF staff estimates.
1/ Share of world GDP by PPP in parenthesis (2007 - 2010 average, percent).
worldwide activity more generally. On
2/ Includes: China, Hong Kong SAR, India, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan
Province of China, Thailand.
balance, developments in the euro area havebeen more reassuring than previously feared, as countries undergoing substantial fiscal adjustment have fared
better than anticipated.
Overall, the refined G-20 baseline growth is broadly similar to the G-20 MAP projections over the
medium term. However, there are two exceptions: advanced deficit countries at the epicenter of the financial
crisis, where real GDP growth was marked down and emerging Asia for which real GDP growth was revised
up. The estimates for the advanced deficit countries are in line with empirical findings that show large
potential output losses in the aftermath of severe financial crisis (see for details MAP’s Initial Assessment
Report). Therefore, real GDP growth in advanced deficit countries at the epicenter of financial crisis wasrevised down to ensure multilateral consistency of output gaps across regions, particularly with advanced
countries that were further away from the crisis.
Using the revised real GDP projections, the path for fiscal balances was adjusted using standard tax andspending elasticities. Specifically, the elasticity of revenues with respect to growth was assumed equal to one,while the expenditures with respect to growth Deviations in MAP Fiscal Deficit Projections 1/(Percentage points of GDP)
was assumed zero. Using these elasticities,
2010
2011
2012
2013
2014
the cumulative revisions in real GDP growth
United States
0.4
1.1
1.7
2.0
2.2
for each model entity over the projection
Euro area excluding Germany
-0.8
-0.3
0.7
0.9
1.2
horizon was used to derive its adjusted
Germany
0.4
0.4
0.2
0.2
0.2
Japan
0.2
0.7
0.9
1.0
1.1
expenditure projections. The adjusted
Source:IMF
staff
estimates.
headline fiscal balance for each block of the
1/ A positive number reflects higher fiscal deficit in G-20 baseline, relative to authorities MAP projections.
model, consistent with its refined baseline
real GDP growth, was obtained by subtracting its adjusted expenditures from its original revenue projections.

23

For more information on GPM see the Report on Alternative Scenarios:
http://www.imf.org/external/np/g20/pdf/062710a.pdf

27
Box IV.3. Gains of Enhanced Fiscal Credibility
Credibility is crucial for advancing medium-term gains from fiscal consolidation. In theanalysis, credibility brings forward these benefits though the expectations channel. Credibility
is defined in the model as private sector beliefs about the implementation of future policies.
Greater fiscal credibility implies that economic agents will more fully anticipate lower interest
rates and tax burdens in the future. Accordingly, growth-enhancing effects of the fiscal
package over the medium term would materialize sooner. Under partial credibility, investors
and consumers anticipate some reversal or slippage in consolidation, which results in weaker
investment and employment responses over the near
G-20 MAP: Fiscal Consolidation Under
term.
Different Credibility Assumptions

Simulations illustrate appreciable costs from lower
credibility. The results for the euro area excluding
Germany fiscal package provide a useful illustration of
the costs associated with insufficient credibility. To
model the effect of lower credibility private
expectations are assumed to align with public sector
fiscal goals later (2014 or 2015) than in base case(2013). The result show that lower credibility
significantly increases the short-term adverse effects
on GDP, as it takes longer to crowd in private demand.

(Euro area excluding Germany; Percent deviation frombaseline)
0.3

Credible in 2013
Credible in 2014
Credible in 2015

0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
2010

2011

2012

2013

2014

Sources: G-20 authorities and IMF staff estimates.

Credibility of fiscal plans could be strengthened through several policy measures.
Specifically, clear and effective communication of coherent plans is important. Strengtheningof budgetary institutions and frameworks would also help anchor private sector expectations.
In addition, a clear commitment to critical measures, such as entitlement spending reforms,
would deliver further credibility gains, while forestalling a need for more painful reforms in
the future.

28
Box IV.4. Potential Costs from a Breakdown of G-20 Policy Cooperation
The potential cost of a lack of policy cooperation among G-20 members could besubstantial. The welfare implications would depend inter alia on the severity of market
reaction, the loss of credibility in G-20 cooperative policies, as well as the extent of recourse tofragmented or “beggar thy neighbor” actions among members. The interaction or spillovers
between non-cooperative actions could exacerbate risks associated with still vulnerable
financial systems, sovereign debt concerns, and possible adverse real-financial feedback loops.
One policy risk scenario can be illustrated by considering the impact of postponing
credible consolidation in the advanced economies. Postponing fiscal consolidation increases
downside risks through adverse market reaction, which would raise advanced economies’
sovereign and corporate spreads. This in turn would force these economies into a reactive
policy posture, and forced fiscal consolidation may take many years to become credible and tobring spreads back down.
The downside scenario assumes a sharp
increase in U.S. sovereign spreads.
Specifically, sovereign spreads increase by
over 200 basis points, with an additional
150 basis points increase of corporate sector
spreads, amid heightened market concern. The
increase in spreads is roughly half the size forthe other advanced economies. The
simulations suggest that the impact on world
GDP from this policy risk is sizable—world
output declines by over 1½ percent.

G-20 MAP: Downside Scenario(World real GDP; Percent deviation from baseline)
Risk Premia Shocks against Adv. Economies
Add Fiscal Consolidation in Adv. Economies

0.5

0.0

-0.5

-1.0

-1.5
2010

2011

2012

2013

2014

Sources: G-20 authorities and IMF staff estimates.

The increase in market pressure and borrowing spreads forces reactive, front-loaded,and highly contractionary consolidation in the advanced economies. Fiscal consolidation issignificantly frontloaded—2 percentage points of GDP in the United States and half as much in
the other advanced economies. The simulations suggest that as a result of delayed credibility ofconsolidation, negative multiplier effects, including spillovers to regions that do not undertake
fiscal consolidation, are large. This follows for two reasons. First, the cuts are assumed to bechosen on the basis of implementation speed rather than likely impact on output. Second, thesudden, forced consolidation is assumed to become credible only in 2014, so that theirbeneficial effects through expectations are quite gradual.
The conclusion from this analysis is that cooperative policy action is highly beneficial to
the G-20 membership to insure against such downside risks. By significantly reducing
risks, collective action increases effectiveness of policies in key areas and avoids significant
welfare costs to the G-20 members.

29
Figure 1. G-20 Upside Scenario(Deviation from baseline)
Government BalanceReal Effective Exchange Rate 1/

Real GDP(Percent)(Percent of GDP)

Current Account Balance(Percentage point of GDP)

(Percent)

Infrastructure, Safety Net Spending and Exchange Rate Flexibility in Emerging Economies

Add Fiscal Consolidation in Advanced Economies

Add Product and Labor Market Reforms

2

United States

1
0-1
2010 2011 2012 2013 20143
2

Euro area excluding
Germany10-12010 2011 2012 2013 2014
5
4

Germany

3
2
1
0

0
-2
-4
-6
-8
-10
-12

2010 2011 2012 2013 2014
0
-1
-2
-3
-4
-5
-6
-7

2.0

Japan

0
-1
-2
-3
-4
-5
-6

1.0
0.0
2010 2011 2012 2013 2014
Emerging Asia

0

1

-1

0
2010 2011 2012 2013 2014
2.0

ROW

1.5
1.0
0.5
0.0
2010 2011 2012 2013 20140Japan 2/

Emerging Asia

-2

0.2

2010 2011 2012 2013 2014
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

GermanyEuro area excluding
Germany

2010 2011 2012 2013 20142010 2011 2012 2013 2014
0.5

Germany

0.0
-0.5

ROW

-1.0

-1.5

2010 2011 2012 2013 20142010 2011 2012 2013 2014
4

Japan

2.0

0

1.5

-4

1.0

-8

0.5
2010 2011 2012 2013 20142010 2011 2012 2013 2014
12
10
8
6
4
2
0

Emerging Asia

1

3

-1
-2
-3
2010 2011 2012 2013 2014

ROW

0.2
0.1

0.1

2

0.0

0.0

1

-0.1

-0.1

0

-0.2

-0.2

-1
2010 2011 2012 2013 2014

Sources: G-20 authorities and IMF staff estimates.
1/ Increase indicates appreciation.
2/ Levels in percent of GDP.

Emerging Asia

02010 2011 2012 2013 2014
4

Japan

0.0

-12

2010 2011 2012 2013 2014
0.3

Euro area
excluding Germany-1.02010 2011 2012 2013 2014

2

0

-0.5

-10
1

0.2

0.0

-9

0.5

0.4

1

0.5

United States

0.6

-3

Germany 2/

0.82010 2011 2012 2013 2014-2

2010 2011 2012 2013 2014-7

United States

-1

-8

1.5

3

Euro area excluding
Germany 2/

2
0
-2
-4
-6
-8
-10
-12

2010 2011 2012 2013 20142010 2011 2012 2013 2014
2.5

United States 2/

ROW

-0.3
2010 2011 2012 2013 20142010 2011 2012 2013 2014

APPENDIXSTOCK-TAKING OF G-20 POLICY ACTIONS AND COMMITMENTS
Securing strong, sustainable, and balanced growth over the medium term rests on two
rebalancing acts—internal rebalancing in major advanced economies through strengthening
private demand and a gradual reduction of public support; and external rebalancing througha shift toward greater reliance on growth led by domestic demand in external surplus
countries and by external demand in deficit countries. This implies that policy challenges andpriorities will differ across the G-20 membership. Against this backdrop, key commitments
and actions taken by the G-20 since the MAP Framework was launched at the September
2009 Leaders Summit in Pittsburgh are summarized below. Based on this stocktaking
exercise, a box summarizing remaining policy challenges facing the G-20 is reported at theend of the appendix.
A. Financial Sector Policies
Repair and reform of the financial sector can contribute significantly to strong andsustainable growth, by increasing its capacity to support real economic activity and by
mitigating the risk of future financial crises. The G-20 has made progress towards a reformed
financial system, better aligned with these objectives. Further efforts are required, however,in several areas, including to repair damage from the crisis (e.g., to securitization and bankcapital), to address remaining vulnerabilities, and to ensure expeditious implementation of themeasures and accords already announced.
1.
At the forefront of multilateral coordination across the G-20 has been theagreement on the Basel III framework. Basel III aims to establish new capital requirements
and buffers for banks, improve risk management and governance, and strengthen banks’transparency and disclosures. As an intermediary step towards full compliance with the newaccord, a number of members are at various stages of implementing Basel II, including Brazil,
China, Turkey, and the United States.
2.
Progress has been made across several G-20 economies in enhancing national
regulation and supervision. There has been a particular focus on enhanced coordination, atthe national and regional level, among different regulatory and supervisory authorities,
including by establishing or enhancing the role of financial stability councils and committees(e.g., India, Mexico, South Africa, the United Kingdom, and the United States) andcentralized regulatory or coordination bodies (e.g., Canada, the EU, and South Africa).
Canada is now moving towards a national securities regulator (Canadian Securities Regulator)
with voluntary participation by provinces. Many countries are also in the process of widening
the regulatory perimeter to better mitigate risks presented by non-bank financial institutions(e.g., Mexico, South Africa, and the United States). Other areas of progress on regulation andsupervision include:2

Some G-20 members have committed to publishing regular bank stress testing. Stresstests, where they have been published, have been generally successful in addressing
market concerns. The euro area is building on the stress tests conducted in July 2010
by establishing a regular schedule of regional stress tests. Some individual euro area
economies are already implementing a publically-backed bank recapitalization
scheme, in part based on the test results (e.g., Spain). Other economies have also
recently undertaken stress tests (e.g., Saudi Arabia).



Many countries have announced and begun implementing policies to ensure greatertransparency in financial markets, particularly those for derivative instruments.
Members such as the EU, Japan, and the United States are working on shifting
derivative trading to clear through central counterparties, enabling supervisory
authorities to better identify a build-up of systemic risks. Other efforts include
proposals to enhance oversight of credit rating agencies, to ensure that ratings moreaccurately reflect inherent risks in the instruments they cover (e.g., Canada, India,
South Africa, the EU, and the United States).1 There is also a broad movement toward
adopting International Financial Reporting Standards (IFRS) in the coming years andenhancing auditing and disclosure standards.



Various other measures seek to reduce the riskiness of financial sector activities,
although the projected pace of implementation varies across countries. Many of the
new G-20 measures aim at regulating more closely the activities and compensatory
practices of banks, in part to prevent the build-up of excessive risks in the banking
sector. For instance, the United States has put in place legislation in response to thecrisis, which includes limits on banks’ activities (the Volcker Rule), while France hasreformed compensation practices in the financial sector. A number of both advanced
and emerging G-20 members are designing frameworks to address the “too big to fail”
problem posed by large, interconnected, and systemically-important financial
institutions. 2

Financial sector reforms in some countries have also included consumer protection
legislation (the United States). One of the pillars of G-20 financial sector reform asagreed by Leaders is “transparent international assessment and peer review.” Mexico
is the first country to have completed the FSB review.

3.
Macroprudential frameworks to address systemic risk have begun to be
introduced in many countries. While the Basel committee is working on developing an
1

The FSB and the BCBS are developing recommendations to strengthen market infrastructure, such as shifting
OTC derivatives to central clearings.

2

Several G-20 members are working together in the FSB and the BCBS, with the cooperation of the Fund, todevelop a harmonized framework to address systemically important financial institutions.

3internationally relevant macroprudential framework, countries have progressed withintroducing macroprudential elements in their regulatory and supervisory measures. The
development of enhanced early warning systems has also been prioritized by many members.
China has announced plans to further enhance its macroprudential toolkit, with a particularfocus on countercyclical capital, leverage, and liquidity ratios, and on dynamic provisioning.
Canada has tightened the conditions for publically-insured mortgage products, to prevent theassumption of excessive risk by borrowers and to enhance the resilience of housing markets toshocks. Many other G-20 economies are also at an early stage in the process of developing
macroprudential frameworks. Several members are in various stages of operationalizing their
newly legislated macro-prudential institutions, e.g., a European Systemic Risks Board(ESRB), the Financial Policy Committee in the United Kingdom, and the Financial Stability
Oversight Committee (FSOC) in the United States.3
4.
Shortcomings in financial crisis management exposed during the crisis havebegun to be addressed. The European Financial Stability Mechanism (EFSM), an EU-wide
facility, and the European Financial Stability Facility (EFSF), a euro area mechanism, havebeen established to provide financial assistance to a member state in difficulties or seriously
threatened with severe difficulties caused by exceptional occurrences beyond its control.
Some countries have begun reviewing and improving their crisis management capabilities,
including through new institutional arrangements and specific facilities and instruments(e.g., South Africa), and resolution frameworks for non-banks (the United States).
Frameworks to minimize damage from the failure of systemically-important financial
institutions have also been proposed and begun to be implemented in many G-20 economies,
including some euro area countries, China, and Mexico. In several emerging economies,
proposals have been put forward to develop a legal foundation for crisis management, toinclude the establishment of financial safety nets (e.g., China and Indonesia), but full
implementation has not yet been achieved in most cases.
5.
In some emerging economies, reforms have also been targeted at broadening anddeepening the financial sector to enhance its capacity to support economic growth. China
has proposed specific measures to improve access to capital markets for SMEs. South Africa
has introduced legislation that aims at broadening financial access for the poor and improving
the efficiency and competitiveness of the financial sector. Mexico is also targeting improved
access to financial services and better financial education. Measures to broaden access arealso being implemented in other emerging economies, including Indonesia, and Turkey. In
advanced economies, financial sector measures aimed at boosting economic growth have been
focused on easing SME access to credit (e.g., in Italy and Spain).

3

The BCBS introduced leverage and liquidity ratios, as well as a counter-cyclical capital buffer, as part of theBasel III framework, and is developing recommendations on forward-looking provisioning.

4Overall, G-20 financial policies have made some progress—mainly, at the national
level. Remaining core policy challenges center around (i) fully repairing the damage
inflicted by the crisis, including through recapitalizing or resolving weak banks; (ii)better managing systemic risk, including through wider national supervision andstronger international frameworks to handle failing cross-border financial
institutions; and (iii) developing macroprudential tools and mechanisms to augment
financial stability frameworks.
B. Fiscal Policies
Fiscal consolidation is an essential part of internal rebalancing. At the Toronto Summit,
G-20 Leaders in advanced economies agreed to halve fiscal deficits by 2013 and to stabilizeor reduce public debt by 2016. The magnitude and pace of fiscal consolidation plans differ
across countries, reflecting differences in cyclical positions, fiscal space, and market reaction
to the strength of public balance sheets. While several countries have articulated mediumterm fiscal plans, or are in the process of doing so, many G-20 countries have not yet
articulated credible plans underpinned by specific measures. An assessment of the consistencyof current fiscal plans with commitments made by G-20 Leaders in Toronto is made in SectionIV.
6.
Advanced deficit economies have announced or brought forward fiscal
consolidation plans, but these differ across countries in magnitude and pace ofadjustment, reflecting the strength of economic recovery, the amount of fiscal space, andthe reaction of markets to the strength of public balance sheets.4
4Responding to severe market pressure earlier this year—notably, concerning
sovereign risks—several euro area deficit economies have brought forward anddeepened their consolidation plans. Spain, for example, accelerated its consolidation
by 0.5 percentage point of GDP in 2010 and 1 percentage point in 2011. Overall,approximately three quarters of deficit reduction in the European countries is projected
to be achieved through expenditure cuts. In many cases consolidation plans areaccompanied by measures to increase the transparency of the budget process.

To maintain comparability with the previous reports, theme-based groups of G-20 members are identical to those describedin IMF staff’s Mutual Assessment Process–Appendices to the Report. In particular, advanced surplus economies refers to
Canada, France, Germany, Japan, Korea and the Netherlands and advanced deficit economies refers to Australia, the United
Kingdom, the United States and the euro area excluding France, Germany and the Netherlands. For the analysis of global
imbalances, the euro area is treated as a whole given its common monetary and exchange rate policies. Accordingly, in thatcase advanced surplus refers to Canada, euro area, Japan and Korea whereas advanced deficit economies corresponds toAustralia, the United Kingdom and the United States. The above groupings are defined based on the sign of the average
current account balance over the period 2001-2008.

5


The United Kingdom has also committed to additional tightening and an accelerated
consolidation plan. The plan aims to balance the cyclically-adjusted current fiscal
balance and put the public sector net debt ratio on a downward path by FY2014/15,
with expenditure cuts and VAT increases partially offset by a reduction in thecorporate tax rate. To enhance the transparency and credibility of the budget process
and help inform policy decisions, the United Kingdom is establishing a new
independent Office for Budget Responsibility, which will be tasked with providing themacroeconomic and fiscal forecasts for the budget and assessing fiscal sustainability
and compliance with the fiscal mandate.



The United States intends to embark upon an ambitious consolidation over the
medium-term, including moving the primary deficit into balance by 2015. In the nearterm, however, the focus is placed on supporting economic recovery which has
slowed. Fiscal discipline is expected to be supported by PAYGO rules, tax increases
for high-income tax payers, a broader corporate tax base, and savings in discretionary
spending. Recent health care reforms are anticipated to make some contribution
towards consolidation, provided that the planed measures to contain costs are followed
through. Australia has begun withdrawing fiscal stimulus, plans to return to budget
surplus in FY2012-13, and has announced a tax reform package.

7.
Many advanced surplus economies have also announced fiscal consolidation plans,
although fiscal space, the need for immediate action, and the degree of specificity inplans vary significantly.
Japan is facing the largest fiscal challenge and current plans target halving the
primary deficit by fiscal year 2015. The medium-term fiscal framework aims toachieve this target through entitlement and tax system reforms and pay-as-you-go
principles. Spending cuts are focused on non-social security expenditures, but many of
the tax reform measures have yet to be specified.



Other advanced surplus economies have announced relatively detailed and broadbased consolidation plans. In some cases, new measures to bolster the credibility of
public finances have been established or planned, including mechanisms to review andidentify risks in federal and state budgets (e.g., Germany and Korea) and to reform thefiscal framework (e.g., France). Canada is continuing to implement stimulus
measures, but has articulated a plan to roughly balance the federal budget over the
medium term.

8.
Some emerging deficit economies have begun fiscal tightening and announced
medium-term consolidation plans. In many cases, the broad measures are dependent upon
the pace and durability of economic recovery.

6India has announced its intention to reduce the fiscal deficit by about 4 percentage
points in 2010–15. Measures addressing tax avoidance are yielding early dividends,
but a full breakdown of specific measures has not yet been disclosed. Mexico isbroadening the non-oil tax base and reducing subsidies. South Africa is targeting anear 3 percentage point reduction in the deficit through 2012/13, while taking into
account the progress of recovery. Turkey has made progress toward reversing thedeterioration in the primary balance, although much of the recent improvement reflects
improved cyclical conditions.

9.
The large oil-exporting economies have committed to some fiscal consolidation.
Russia, for instance, is considering a draft budget based on a consolidation of about 3 percent
of GDP through 2013, with increases in pensions funded, in part, by higher payroll taxes. In
these economies, increased non-oil infrastructure spending could help address supply
bottlenecks and sustain growth, with less dependence on oil prices.
Overall, G-20 fiscal policies appear broadly on track to meet the Toronto Declarationcommitments, although medium-term consolidation plans rely on relatively optimistic
growth assumptions for some countries (See Section III). Central policy challenges areto sustain fiscal consolidation efforts and to formulate clear, credible and ambitious
medium-term plans underpinned by specific commitments in critical areas—including
addressing rapidly growing public spending programs and tax reform that is supportiveof growth. Stronger governance and budgetary institutions in many cases would
strengthen such efforts. Beyond the MAP framework, long-term fiscal plans to restore
sustainability of public finances will be required to rebuild policy space and to address
long-run budgetary pressures.
C. Monetary and Exchange Rate Policies
Short-run monetary accommodation and central bank interventions have been critical for
alleviating the financial crisis and the recession. Normalizing the monetary policy stance overthe medium term in major advanced economies and greater exchange flexibility in emerging
surplus countries are important for rebalancing global demand and sustaining growth. Someemerging surplus countries have allowed greater exchange rate flexibility or announced
policy changes to that effect, although intervention and reserve accumulation have restrained
currency appreciation in many cases.
10.
Almost all advanced economies have kept their target policy interest rates
constant at highly accommodative levels since the G-20 Leaders Summit in Pittsburg.
The largest advanced economy central banks had started winding down some of theunconventional measures taken during the crisis, but renewed financial stress and awidespread moderation in the pace of economic recovery during the second and third quarters

7
of 2010 have prompted provision of additional liquidity support. Several smaller advanced
economies have started raising policy rates from the low levels prevalent at the bottom of therecession, but only in Australia, which had avoided a recession, have the rates risen close toneutral levels.5
11.
Reflecting their lead role in the global economic recovery and, in a few cases,
signs of overheating, some emerging economies have tightened monetary policy. Only two
emerging economies—Brazil and India, both deficit countries—have raised policy rates.
Many emerging economy central banks have tightened their monetary policy through othermeans, such as higher reserve requirements. Russia and South Africa are the only G-20
economies to have lowered their policy rates since September 2009.
12.
Exchange rate adjustment is extremely important for global rebalancing, andsome emerging surplus economies have made progress towards increased flexibility.
Strong recoveries, declining absolute and relative risk aversion, and wide interest rate
differentials vis-à-vis advanced economies have put upward pressure on the currencies ofmost emerging G-20 members. Some of these countries, including Brazil, India, Indonesia,
Mexico, Russia and South Africa, have allowed their currencies to appreciate substantially innominal effective terms since September 2009. But other big emerging economies haveintervened in foreign exchange markets and increased their reserve holdings to limit thestrengthening of their currencies.


China recently announced a return to a more flexible exchange rate regime. The RMB
has appreciated less than 2 percent against the U.S. dollar since the policy
announcement, but day-to-day exchange rate volatility has increased markedly.

13.
Despite large exchange rate fluctuations, advanced economies have largely
avoided intervening in currency markets. Exchange rate movements among advanced
economy currencies have been sizable since September 2009. Through September 2010, theAustralian dollar appreciated against the U.S. dollar, the pound depreciated, while the euro
depreciated until mid-2010 but has appreciated since then. Korea, while allowing the won toappreciate somewhat, has increased its foreign reserves, and Japan intervened in September
2010 in the foreign exchange market for the first time since 2004 to weaken the yen after its
steep rise.

5

Understandably, the future path of monetary policy is generally not specified in the G-20 submissions.
Regarding prospective monetary policy developments, G-20 members have largely confined themselves to
describing their monetary policy frameworks and exchange rate regimes and pledging to take actions required tofulfill their central banks’ mandates without charting a specific course for interest rates.

8Overall, the stance of G-20 monetary policies remains broadly appropriate given
individual members’ circumstances. Key policy challenges remaining in advanced
economies will be to normalize the accommodative policy stance over time without
jeopardizing the recovery while remaining vigilant to potential threats to financial andprice stability. Exchange rate policies in emerging economies would need to allow
greater flexibility to help facilitate global rebalancing toward stronger, sustained andmore balanced global growth.
D. Structural Policies
Structural policies, including a reform of entitlements, investments in infrastructure, andenhancing competition and flexibility, are important for both internal and external
rebalancing. G-20 policy frameworks, however, indicate that only modest progress will bemade based on measures being planned in this critical area.
14.
G-20 members have taken some limited steps toward demand rebalancing
through structural reform. Some of the advanced deficit economies—namely Australia andthe United States—are considering measures that would encourage and facilitate saving for
retirement. The health care reform in the United States should help contain both public andprivate medical expenses. Several advanced surplus countries have announced policies toincrease labor market flexibility (e.g., some euro area members, Korea), some are considering
pension reforms (France), and Japan and Korea are considering investment in “green”
technology.
15.
Emerging surplus economies are also making modest progress towards
supporting private consumption through structural reforms. China is making progress onsocial safety nets and tax reform. The coverage of rural pensions and medical insurance isgradually being extended, but large gaps remain. China’s plan to broaden the VAT to services
will equalize treatment with goods, but may also have an adverse impact on consumption.
Plans to broaden the coverage of energy taxation are expected to be pursued. Indonesia hascommitted to improving the design and effectiveness of social safety net spending, althoughno specific implementation timetable has been announced. Russia, an oil exporter, has madeprogress toward strengthening its social safety nets by raising public pensions a cumulative
45 percent.
16.
Investments in infrastructure, education, and R&D feature prominently in plansacross G-20 advanced and emerging economies. A large number of both advanced andemerging economies from surplus and deficit groups have embarked on public infrastructure
investment projects as the means both to stimulate their economies during the slump and toincrease future potential output. Similarly, many countries from across the spectrum plan to
improve their support for education—another form of investment into the future. Numerous

9G-20 members also seek to encourage research and development through tax credits and otherincentives.
17.
G-20 plans pledge broad support for labor market reform to increase labormarket flexibility and reduce unemployment. In particular, EU members have, of course,
endorsed the Lisbon Agenda—aimed at improving labor, product and services market, tradeand other policies. However, a comprehensive set of specific measures from individual
countries has not been articulated at this stage. A number of countries have announced certain
initiatives to enhance labor market flexibility or labor utilization—e.g., by expediting a
resolution of disputes (Mexico), by reducing protection for permanent employees (Spain), byincreasing future labor supply, including through higher retirement age (France), and by
reduced social transfer payments (Germany). Many other countries are contemplating labormarket reform, including by promoting higher geographic labor mobility in some emerging
economies (e.g., China and Russia), but most plans lack specifics.
18.
Product and services market reforms to boost potential output are also being
considered, although the scope of reforms appears to be relatively modest. Measures
include increasing competition in services—through deregulation and other means—in certain
advanced deficit and surplus economies. Other avenues for enhancing the businessenvironment being considered by a few G-20 members (several emerging economies) are
privatization and increased openness to international trade and foreign investment. Russia isalso considering the privatization of large shares of state-owned financial and nonfinancial
enterprises (including in the oil sector) over the medium-term. It plans to raise some 2 percent
of GDP from privatization during 2011–13.
G-20 structural policies have made only limited progress thus far in specifying concreteand far-reaching plans for key reforms or have seen limited implementation of measures incurrent plans. Major reform challenges include developing a more ambitious and detailed
policy agenda (aligned with strategic priorities) with a specific roadmap (e.g., timetables)for reform. Policy challenges would include deeper and broader product and labor market
reforms that strengthen competition, or enhance flexibility and mobility in key markets
segments in advanced economies; and strengthening infrastructure investment and social
safety nets in emerging economies.

10
Box. Main Policy Challenges Remaining for the G-20
Notwithstanding progress already made, significant policy challenges remain for the G-20. Based on staff’s
stocktaking of main policy achievements since fall 2009, remaining priorities in each area are listed below.
Financial Policies
To repair fully the damage from the crisis and to better align global financial reforms with the medium-term
growth objectives of the G-20, key policy challenges include the following: Supervisory frameworks should be made more proactive to identify activities on the fringe of the regulatory
perimeter and broadened to better monitor systemic risks.
 Commitments to publish regular bank stress tests. This should be accompanied by commitments to publish
the results and to allow prudential authorities to pro-actively intervene, restructure, or resolve weak banks.
 Reforming cross-border resolution frameworks to enhance international cooperation for resolution large,
cross-border firms and to reach an international agreement on principles for burden sharing.
 Augment financial stability frameworks by developing macro-prudential tools to safeguard against volatilefinancial market conditions, including the effects of net capital flows.
Fiscal Policies
To put public finances on a sustainable path, promote internal rebalancing, and rebuild policy space,members—particularly, advanced economies—face the following challenges:
 To outline clear and credible medium-term consolidation plans that are ambitious in scope and timing tominimize the risks of significant fiscal slippages going forward, and underpinned by key commitments
 To emphasize specific growth friendly policy measures aimed at reforming rapidly growing public spending
programs and making tax reform more concrete to reduce uncertainty.
 To implement rapidly measures aimed at strengthening fiscal institutions to enhance their credibility andimprove the budgetary processes and governance and better monitor fiscal developments.
 To sustain the fiscal consolidation effort, notably by developing long-term budgetary plans.
Monetary and Exchange Rate Policies
Remaining policy challenges vary across the membership:
 To normalize over time the current accommodative monetary policy stance in major advanced economies
without jeopardizing economic recovery, while remaining vigilant to potential threats to financial and pricestability.
 To enhance greater enhance exchange rate flexibility in emerging surplus economies to facilitate global
demand rebalancing and paving the way for a healthier, sustained recovery.
Structural Policies
More ambitious structural reforms are required to repair damage to supply potential following the crisis and to
reduce high unemployment. Specifically: For advanced deficit economies, specify concrete measures to encourage and facilitate saving for retirement.
 For advanced surplus economies, provide concrete and ambitious plans for labor, product, and services
market reforms with specific timeframes.
 For emerging surplus expand coverage of social safety nets to reduce high precautionary saving.
 In oil-exporting countries, plans and timetables to enhance the productivity of the non-oil sector, including
through infrastructure investment, should be more clearly identified.