G-20 states back keeping in place stimulus policies

Top policy makers and central bankers from the world’s major advanced economies pledged during the preliminary G-20 meeting to maintain their stimulus policies until the economic recovery is better established.

They also indicated that the G-20 economic powers would for now shy away from coordinating possible exit strategies or implementing economy-tightening policies until they see more solid signs of an economic comeback.

A growing number of Korean policy makers, experts and the central bank have signaled the need to end expansionary policies to preempt possible inflation, but such arguments will likely die down after the latest pledge at the London meeting, a preparatory gathering for the leaders’ summit three weeks later.

“It is clear in my view that too early a withdrawal of vital support could undermine the tentative signs of recovery we are now seeing and lead to a further downward lurch in business and consumer confidence, reducing growth and employment and worsening governments’ debt problems over the long term,” British Prime Minister Gordon Brown said in a speech to the London Summit. The full G-20 summit is to be held in Pittsburgh Sept. 24-25

“The stakes are simply too high to get these judgment wrong, so to decide now that it is time to start withdrawing or reversing the exceptional measures we have taken would, in my judgment, be a serious mistake,” Brown said.

The policy makers, finance ministers and central bankers who convened in London also pledged to work with the International Monetary Fund and the Financial Stability Board to map out how to withdraw each country’s economic stimulus.

“Working with the IMF and the FSB, we will develop cooperative and coordinated exit strategies, recognizing that the scale, timing and sequencing of actions will vary across countries and across types of policy measures,” said the final joint communique from the latest meeting.

Korean Finance Minister Yoon Jeung-hyun also echoed the same sentiment, saying it is “too premature” to implement possible exit strategies, and Korea needs “international coordination” with other countries when the time to initiate tighter policies comes.

Talks about how to end the current expansionary mode, which puts each country’s government under greater debt and larger deficits, have intensified recently amid growing signs of economic recovery, ranging from improving consumer confidence to better-than-expected earnings of major companies.

But selecting the right time to get out of alert mode is critical, since a badly timed move to launch the exit strategies may nip in the bud the nascent shoots of recovery, according to the latest report from the state-run Korea Institute of Finance yesterday.

Jang Min, a researcher at the institute, said in his latest report that Korea needs thoroughly-coordinated efforts to kick start tightening policies with other countries because of the dependence on exports here.

“Korea needs to watch the major economies including the United States when it rolls out full-fledged exit strategies including the interest rate hike,” said Jang. “If it by any chance activates its own exit strategies alone, doing so will not only strengthen the value of won but also will weaken recovery.”

Jang said many experts forecast that raising interest rates, the first possible step for an exit strategy, may come as early as the second quarter of next year, but a relatively weaker recovery in other parts of the world may delay such a move until the latter half of 2010.

By Jung Ha-won [hawon@joongang.co.kr]