The Group of Twenty industrialized and emerging market economies (G-20) has broken new ground over the past year or two. It has embraced the type of collaborative approach to policy design and review that is well suited to today’s interdependent world, where policies in one country can often have far-reaching effects on others.

Collective action by the G-20 in response to the recent crisis was critical in avoiding a catastrophic financial meltdown and a potential second Great Depression. Exceptional policy responses around the globe—including macroeconomic stimulus and financial sector intervention—indeed helped avoid the worst. These actions were notable, both for their scale and force, but also for their consistency and coherence.

Keen to build on this success, G-20 Leaders pledged at their 2009 Pittsburgh Summit to adopt policies that would ensure a lasting recovery and a brighter economic future. To meet this goal, they launched the “Framework for Strong, Sustainable, and Balanced Growth.” The backbone of this framework is a multilateral process, where G-20 countries together set out objectives and the policies needed to get there. And, most importantly, they undertake a “mutual assessment” of their progress toward meeting those shared objectives. With this, the G-20 Mutual Assessment Process or the “MAP” was born.

But, what exactly will the G-20 Framework imply in terms of prospective actions? And what have we learned so far from the MAP?

The MAP—led and owned by the G-20

The MAP is a new approach to policy collaboration, entirely conceived and owned by G-20 members. Leaders have set the tone and substance for the initiative. The aim is to ensure that the collective policy action will benefit all. Like any new initiative, the MAP will be fully fleshed out over time, in large part through learning by doing. In the meantime, however, all G-20 members have signaled their “buy-in” to the process through their full cooperation in providing the information required for the analysis and assessments.

When the G-20 initiated the MAP, they asked the International Monetary Fund (IMF) to provide supporting technical analysis. In carrying out this task, the Fund was asked to seek help from other international institutions such as the World Bank, the OECD, the ILO and the WTO. Moreover, a G-20 Working Group (co-Chaired by Canada and India), which was established to substantively add value to each stage of the mutual assessment, has assisted the G-20 Deputies in providing guidance to the Fund and other organizations on the analysis. 

The initial assessment was based on three key steps.

• As a first step in this process, all G-20 countries supplied each other and Fund staff with information about their “policy and macroeconomic frameworks”—that is, their policy plans and the expected performance of their economies over the next 3-5 years.
• Fund staff aggregated the inputs to assess whether the policies were consistent on a “multilateral” basis. And also what they implied for growth, employment, poverty, and so on. This formed the basis for the G-20 “base case” scenario. In keeping with the G-20 ownership of the exercise, individual country policies were taken at face value and no judgments were made by IMF staff concerning their feasibility, timing, or effectiveness.
• Once the base case assessment was considered by the G-20, Fund staff liaised closely with the Working Group to analyze alternative policy scenarios. A key objective of this exercise was to show how the economic outcomes could be improved through collective action by G-20 members.

Providing the foundation—the G-20 “base case”

The G-20 base case collectively implied “strong” growth.  This enabled a decline in unemployment, which would, nevertheless, still remain quite high for several years. Growth was projected to be “balanced”, since it was broad-based across the G-20 countries.  Finally, growth was expected to be “sustainable,” since it was led by private demand.

The analysis, however, pointed to some shortcomings and risks. 

Budget balances in the base case were projected to improve noticeably, helped by strong growth. But deficits and debt levels would still remain high in the large advanced economies. Moreover, there is a risk that if strong growth projected in the submissions by the large advanced economies did not materialize, fiscal positions in these economies could worsen significantly and even trigger another crisis.

The forecasts were also associated with only a modest rebalancing of global demand. Countries with large current account deficits before the crisis did not expect a significant boost to growth from exports. And countries with large surpluses did not expect a significant boost from domestic demand.

Alternative policy scenarios—benefits of collective action

Based on the findings of the “base case” assessment, the G-20 asked IMF staff to explore two alternative policy scenarios. First, an “upside scenario” and associated policy requirements that would help improve the outlook. Second, a “downside scenario” aimed at assessing the implications of the risks identified in the base case, if they were to materialize.

Prior to carrying out the scenario analysis, Fund staff made technical refinements to the G-20 base case. This was made for two reasons. First, to ensure greater multilateral consistency in assessing the impact of the crisis and the estimation of output gaps; and Second, to update the macroeconomic frameworks for economic and market developments since the submission of G-20 inputs.

The “upside” scenario assessed—in a layered approach—the cumulative benefits of three sets of policy actions for groups of countries with similar circumstances.

• First, “growth-friendly” and credible fiscal consolidation in major advanced economies, beginning in 2011 and beyond countries’ existing medium-term plans.  Fiscal consolidation plans were conceived to be strong, credible, and, to the extent possible, supportive of growth. 
• Second, policies aimed at nurturing domestic demand in emerging economies with large external surpluses. These were aimed at offsetting the loss of demand as advanced economies further tightened their fiscal positions in coming years.
• Third, structural reform policies aimed at alleviating supply constraints and reducing high unemployment, particularly in advanced G-20 economies, along with measures to boost demand.  

The key takeaway from this exercise is that well-designed, collaborative policy actions by the G-20 economies can produce outcomes that will make everyone better off. For instance, considered in isolation, fiscal consolidation in advanced economies would dampen growth in the next year or two. And it would have a lasting adverse impact on partners in emerging Asia, given their high export dependence. But all G-20 countries stand to gain when fiscal consolidation in advanced economies is accompanied by key reforms in emerging economies. Benefits to all countries increase further when all three sets of policies noted above are undertaken together. Indeed, our simulations suggested that the payoff for collective policy action by G-20 countries could be high, raising global GDP by an estimated 2½ percent over the medium-term. This would also be good news for job creation and poverty reduction.

The “downside” scenario assessed the implications of the risks identified in the G-20 base case. What if growth in major advanced economies was lower than projected or what if market concerns about fiscal sustainability led to a sharp increase in sovereign risk premia? Not surprisingly, the outcome could be quite scary. There would be significant output and employment losses, with a large number of people falling into poverty. At the same time, it is clear that the implementation of the policies needed to reach the upside scenario would likely reduce the probability of such a downside scenario occurring.

So, where to next?

Reflecting on this assessment, G-20 Leaders agreed at the Toronto Summit in June 2010 that they could do a better job of achieving the objective of strong, balanced and sustainable growth by working together and pursuing reforms along those lines. Leaders committed to taking stronger policy actions that would get the world economy closer to the “upside” scenario in the staff’s report.

This set the stage for the second phase of the process, where the mutual assessment will be conducted at the country and regional level. During this phase, each G-20 member will identify policy actions that could help achieve an ambitious outcome of stronger growth than in the base case. These “country-level” policy plans will form the basis for a comprehensive plan that will be articulated by Leaders at the Seoul Summit this November.

As the G-20 moves forward with this shared approach to tackling today’s policy challenges, they have a unique opportunity to deliver a better outcome for all.