A Problem Shared Is a Problem Halved: The G-20’s “Mutual Assessment Process”

IMF Blog, August 26, 2010

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The Mutual Assessment Process (MAP) is a multilateral, G-20–owned approach to policy collaboration, conceived to ensure collective policy actions benefit all members.
Leaders launched the “Framework for Strong, Sustainable, and Balanced Growth” at the 2009 Pittsburgh Summit; the MAP is the backbone of that framework.
The IMF was asked to provide supporting technical analysis, drawing on the World Bank, the OECD, the ILO and the WTO, and working with a G-20 Working Group (co-Chaired by Canada and India) to guide the analysis.

Step 1: All G-20 countries supplied their “policy and macroeconomic frameworks” (policy plans and expected economic performance over the next 3-5 years).
Step 2: IMF staff aggregated country inputs to assess multilateral consistency and implications for growth, employment, and poverty, forming the G-20 “base case.” Individual country policies were taken at face value; IMF staff made no judgments on feasibility, timing, or effectiveness.
Step 3: Fund staff, liaising with the Working Group, analyzed alternative policy scenarios to show how collective action could improve outcomes.

The base case collectively implied:
- “strong” growth;
- a decline in unemployment that would nevertheless remain quite high for several years;
- “balanced” growth, broad-based across G-20 countries;
- “sustainable” growth, led by private demand.
Key shortcomings and risks identified:
- Budget balances were projected to improve noticeably, helped by strong growth, but deficits and debt levels would still remain high in the large advanced economies.
- If the strong growth projected in large advanced economies did not materialize, fiscal positions in these economies could worsen significantly and even trigger another crisis.
- Only a modest rebalancing of global demand was projected: countries with large pre-crisis current account deficits did not expect a significant boost to growth from exports, and countries with large surpluses did not expect a significant boost from domestic demand.

IMF staff explored two alternative scenarios at the G-20’s request:
- An “upside scenario” with policy requirements to improve the outlook.
- A “downside scenario” assessing implications if base-case risks materialized.
Before scenario analysis, Fund staff made technical refinements to the base case to:
- ensure greater multilateral consistency in assessing the impact of the crisis and the estimation of output gaps;
- update macroeconomic frameworks for economic and market developments since G-20 submissions.

The “upside” scenario evaluated cumulative benefits of three layered policy actions across groups of countries:
- 1) “Growth-friendly” and credible fiscal consolidation in major advanced economies, beginning in 2011 and beyond countries’ existing medium-term plans; consolidation conceived to be strong, credible, and, to the extent possible, supportive of growth.
- 2) Policies to nurture domestic demand in emerging economies with large external surpluses, to offset lost demand as advanced economies tighten fiscal positions.
- 3) Structural reform policies to alleviate supply constraints and reduce high unemployment (particularly in advanced G-20 economies), along with measures to boost demand.

Simulations suggested 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.
The upside scenario would also be favorable for job creation and poverty reduction.
The “downside” scenario (e.g., lower-than-projected growth in major advanced economies or a sharp increase in sovereign risk premia) could produce significant output and employment losses and a large increase in poverty.
Implementation of policies toward the upside scenario would likely reduce the probability of the downside outcome.

G-20 Leaders at the Toronto Summit in June 2010 agreed to pursue stronger policy actions to move the global economy closer to the staff’s upside scenario.
The MAP’s second phase focuses on country- and regional-level mutual assessment:
- Each G-20 member will identify country-level policy actions that could achieve stronger growth than in the base case.
- These country-level policy plans will form the basis for a comprehensive plan to be articulated by Leaders at the Seoul Summit in November.
Collective, well-designed policy coordination across the three identified policy sets is central to delivering stronger, balanced, and sustainable growth for all.

Olivier Blanchard, “A Problem Shared Is a Problem Halved: The G-20’s ‘Mutual Assessment Process’”, August 26, 2010.