WASHINGTON -- Last week, President Barack Obama signed a $787 billion spending program designed to revive the U.S. economy, just the latest in a series of government interventions aimed at "stimulating" growth as consumer demand and industrial production slump.
Other rich countries have also opened the taps of government spending. But countries like Ukraine and Latvia, which have been forced to turn to the International Monetary Fund (IMF) for loans, are being told they must do the opposite -- slash spending and balance their budgets.
The key difference between Ukraine or Latvia and most industrialized Western countries is the ability to deal with growing debt. Basically, countries like the United States and Britain can afford large stimulus packages because they can afford to create more government debt. For now, at least.
They will fund their debts by issuing a record amount of government bonds in 2009 and investors are expected to keep buying them.
But when it comes to countries like Ukraine of Latvia, they have already borrowed so much from abroad that borrowing further to fund more deficits is simply not an option. Outside investors will no longer buy their government bonds in the required quantity. And printing more money would just lead to high inflation.
As a result, large government stimulus just can't be done. That's when the IMF steps in, as a lender of last resort.
"Basically [the difference is] between those countries who can take on extra debt, where markets have confidence that their wider budget deficits will remain under control, and those that don't have the resources to take on extra debt, either because they would face very high borrowing costs or they're already highly indebted," says IMF spokesman David Hawley.
"And the distinction isn't strictly between the industrial economies and the rest of the world -- for example emerging-market countries such as China, which have quite rightly undertaken fiscal stimulus."
Lender Of Last Resort
Hawley says the IMF can help countries that can't afford to mount stimulus campaigns in two ways: by providing temporary loans to help stabilize a country's currency, and provide what he calls "policy advice," which is designed to help a country emerge more quickly from the crisis.
And that advice often includes cutting social spending, raising taxes, and balancing the budget.
The goal is to ensure that those countries can once again become attractive to outside investors when the IMF stops lending. In Hawley's view, Ukraine is a textbook example.
"Ukraine is not in a position to undertake the kind of fiscal stimulus that a country like the U.S. is undertaking," he says. "Ukraine needs the help of others to emerge from its difficulties, and that means a combination of some budget adjustment and some external financing, a portion of which comes from the IMF."
Desmond Lachman, an economist who worked for the IMF for 22 years, says the fact that Latvia and Ukraine are both postcommunist countries isn't really relevant. It's not a case of double standards, he argues.
Lachman says their common communist past doesn't "necessarily set them back, "because there's been differentiation between them. Some of the countries are stronger than others." He says that unlike some other countries, "Latvia has borrowed a huge amount of money from abroad, and now that the money is drying up abroad, Latvia's got a huge problem."
Economists fear there may be a lot more countries like Ukraine and Latvia waiting to be rescued.
And that's why on February 22, the leaders of Britain, France, Germany, and Italy said the IMF's resources should be doubled, to $500 billion, to be ready to help more countries whose economies have been brought low by the global economic crisis.
Hawley says additional funding will make possible two features in the way the IMF would make loans in the near future.
"One is the idea that countries could qualify in advance for [IMF] loans. And that means that when they actually come to borrow, there aren't conditions attached to that money as such," he says.
"The second is taking a more streamlined approach to the conditions that the [IMF] attaches to its lending, so that they focus only on remedying the problems at hand and not trying to attempt more ambitious reform agendas."
In essence, Hawley says, doubling the IMF's resources will go a long way toward what he calls "confidence building." With this new confidence, he says, countries know that the IMF would be able to help them if a loan option becomes necessary.