The World Bank's chief economist on Monday called for $2 trillion in economic stimulus projects in low-income countries to be funded by loans from the United States and cash-rich countries such as China and the Middle Eastern oil producers.
Justin Lin, the first Chinese official to serve as the bank's top economist, warned that a prolonged global slump can be avoided only by coordinated global action to spur demand.
A "global recovery fund in the spirit of the Marshall Plan" is needed to make up for lost demand, he said. The $2 trillion should be spread over five years and used to clear economic bottlenecks in poor countries in Africa and Southeast Asia, Lin said.
Spending on new roads, bridges and ports in developing nations would provide greater benefits than similar projects in the U.S. or Europe, Lin said. A 1998 Chinese stimulus effort drove growth from a long-run average of 9.6% to 10.8%, he said.
With the Obama administration's proposed $800 billion stimulus program facing strong political headwinds, Lin's proposal is unlikely to win many supporters. But it underscores the shared fates of advanced and developing countries amid the worst economic environment since the 1930s.
"It's in the rich world's self-interest to get trade and especially credit flowing into these countries," said Adam Posen, deputy director of the Peterson Institute for International Economics.
Lin's speech came one day after Dominique Strauss-Kahn, the managing director of the International Monetary Fund, said the U.S., Europe and Japan are "already in depression."
Economists differ on exactly what qualifies a downturn as a "depression." But most public officials have shied away from the term.
Lin traced the crisis to a yawning gap between world factory capacity, swollen by years of excessive investment in developing countries, and anemic rich-nation demand. Consumers in wealthy countries are paring spending after seeing $30 trillion in stock market wealth and $5 trillion to $10 trillion in home equity vanish in the downturn, he said.
Unless joint action is taken to spur demand, countries are "likely to turn to protectionism" in an effort to ensure that domestic producers enjoy the benefits of individual nations' stimulus efforts, he said.