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The Road to Sustainable Global Growth—the Policy Agenda
April 2, 2014
As Prepared for Delivery
Good morning. I would like to thank Provost Lieberman for his warm introduction. I am also appreciative of Dean Vali Nasr’s kind invitation to join you today. And I want to salute my friend and former IMF colleague, John Lipsky, who will be moderating today’s session.
I am delighted to be at SAIS, one of the world’s top learning institutions, with a faculty and student body renowned not only for their intellectual ability but also for their international commitment—which includes campuses on three continents. I understand that the school’s theme for this year is “Emerging Markets.” This seems most appropriate, since emerging market economies now account for the bulk of global growth.
Next week, Finance Ministers and Central Bank Governors of our 188 member countries— emerging markets, advanced economies and low-income countries—will gather in Washington for our Spring Meetings. Today, with this global audience at SAIS, let me give you a preview of our global policy agenda.
Strengthening International Cooperation is a Priority
I want to begin with what will be a priority issue. At a time when the world is still recovering from the Great Recession—and at a time when geopolitical tensions are rising—how can we strengthen the international cooperation that is key to addressing these challenges?
Certainly the global economy has stabilized since the onset of the financial crisis, but the recovery is too weak for comfort. Moreover, unless countries come together to take the right kind of policy measures, we could be facing years of slow and sub-par growth—well below the solid, sustainable growth that is needed to create enough jobs and improve living standards into the future.
This is not inevitable. As Aristotle wisely said: “We become just by performing just actions, temperate by performing temperate actions, and brave by performing brave actions.”
Now is the time for brave action.
The major G20 countries, at their meeting in Australia in February, recognized that the right policy actions by countries—and the right cooperation across countries—could raise world GDP by over 2 percent over the next 5 years.
This would place the global economy on a substantially different and better trajectory from today.
At that same meeting in Sydney, the IMF was asked to monitor country-specific plans and tasked with assessing possible “spillover” effects—how one country’s policy actions might affect others. With our global membership, technical expertise, and cross-country experience, the IMF is well placed to help.
We have been doing that for 70 years: after the Second World War, during the Asian and Latin American financial crises, and during the Great Recession. A more recent example is the assistance that we are proposing for Ukraine—and where IMF support will galvanize support from others.
It is international cooperation in action. It is the IMF in action.
Our role is generally well recognized. Consequently, almost our entire membership has approved a set of governance reforms aimed at strengthening our resources and better representing the changing dynamics amongst our shareholders.
The exception to this support, unfortunately, is the United States—our leading shareholder and a founding member. Just last week, legislation that would have brought these reforms into effect did not make it through the Congress. This is disappointing, but it is not the end of the story. We shall carry on.
The U.S. Administration has reiterated its commitment to see the reforms approved as soon as possible. The rest of our membership remains committed. And I am personally committed—because these reforms are good for the IMF, good for the U.S. economy, and good for the world.
So, international cooperation will be high on the agenda next week. What else?
Three broad topics:
(i) The state of the global economy: how is the growth engine running?
(ii) Short-term obstacles on the road ahead: how can they be navigated?
(iii) The medium-term horizon: how do we shift gears and get the global economy up to cruising speed—meaning stronger, more sustainable growth?
Let me discuss each of these.
1. State of the Global Economy
First, a quick check of the global economy. We will be releasing our new forecasts next week, so I will just touch on broad trends.
The global economy is turning the corner of the Great Recession, although overall growth remains too slow and weak. In 2013, global growth was about 3 percent; we project modest improvements in 2014 and 2015, although still remaining below past trends.
Economic activity in the advanced economies is improving, albeit at varying speeds. This is good news, because for the past 5 years the emerging market and developing economies have been shouldering the burden of recovery—accounting for 75 percent of the increase in global growth since 2009. The recovery is finally becoming a bit more balanced, in an overall economic landscape that has changed significantly.
In the advanced economies, growth is strongest in the United States, supported by robust private demand and an easing of the short-term fiscal brake. Even so, it will be critical to continue to carefully manage the gradual withdrawal of monetary support by the Fed, and to put in place a durable medium-term fiscal plan.
In the Euro Area, a modest recovery is taking hold—stronger in the core but weaker in the South. Encouraging steps have been taken recently to establish a banking union—which the IMF has been urging for some time. Implementing a common fiscal backstop remains key, as is the upcoming asset quality review of banks.
In Japan, the world's third largest economy, activity is seeing a boost from the monetary "arrow" of Abenomics. For growth to be sustained, the remaining two policy "arrows"—structural reforms and a concrete medium-term fiscal plan—also need to be comprehensively fired.
Activity in emerging market economies, which has been slowing, picked up slightly in the latter part of 2013—driven by stronger demand from advanced economies. Although tighter external financial conditions will be a drag on domestic demand, emerging Asia in particular will continue to be a bright spot, posting the world's highest growth rate of more than 6½ percent this year. China also will continue to be a key driver, albeit at a slower, more sustainable pace.
Many low-income countries too have been a bright spot. After Asia, Sub-Saharan Africa has been the most dynamic region in the world during the crisis, growing at around 5 percent per year on average. This should continue, although in several countries rapid debt accumulation and erosion of fiscal space will need to be watched.
Turning to the Arab Countries in Transition, their prospects are held back by the difficult socio-political context. Those countries striving to advance much-needed reforms deserve firm support from the international community.
So this is a snapshot of the global economy. I would summarize it this way:
A modest and fragile recovery is underway—and needs to change gears toward more rapid and sustainable growth.
2. Removing Obstacles to Short-run Growth
This takes us to my next topic: what short-term obstacles are emerging on the road to get there? I see three.
The first obstacle is in the advanced economies. There is the emerging risk of what I call "low-flation," particularly in the Euro Area. A potentially prolonged period of low inflation can suppress demand and output—and suppress growth and jobs. More monetary easing, including through unconventional measures, is needed in the Euro Area to raise the prospects of achieving the ECB's price stability objective. The Bank of Japan also should persist with its quantitative easing policy.
The second obstacle is in the emerging market economies. Corporate leverage has been rising, and there is a risk of heightened market volatility associated with the tapering of quantitative easing in the U.S. This is combined with a generally less benign external financial climate. What we saw from the recent bouts of market volatility is that countries with weaker fundamentals—larger domestic and external imbalances—are likely to be more affected. By the same token, strong policy responses by those economies are likely to be the best safeguard against turbulence.
Navigating the choppy waters of financial normalization will require a collaborative approach among all countries. That means building a shared understanding of the risks and the policy responses. It means cooperation among central banks and financial regulators to contain adverse policy “spillovers” and subsequent feedback to source countries—“spillbacks.” It also means, and as I have emphasized repeatedly, continued, clear communication among all central banks.
The third obstacle is the rise of geopolitical tensions, which could cloud the global economic outlook. The situation in Ukraine is one which, if not well managed, could have broader spillover implications. There are also other cases of geopolitical tension. Resolving them requires not only good policies, but good politics. Both are essential to enable the global economy to move into a higher gear.
3. Reaching Cruising Speed for Medium-term Growth
This brings me to my third and final topic—how do we reach cruising speed over the medium-term? How do we achieve higher quality, more sustainable growth that is more broadly shared?
We know that the costs of continued sluggish growth are high: modest income gains and meager reductions in unemployment and inequality. Indeed, the risk is that without sufficient policy ambition, the world could fall into a medium-term low growth trap. How can we avoid this?
We first need to fix problems that have been with us for some time during the crisis:
While some progress has been made on each of these, none has yet been overcome.
The economic, fiscal, and monetary policies that I have already mentioned are a big part of the solution. But with space for supportive policies narrowing in many countries, the role of structural reforms as a policy lever will increase.
What does that mean in practical terms? It means more and better-targeted investment, more labor market reforms, and more product market and services reforms.
First, public investment has taken a hit over the years in many countries; higher, well-prioritized investment would increase potential output and jobs. In Brazil, India, South Africa, and across the ASEAN countries, more public and private investment is essential to close infrastructure gaps. Investment to upgrade existing infrastructure networks is also needed in a number of the advanced economies—for instance, in Germany and the U.S.
Second, inclusive labor market reforms can go a long way in boosting potential growth. In countries with aging populations, increasing participation of underrepresented groups can help to keep them dynamic. In Korea, for example, measures to increase the participation of women and older workers should appreciably boost potential growth and more than offset the impact of aging. Recent IMF research has pointed out that, in many countries, increasing women’s participation in the workforce can be a powerful impetus to growth.
In countries with high levels of youth unemployment or informality, labor market reforms can be critical in avoiding a lost generation. In Mexico, for example, it is estimated that reforms to reduce hiring barriers in the formal sector could create nearly 400,000 new jobs annually.
Third, reforms to product markets and services can help break down vested interests, boost competition, and unleash huge growth and employment potential. This is the case not only in advanced economies such as Japan or Germany, but also in emerging market economies such as China.
Why? Because the innovation and productivity that underpin the services sector are the drivers of a modern economy. Think technology, communications, or finance. These, in turn, depend on effective, accountable and rules-based institutions.
That is why capacity building efforts are so important. That is also why capacity building is the largest service that the IMF provides today—in almost 90 percent of our 188 member countries, as diverse as Greece, Georgia and Guinea.
In Myanmar, for example, which I visited late last year, we are making a major effort to strengthen key areas of macroeconomic management as the country strives for reform. And through the IMF, the international community is coming together to help the country open up to the world.
All of which brings us back to where I began—on the role of the IMF and the importance of cooperation.
Conclusion
On that note, let me conclude.
In many ways, the world is at a critical juncture: emerging from the greatest financial crisis in almost a hundred years. Recovery is taking hold but is too slow and it faces several obstacles along the road. Bold policy steps can overcome these obstacles and take the global economy to the next level of more rapid and sustainable growth.
I have outlined a number of those steps today and they will be discussed further by our global membership next week. It is already clear that one policy step, above all, is key: a strengthening of international cooperation, a renewed commitment to multilateralism.
In our interconnected 21st century, no country can go it alone. National prosperity and global prosperity are linked; they depend, more than ever before, on our working together. The IMF is indispensable for this global cooperation.
Victor Hugo said: “Perseverance is the secret of all triumphs.”
The global economy is turning the corner—we need to persevere and push on together to complete the journey.
Thank you.
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