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IMFSurvey Magazine: Policy

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Worker in India: People from emerging economies are joining the global labor supply as the trend toward globalization continues (photo: Vishal Olwe/EPA)

Worker in India: People from emerging economies are joining the global labor supply as the trend toward globalization continues (photo: Vishal Olwe/EPA)

2013 SPRING MEETINGS

IMF Has Clear Role in Interconnected World

IMF Survey online

April 20, 2013

  • Rise of emerging economies, globalization seen as key trends
  • Structural economic reforms will be vital over long run
  • IMF needs to continue adapting to changing global circumstances

As economies become increasingly interconnected and interdependent, there is a major role for international organizations such as the IMF, panelists told a seminar at the IMF-World Bank Spring Meetings.

At “Long-Term Global Trends and Their Implications for the IMF,” a group of eminent thinkers examined "big picture" global trends, such as the rise of emerging market economies, the aging of populations, the rapid development of technology, and climate change.

These long-term trends are shaping the future global economic landscape. To be able to predict and avert crises, the IMF and others will have to pay greater attention to these developments, suggested Namrata Brar of New Delhi Television, who moderated the session.

“At the macro level, the world is becoming ever more interdependent,” said IMF Deputy Managing Director Min Zhu. “We need to truly become the institution to safeguard macroeconomic stability in a super-interconnected world.”

Joining Zhu on the panel were economist Nouriel Roubini, journalist Thomas Friedman, and Singaporean Finance Minister Tharman Shanmugaratnam.

From connected to hyperconnected

Brar began by asking the panelists to name the one long-term global trend that will be predominant over the next decade and that the IMF cannot afford to ignore.

Globalization is the leading trend, said New York University’s Roubini. In addition to greater international trade in goods and services, there will be more international movement of capital and labor, more global supply chains, and more foreign direct investment. Within this trend is the integration of emerging markets in the global economy. Over two billion Chinese and Indians are now joining the global labor supply, he noted, with workers from the rest of the world’s emerging economies close at their heels.

Partly as a consequence of this trend, the world is undergoing a major structural shift, he observed. Advanced economies are now increasingly the debtors and the borrowers and emerging economies are becoming the creditors, in a reversal of their traditional roles. “85 percent of the IMF’s loans now go to countries like Greece, Ireland, and Portugal,” Roubini said, “and it used to be the opposite.”

Thomas Friedman of the New York Times agreed, saying that globalization has been taken to a new level. Globalization was the subject of his 2004 book, The World Is Flat, which asserted that the world’s historic and geographical divisions were becoming increasingly irrelevant and the world is a level playing field in terms of commerce. Today, he said, the world has gone from connected to hyperconnected in the space of a decade.

“When I was running around the world saying the world is flat, Facebook didn’t exist, Twitter was still a sound, the cloud was still in the sky, 4G was a parking space, LinkedIn was a prison, an application was what you sent to college, Big Data was a rap star, and Skype was a typo,” Friedman said.

As with many long-term trends, this change has essentially escaped notice, he observed. “We’ve been looking in other places and talking about other things, but every one of us in our jobs, our markets, and our countries is living and experiencing a very different world.”

Crisis in social balance sheets

For Tharman (who is chairman of the IMF’s main policy-setting body, the IMFC), the most troubling trends were social and political in nature. “Far more important than the crisis of financial balance sheets is the crisis in social balance sheets,” he said.

The world’s most difficult problems have to do with the growing risk of a significant pool of long-term unemployed persons in the advanced economies and the challenge of creating meaningful jobs for the large youth bulge in the emerging economies, he said.

A second big challenge, Tharman said, relates to pensions and health care financing, where commitments made by governments to future generations cannot be met. “There’s a serious intergenerational issue that we face—most pronounced in advanced societies—for which we do not yet have a solution,” he said.

“Toxic nexus”

Brar asked Roubini—also known as “Dr. Doom” for having predicted the recent global financial crisis—what advice he had for the IMF and other institutions on forecasting crises.

Crises used to occur most frequently in emerging economies, Roubini responded, but these countries have learned from the past and become more resilient. It’s the advanced economies that now cause the most concern, he said.

“I worry about this toxic nexus of high debt, low potential growth, still-lingering effects of the financial crisis—in a world in which the rise of emerging markets presents major new challenges for advanced economies,” Roubini said.

Echoing Tharman’s concerns on unemployment, Roubini noted that a technology-related phenomenon similar to the one that allowed the reduction of labor in manufacturing is now playing out in the service sector.

“In retail, I don’t go to a cashier anymore, I go to those automatic checkouts,” he said. “And right now radiologists in Mumbai can do the same job as a radiologist in New York at one quarter of the salary—and eventually some software is going to do that job.”

All this, he said, is creating huge challenges for employment generation in advanced economies at the very time that these countries are coping with the effects of the emerging economies’ ascendance.

The IMF and crises

Asked whether the IMF was equipping itself to predict and prevent crises, the IMF’s Min Zhu noted that one of the IMF’s jobs was to monitor risks, a task made more complicated by the evolution of the global economy and the emergence of new threats.

“We see different risks in different parts of the world,” Zhu said. “For example, we see slow growth as the main risk in the euro area; we see the high debt overhang risks in countries such as Japan and the United States; and we see financial imbalances in some emerging markets, such as China. So we are focusing on different risks around the world.”

The IMF has adapted its toolkit to respond to these new challenges, Zhu observed. “If you look at the past two to three years, we’ve really developed into new areas. We’ve moved from bilateral surveillance into multilateral surveillance; we do early warning exercises; we do spillover reports to better understand the links between countries; and we do external sector assessments to assess the value of countries’ exchange rates in a multilaterally consistent way.”

In a tweet…

Brar concluded by asking each panelist to summarize the seminar in a tweet of 140 characters or less:

Zhu: “The world has been changing dramatically. The Fund has to face, adapt, and prepare for this change and support global economic and financial stability.”

Roubini: “A more interconnected world needs more international cooperation and coordination, but unfortunately so far policies seem to be more national than international.”

Tharman: “Focus more on structural reforms, less on macroeconomic policies as a solution to the world’s problems.”

Friedman: “I’m an old fuddy-duddy, I’m 59. When I graduated from college, I got to find a job; my girls will have to invent a job.”


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