IMF Economic Counsellor and Director of Research Maury Obstfeld: “The year will offer an abundance of challenges.” (IMF photo)
Chief Economist Interview
The IMF marked some big changes in 2015 as well: the U.S. Congress passed the 2010 quota reform and China’s currency, the yuan, was added to the IMF’s basket of official currencies.
On the personnel front, the IMF welcomed a new chief economist, Maury Obstfeld, former chair of the economics department at University of California at Berkeley. He arrived in September from the U.S. President’s Council of Economic Advisors to succeed Olivier Blanchard as the IMF’s Economic Counsellor and Director of Research.
Shortly before the start of the new year, IMF Survey sat down with Obstfeld to discuss the past year and to look ahead to 2016.
IMF Survey: What is your assessment of how the global economy turned out in 2015? What went better than you anticipated, and what does not look so good?
Obstfeld: There was good news and bad news. The U.S. economy continued its solid growth and job creation, while Europe generally picked up speed and Japan remained a question mark. But with some exceptions (such as India), emerging and developing countries continued to slow in the face of falling commodity prices and tighter financial conditions, and synchronized and sustainable global growth remained elusive.
In some countries, beyond these very general trends, there is an overlay of political or geopolitical tension that magnifies the purely economic challenges. How these tensions play out in 2016 will be a major determinant of regional and global macroeconomic outcomes. It comforts me to reflect, however, that the end of 2015 produced one piece of very good news on the international monetary system: the U.S. Congress finally approved the IMF quota reform originally agreed in 2010. Along several dimensions, that change will strengthen the IMF’s capacity to meet future stability challenges, whatever they may be.
IMF Survey: What are the other key issues we need to pay attention to in 2016?
Obstfeld: China will remain high on the list. Its economy is slowing as it transitions from investment and manufacturing to consumption and services. But the global spillovers from China’s reduced rate of growth, through its diminished imports and lower demand for commodities, have been much larger than we would have anticipated. Serious challenges to restructuring remain in terms of state-owned enterprise balance sheet weaknesses, the financial markets, and the general flexibility and rationality of resource allocation. Growth below the authorities’ official targets could again spook global financial markets—but then again, time-honored methods of enforcing growth targets could simply extend economic imbalances, spelling possible trouble down the road.
Obstfeld: “A predominantly advanced-economy lens for viewing the world economy has become ever more outmoded.”
What else to watch? The crisis of refugees fleeing Iraq and Syria offers a major challenge to the absorptive capacity of EU economies and labor markets, but even more so to political systems. The project for common policing of the EU perimeter and the related tensions concerning free mobility of people within Europe bear watching. But we should not forget that countries such as Lebanon, Jordan, and Turkey are on the advanced front line of the refugee crisis. And even apart from refugee issues, Europe faces other political and economic challenges—from the Iberian Peninsula, to Greece, to Ukraine.
Climate change and the struggle to limit CO2 emissions is a slow-moving crisis but one that we ignore at our peril. The COP21 agreement in Paris was a triumph for international cooperation. In 2016 we will see how national capitals react and get an initial take on whether the agreement promotes effective international cooperation.
Finally, there is international trade—which has had setbacks in recent years as global trade growth has slowed relative to GDP growth. Will the Trans-Pacific Partnership (TPP) pass the U.S. Congress? We may know this spring. If so, will it be a prelude to a deal between the United States and the EU? The Doha round was effectively scrapped in Nairobi last month. If comprehensive multilateral trade agreements are off the table, can trade liberalization still proceed usefully on a more limited scale? The answers are important across the Fund’s membership.
IMF Survey: Will 2016 be the year of Emerging Markets? Are capital outflows from emerging market countries a growing worry?
Obstfeld: The year will offer an abundance of challenges, but yes, emerging markets will be at center stage. Capital inflows are down, some reserves have been spent, sovereign spreads have widened, currencies have weakened, and growth is slowing sharply in some countries. Currency depreciation has proved so far to be an extremely useful buffer for a range of economic shocks. Sharp further falls in commodity prices, including energy, however, would lead to even more problems for exporters, including sharper currency depreciations that potentially trigger still-hidden balance sheet vulnerabilities or spark inflation.
The mood in financial markets is glum as 2015 ends, and susceptible to increased volatility, notwithstanding continuing accommodation by the European Central Bank and the Bank of Japan. Of course, the U.S. Federal Reserve launched in December what it intends to be a cycle of gradual interest-rate hikes. It will be critical how the Fed manages subsequent interest-rate increases during 2016 and how it communicates with the market—a task it seems to have commenced on the right foot at the end of 2015. But there is no doubt that global financial conditions are tightening, and emerging and developing markets are especially sensitive to the effects, given other current woes.
IMF Survey: Building on this, what do you see as the main analytical challenges for the profession and for the Fund in particular?
Obstfeld: Emerging and developing economies should be an even more intense focus of research. During the 1980s, emerging and developing economies accounted for around 36 percent of global GDP (measured in purchasing power parity, or PPP, terms) and some 43 percent of global GDP growth (with PPP weights). For 2010-2015, the numbers were 56 percent and 79 percent, respectively. So a predominantly advanced-economy lens for viewing the world economy has become ever more outmoded. That research agenda for emerging and developing economies comprises classic issues related to the balance of payments—capital flows and their management, foreign exchange intervention, vulnerabilities in external balance sheets, and the determinants of current account balances, trade patterns, and trade volumes.
But there are many additional questions. What policies and policy frameworks are most conducive to higher potential output and its growth? Potential GDP growth seems to have declined throughout the world, as noted in past editions of the World Economic Outlook (WEO), but the reasons are not well understood. The April 2016 WEO will look at advanced-economy structural reforms in that context.
Trends in inequality also warrant attention. Despite considerable global convergence in national per capita incomes, a more equitable income distribution within countries has not necessarily followed. This inequality has implications for overall economic productivity (for example, through health outcomes) and for the political sustainability of market-friendly policies. How can growth be made more inclusive, and how might that, in turn, support higher growth?
Beyond these longer-term questions of growth and distribution, there are many economic stability issues calling for attention. For example, looking broadly across all economies, integration of the financial sector into our macro-policy frameworks remains an urgent research priority.
IMF Survey: What do you see as the research role of the Fund within the wider international policy community?
Obstfeld: The Fund combines a truly global scope of analysis with the ability to address rigorously live policy issues in real time. That capacity gives Fund research the nearly unique potential to lead global opinion through a simultaneous impact in academic and policy circles and in broader public debate. The Fund today engages with 188 member countries—that scope and 70 years’ experience of multilateral surveillance, Article IV consultations, and technical assistance give us a unique vantage point, and much of our research has flowed from that perspective.
From some of the earliest influential analyses of the effects of exchange rates on trade, to more recent work on global real interest rates, fiscal policy, capital flows, public infrastructure spending, and the investment accelerator, the Fund has been at the center of intellectual progress on policy-relevant topics. More recently, the Fund’s willingness to reassess its doctrines and policies in light of both experience and research has lent our views added credibility. No one gets it right 100 percent of the time. Intellectual honesty means occasionally admitting mistakes and adapting to new realities, but it pays off in terms of long-run influence if people see you are working in good faith to reach the right answers.
IMF Survey: Is sufficient work being undertaken on traditional issues within the IMF (e.g., international monetary system)? Should we be getting into new topics (climate change, inequality) in terms of our analytical work?
Obstfeld: The international monetary system was much simpler in the early days of the Bretton Woods system, when the key issues were limited to exchange rates and balance of payments adjustment. In today’s world of tightly linked but still nationally distinct capital markets, the issues have become much more complex. Questions about the link between the exchange-rate regime and financial stability, for example, are now central and will remain the subject of intensive research within the Fund.
In other respects too, the Fund’s remit has broadened as the global economy has become more complex and interconnected. So, it is natural that the scope of research and policy will also expand.
Regarding so-called “new” topics: we have to be realistic about our resources, which are not unlimited. But the Fund has long (and rightly) been concerned with macro-critical issues like women’s labor-force participation and labor-market institutions, which can also be quite relevant to some of our Article IV assessments. As other examples, the April 2008 WEO following up on the Stern review of climate change, featured a chapter on global CO2 emissions and the macroeconomic effects of carbon pricing, while the IMF’s Fiscal Affairs department has done important recent work on energy subsidies and carbon pricing. Our Managing Director Christine Lagarde emphasized these topics in the lead-up to the Paris agreement of December.
The challenge will be to select those aspects of the newer topics where IMF staff members have a comparative analytical advantage and where the macroeconomic implications are most relevant among a large share of the Fund’s membership. But in general, we are seeing that these topics are too important to ignore if we really want to understand the state and future of the global economy. They are critical to a truly member-focused approach.
