We Need Forceful Policies to Avoid the Low-Growth Trap

Christine Lagarde

September 1, 2016

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Low growth, high inequality, and slow progress on structural reforms are among the key issues that G20 leaders will discuss at their meeting in Hangzhou, China, this weekend. This meeting comes at an important moment for the global economy. The political pendulum threatens to swing against economic openness, and without forceful policy actions, the world could suffer from disappointing growth for a long time.

2016 will be the fifth consecutive year with global GDP growth below its long-term average of 3.7 percent (1990-2007), and 2017 may well be the sixth (Chart 1). Not since the early 1990s—when ripple effects from economic transition caused growth to slow—has the world economy been so weak for such a long time. What has happened?

Chart 1 with background

In advanced economies, real growth is running almost a full percentage point below the average of 1990-2007.

Emerging economies have also been slowing—but from an exceptionally fast pace of growth in the past decade. Their slowdown is therefore more a return to the historical norm. Developments within emerging economies are quite diverse. In 2015, for example, GDP in two of the four largest economies—China and India—grew between 7-7½ percent, while GDP contracted by close to 4 percent in the other two—Russia and Brazil. But there are important common factors:

Weak global growth that interacts with rising inequality is feeding a political climate in which reforms stall and countries resort to inward-looking policies. In a broad cross-section of advanced economies, incomes for the top 10 percent increased by about 40 percent in the past 20 years, while growing only very modestly at the bottom (Chart 2). Inequality has also increased in many emerging economies, although the impact on the poor has sometimes been offset by strong general income growth.

Chart 2 with Background

Forceful policy actions are needed to avoid what I fear could become a low-growth trap. Here are the key elements of a global growth agenda as I see them:

It takes political courage to implement this agenda. But inaction risks reversing global economic integration, and therefore stalling an engine that, for decades, has created and spread wealth around the globe. This risk is, in my view, too large to take.

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