Can Globalization Still Deliver?

IMF News, May 24, 2016

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Authors: David Lipton
Published: May 24, 2016

Overview

Speech by David Lipton, First Deputy Managing Director, IMF, delivered as the Stavros Niarchos Lecture, Peterson Institute for International Economics; "As prepared for delivery".
Date of speech: May 24, 2016.
Central question: What more can globalization do to boost living standards, spread benefits more fairly, limit costs, and manage risks—can internationalism be renewed when no single country can be the guardian of globalization?

From Theory to Practice

Graduate-school model summary:
- Poor country acquires superior technology from rich country.
- Investment in poor country rises; rich-country investors “reach for yield.”
- Poor-country citizens save more (“domestic resource mobilization”).
- Poor country runs a substantial current account deficit and imports capital.
- Outcome predicted: convergence in living standards; both countries gain.
Real-world experience showed additional necessary elements beyond the simple model:
- People (courageous politicians and reformers) mattered.
- Reform strategies mattered (liberalize prices, stabilize public finances, privatize, build governance).
- Rejoining Europe and official external support helped transition countries.

Global Reality Bites: Crises and Lessons

1980s: Developing-country borrowing sometimes led to debt crises and “lost decade” (Latin America).
Philippines example: about 20 nearly consecutive IMF lending programs.
Transition economies required large-scale institutional rebuilding; outcomes were uneven (Poland succeeded; Ukraine struggles).
1994 Mexican crisis highlighted vulnerability of open economies; required U.S. direct loans in addition to IMF support.
Late 1990s Asian crises (Thailand, Korea, Indonesia) showed:
- Even countries with good policies can develop financial vulnerabilities.
- Global financial markets can herd and trigger reversals of capital flows across similar countries.
- Emerging markets responded by building reserves, weakening exchange rates, and running smaller current account deficits.

The “Rise of China” and “Africa Rising”

China:
- Foreign direct investment permitted from late 1970s; took off in the 1990s.
- Growth model included high savings and investment, export competitiveness, current account surpluses, huge reserve accumulation.
- Result: 600 million people lifted out of poverty in a generation.
Africa:
- After debt relief and policy improvements, exports powered growth aided by rising oil and commodity prices and China’s demand.
- By 2008, 14 countries in sub-Saharan Africa achieved a decade or more of 5 percent annual growth; nine exceeded 7 percent for a decade.

From Global Financial Crisis to the “New Mediocre”

2009 G20 response (Pittsburgh and London) helped avoid a global economic collapse; IMF resources were bolstered and coordinated stimulus implemented.
Since 2011, global growth has slowed and international trade has weakened; Christine Lagarde’s term “new mediocre” referenced.
Two possible explanations for weak advanced-economy growth:
- Crisis legacy: debt-laden balance sheets, crisis-wary consumers and investors, overstretched monetary policy, too-austere fiscal policy → hysteresis.
- Secular stagnation: increasing scarcity of profitable investments and falling real interest rates for 15 years.
Emerging and developing countries are also slowing; long-run potential growth appears to have fallen in many cases.

Emerging and Developing Economies — Struggling to Catch Up

IMF medium-term forecasts: emerging world converging at only two-thirds of the pace predicted a decade earlier.
Many major emerging economies may not be converging; per capita income for some is flat or falling as a share of U.S. per capita income (examples: Brazil, Russia, Mexico, South Africa).
Paradox: greater capital mobility, financial innovation, and universal knowledge availability should ease convergence, yet it is lagging.
OHIO (“Own House In Order”) strategy components discussed:
- Legacy of global crisis: slower growth in advanced economies and China; divergent U.S. and Eurozone monetary policies.
- Necessary adjustments for commodity and oil producers due to price declines and global excess capacity.
- Unfinished reforms: legal, institutional, and policy foundations to support investment.
Concern: OHIO elements may be strongly pro-cyclical, deepening the global slowdown; countries may build larger self-insurance buffers (reserves, stronger current account positions) that are also pro-cyclical.

Collective Action (“California strategy”)

Need to re-examine global architecture to support growth and convergence via collective action.
Key elements to revisit:
- An international financial safety net that emerging economies view as reliably available, financially sufficient, with equal voice; better weaving of global and regional safety nets; possibly something new—IMF intends to engage.
- Reassess whether short-term, volatile capital flows are problematic; consider adjustments to source-country supervisory frameworks and tax systems that encourage short-term, debt-creating flows.
- Consider coordinated capital flow measures and macroprudential policies in capital destination countries.
- Reassess tax policies to reduce debt bias and facilitate greater equity flows.
- Ensure advanced-economy financial institutions, particularly nonbanks, have proper regulatory incentives to price risks of short-term international debt and hold sufficient capital.
- Permit greater transfer of technology: reassess property right protections and whether overly generous patents and trademarks stifle global adaptation (issues highlighted by debates around pharmaceuticals and TPP).
Observation: Despite agreement to mobilize finance for global infrastructure, cross-border project lending is declining; little progress in channeling wealthier-country capital to lower-income countries.

Looking on the Bright Side — Scenarios for Better Outcomes

China will inevitably slow but can remain the largest single contributor to global growth for some time; in 2015 China’s growth was equivalent to adding an economy the size of Poland or Sweden to global GDP.
India is identified as the only other country with potential to transform at similar scale.
Potential for 10 to 15 smaller countries to become a new engine of growth if they boost growth potential and the international system becomes more supportive:
- Hypothetical example: six percent annual growth in 10 to 15 countries with a starting total GDP of 4 trillion dollars would add more to the global economy than the Eurozone growing at potential.
- Possible contributors named: Vietnam, Bangladesh, the Philippines, Indonesia, Peru, Colombia, Ethiopia, Nigeria.
Historical precedent: Korea averaged 7 percent growth for 50 years, raising living standards from less than 10 percent of U.S. levels to 55 percent.

Political Economy Challenges and Policy Imperatives

Need to secure benefits of cooperation, integration, and a globalized system while managing spillovers and volatility that cause setbacks and disillusionment.
Remain mindful that protectionism in trade and finance is self-defeating.
New lessons: economic and gender inclusion and reduced income inequality can boost growth.
Urgent need to make the case for globalization to electorates—highlighting poverty reduction, innovation from shared ideas, higher living standards from trade, and higher returns to wealthy countries from investment partnerships with developing countries.

Conclusion

Collective action is essential: “we cannot go it alone in the modern world.”
Renewed international cooperation is required to foster a form of globalization that works for all.
Historical note cited: in the U.K. 1975 referendum two-thirds of the electorate voted “yes” to remain part of the European Common Market.

Source: "Can Globalization Still Deliver?", speech by David Lipton, First Deputy Managing Director, IMF, Stavros Niarchos Lecture, Peterson Institute for International Economics, May 24, 2016.