Boosting Growth and Adjusting to Change

September 28, 2016

Good morning. Provost Lizner, Dean Blount, thank you for your generous introduction. And thank you students, faculty, and guests for coming here this morning.

Some of you may not be aware that Chicago was my home for more than five years. And it is such a pleasure to be home again just before an enormously busy week in Washington, DC next week, when we hold the Annual Meetings of the IMF and the World Bank.

Our event today provides an informal opening to these meetings, and I am grateful that we can hold it at one of the most respected management schools in America. Kellogg’s success is based on what we at the IMF also strive to achieve: the ability of not only adapting to change, but leading it.

I would like to pay tribute to Dean Blount – one of that select group of women to become dean of a top-ranked business school in the United States. Your intellectual experience and vision will help Kellogg continue to anticipate and adjust to tomorrow’s challenges!

As you have rightly said: “In today’s world, sticking with the status quo can be even riskier than striving for change.”

Indeed, the world has changed fast over the past 20 years, and it will not stand still.

In the emerging and developing countries – home to 85 percent of the world’s population – we have seen more progress for more people than at any time in history: child mortality is down, life expectancy is up; absolute poverty has declined, school enrollment is on the rise.

A good deal of this development is due to the success of China, but there has been a broader trend of economic convergence between the poor and the rich nations—not as fast as it should be, but a trend nevertheless.

We are also in the middle of a giant move toward the digital age. Six billion people now have access to a cell phone, and 3½ billion can access the internet. Innovation is sure to follow.

And who knows, we may be on the cusp of a social revolution. At the UN General Assembly last week, I saw one global leader after another acknowledging that empowering women is not only morally right, but will also be an economic game changer for the planet.

These are all good reasons to be optimistic about the future. And yet, the mood in an important part of the world—the one we call the advanced economies—has shifted in the opposite direction.

Rising economic inequality is a phenomenon in many countries today, rich and poor, but it has really hit home in the advanced world right now, where real incomes for many have been declining – or growing at a much slower rate – and past economic achievements seem at risk.

What this tells us is that governments must work harder to make growth inclusive, so that all people can benefit from the positive trends that I just mentioned.

Of course, the solution to making people better off is not to fall back on protectionism or other failed economic recipes of the past.

The task at hand is, first of all, to take the right macroeconomic policy decisions and maintain economic openness, a combination that has delivered so much good for the world in recent decades.

Getting everyone a bigger piece of the pie means that the pie has to continue to grow.

I will come back to these themes, but let me first talk about the economic outlook.

1. The State of the Global Economy: Still Weak and Fragile

For the past several years, the global recovery has been weak and fragile, and this continues to be the case today. Especially for advanced economies – while there are some good signs – the overall growth outlook still remains subdued.

  • The U.S. economy has been recovering for some time but had a setback in the first half of 2016, which will lead to a downgrade in our U.S. forecast. However, news on the employment front has been relatively good, and there are hopeful signs of falling poverty and rising median incomes in 2015.

  • In the Euro area, growth remains sub-par, although economic activity is now holding up under strain from high debt and weaknesses among a number of banks.

  • Japan also has seen a small rebound, but it will need to implement difficult reforms to maintain momentum.

The prospects of the emerging and developing economies merit some guarded optimism. After driving the global recovery since the 2008 financial crisis, these countries will continue to contribute more than three-quarters of total global growth this year and next.

  • China is rightly rebalancing from manufacturing to services, from investment to consumption, and from exports to domestic services – which should produce a more sustainable, albeit slower growing economic model. Even so, it will continue to grow at a robust rate of about 6 percent.

  • So too will India, which is also embarking on significant reforms, at more than 7 percent.

  • Moreover, Russia and Brazil are showing some signs of improvement after a period of severe contraction.

  • Commodity exporters have been hit hard by low commodity prices, and countries in the Middle East continue to suffer from conflict and terrorism.

  • Many low-income countries in Sub-Saharan Africa, which have performed so well over the past decade, are also facing a challenge from lower commodity prices.

Adding it all up, the good and the bad, we continue to face the problem of global growth being too low for too long, benefiting too few.

And even around that modest recovery, there is considerable uncertainty. Diverging paths of monetary policy in the major economies could trigger a resurgence of financial market volatility.

Low productivity growth and high levels of debt could further depress investment and expectations of future demand. And, of course, geopolitical events such as terrorism and the related refugee surge pose risks that are very hard to quantify, let alone mitigate.

Now, I would not speak for the IMF if I did not have a number of policy suggestions for dealing with this forecast, which I admit is not a very uplifting one.

2. Adjusting to Change: Do No Harm

My first policy message would be the one given to students when they enter medical school: “First, do no harm.” What do I mean by that?

I just mentioned tentative signs of improvement among some economies, as well as signs of transition and turnaround in emerging markets.

These changes have not just happened by themselves—they reflect a positive impulse from supportive monetary conditions. They reflect improvements in financial regulation and oversight that have helped the financial sector weather shocks such as the change in the Chinese currency regime or the UK referendum. And they reflect very deliberate structural reforms in a number of countries.

Good policy choices – based on expert analysis – matter, even if they take time to work. This is true especially after a crisis of the 2008 magnitude which – unlike in the 1930s – was itself contained only through the exceptional efforts of policy makers around the globe.

The same applies in reverse. Policies that hurt growth will have real consequences—both for the world at large, and very often also for the very people they are meant to protect.

Take trade, for example.

Since World War Two, trade has been the engine that has propelled economic progress. Trade was growing at twice the rate of global GDP until the 2008 crisis but has since fallen below that pace. This is largely due to weak overall demand, but a non-trivial role is also played by the increase in protectionist trade measures over the past five years. [1]

If we were to turn our backs on trade now, we would be choking off a key driver of growth at a point when the global economy is still in need of every good piece of news it can get.

Restricting trade is a clear case of economic malpractice. Rather than helping those sectors of the economy it means to protect, shutting off trade would deny families and workers important economic opportunities, wreak havoc on supply chains, and raise the cost of many basic goods.

And as our esteemed colleagues Robert McDonald and Janice Eberly have shown, policy uncertainty, including in trade policy, can deter investment – a critical driver of growth.

History tells us that this would disproportionally hurt the poor and worsen real income inequality, including in the United States.

So we must reverse the trend toward protectionism and restore a climate that supports a rebound in trade—by completing multilateral trade agreements and pushing forward reforms in services and other areas of the "new economy" such as regulatory cooperation and intellectual property rights.

Inclusive growth

At the same time, of course, the challenge is to make sure that the gains from trade are widely shared, and that those at risk of losing out are being supported.

Now, I am under no illusion how difficult it is to achieve such inclusive growth. It requires actions that go beyond just economics, and they can be very different from country to country.

But we do know some policies that work: well-designed public investment in education not only raises underlying growth but increases human capital and the earning potential of low-income people. Education of girls, in particular, is a proven high-return investment.

Another good investment is helping workers displaced by offshoring, outsourcing, or new digital technologies. Some of the Nordic countries, for example, have had success with programs that pair retraining with active job counseling—the goal being to shorten the duration of unemployment.

Here in the U.S., we have advocated raising the minimum wage and extending the earned income tax credit as measures that can help low-income workers adapt to dislocation.

These are not silver bullets – none actually exist – but if we want to keep globalization alive for the next generation, there is no alternative to ensuring that it works to the benefit of all.

3. Boosting Growth: The Immediate Response

Let me now turn to the macroeconomic and structural policy priorities.

Our priority must be to emerge from this prolonged environment of low growth, low inflation, and low interest rates that I have termed the “new mediocre.” It is bad for financial stability, bad for employment, and as I just mentioned, it also encourages bad, inward-looking policies.

Pessimists believe that our traditional tools of monetary and fiscal policy are exhausted, but I beg to differ. In my view, there is more policy space – more room to act – than is commonly believed. It requires pushing harder on all policy levers and taking more advantage of the synergies between them.

Let us start with what I have called a three-pronged strategy: using structural, fiscal, and monetary policies in a country-specific way to make them mutually reinforcing.

First, we need to identify for each country a set of structural reforms that provide the biggest effect on growth and productivity relative to the political capital that needs to be spent. For example, breaking down monopolies in the retail sector and professional services has had positive effects on growth, especially during downturns, and we have called for such measures in several advanced economies. [2]

All these efforts should be supported by macroeconomic policies to make them more politically palatable and accelerate their short-term growth effect.

Second, as for fiscal policies, few would dispute that better roads and airports, more power grids, and high-speed internet are essential components of modern public infrastructure. The current low-interest environment provides an historic opportunity to make these necessary investments—and to boost growth.

Unlike in 2008, we are not calling for broad-based fiscal stimulus today. The basic principle is that countries with fiscal space should use it—Canada, Germany, Korea, for example. Not all countries have such space and need to guard against debt problems accumulating later on.

But even for countries where public finances are stretched, reallocating spending within a given envelope will help. Think of replacing current spending with tax credits on R&D that can support technology and promote innovation.

Third, monetary policy in advanced economies needs to remain expansive at this stage. While supporting demand in general, our research also shows that monetary policy could add a further boost to GDP when infrastructure investment is debt-financed. In fact, the impact on GDP would bealmost twice as large and the debt ratio would fall, compared to the case without monetary support. [3]

In all these cases, it is important for countries to adhere to medium-term monetary and budgetary frameworks—which provide policy consistency over time, set clear expectations and allow for some short-term expansion without undermining the credibility of the overall policy effort.


Finally, let me emphasize one important and often overlooked aspect of global policy making—the one relating to policy cooperation, or even coordination.

Eight years after Lehman Brothers, countries have gone back to their old ways of policy making, largely following their domestic policy priorities.

No doubt, the current situation is different from the 2008 crisis, which required a prompt, massive, and coordinated fiscal response. But as our “new mediocre” is less acute, it is also more divisive and subtle than a full-blown crisis, and it could prove just as toxic as the recovery has so far proven elusive.

This requires a more sophisticated and coordinated approach. The principle is simple: if all countries act decisively to stimulate their own growth, the positive spillovers reinforce each other. And as everyone is working to expand growth, everyone benefits from the efforts of others, to a much greater effect overall.

We will be providing more detail on the benefits of coordination in a staff paper being released later today.

4. Conclusion

Let me conclude. The bottom line is this:

First, do no harm. Restricting trade and limiting economic openness is sure to worsen the growth outlook for the world and especially its weakest citizens. But we need to rethink fundamentally how growth can be made more inclusive, and act accordingly.

Second, stronger, better growth is possible and will facilitate inclusion. By using monetary, fiscal, and structural policies in concert—within countries, across them, and consistent over time—we can make the whole greater than the sum of the parts.

The IMF can assist countries in identifying their fiscal space, their medium term anchoring and the sequencing of necessary reforms.

A few weeks ago, G20 leaders in Hangzhou expressed strong support for a well-equipped and well-resourced Fund, and we will continue to be at the service of our membership.

Michael Jordan once said: “Talent wins games, but teamwork and intelligence wins championships. Winning the “championship of growth and inclusive globalization” requires teamwork and collaboration across the world.

Thank you!

[1] According to Global Trade Alert, there has been a steady increase in protectionist measures since 2012, with 2015 recording the largest number of harmful trade measures. See IMF 2016 October WEO, Chapter 2, Global Trade: What’s Behind the Slowdown?

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