Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy

IMF News, April 11, 2018

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Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy

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• Authors: Christine Lagarde
• Published: April 11, 2018

Overview / Introduction

• Speech by Christine Lagarde, IMF Managing Director, at University of Hong Kong on April 11, 2018.
• Central message: use the current global upswing to enact reforms—“fix the roof while the sun is still shining”—because the window of opportunity is open but risks are rising.

State of the Global Economy

• Global momentum driven by stronger investment, a rebound in trade, and favorable financial conditions.
• IMF projection: 3.9 percent global growth for 2018 and 2019.
• Regional and country notes:
  • Advanced economies expected to grow above their medium-term potential this year and next.
  • United States is already at full employment; growth likely to accelerate due to expansionary fiscal policy.
  • Asia contributes close to two-thirds of global growth.
  • Japan’s economy continues to grow strongly.
  • Asian emerging markets—led by China and India—are driven by rising exports and higher domestic consumption.
  • Challenges remain in some emerging and developing countries, including in sub-Saharan Africa.
• Medium-term headwinds identified:
  • Fading fiscal stimulus (including in the U.S. and China).
  • Rising interest rates and tighter financial conditions as major central banks normalize monetary policy.
  • Aging populations and weak productivity.

Priority 1 — Steer Clear of Protectionism

• Key findings and arguments:
  • Import restrictions hurt everyone, especially poorer consumers, by increasing prices and reducing choice.
  • Bilateral trade imbalances generally reflect division of labor and global value chains; overall trade deficits are driven by spending above income.
  • The multilateral trade system helped reduce by half the proportion of the global population living in extreme poverty from 1990-2010.
• Policy recommendations:
  • Avoid imposing tariffs; use macroeconomic tools (fiscal policy, structural reforms) to address imbalances.
  • Countries should improve their own practices: better protect intellectual property, reduce distortions favoring state enterprises, and trade by WTO rules.
  • Scale up investment in training and social safety nets to help workers affected by trade or technological change.
  • Support forward-looking trade initiatives (examples cited include agreements between Japan and the European Union, the new African Continental Free Trade Area, and the so-called TPP-11).
• IMF role: support members through analysis, advice, and a platform for dialogue and cooperation.

Priority 2 — Guard against Fiscal and Financial Risk

• Key statistics and findings:
  • New IMF analysis shows global debt—both public and private—has reached an all-time high of $164 trillion.
  • Compared to its 2007 level, this debt is now 40 percent higher, with China alone accounting for just over 40 percent of that increase.
  • The private sector makes up two thirds of the total debt level.
  • Public debt in advanced economies is at levels not seen since the Second World War.
  • In advanced economies, public debt as a proportion of GDP was at 105 percent on average in 2017.
  • High debt in low-income countries could jeopardize development goals by increasing debt service burdens and reducing spending on infrastructure, health, and education.
  • A study shows the decline in output after a financial crisis is less than 1 percent in a country with adequate fiscal and monetary buffers, but almost 10 percent in a country with no buffers.
  • Housing markets in major cities are increasingly moving in tandem, which could amplify shocks.
• Policy recommendations:
  • Use the current window to build policy buffers—“building policy buffers”.
  • Reduce government deficits, strengthen fiscal frameworks, and place public debt on a gradual downward path in a growth-friendly manner through more efficient spending and progressive taxation.
  • Increase exchange rate flexibility to cope with volatile capital flows, especially in emerging and developing countries.
  • Strengthen financial stability by reducing corporate debt and bolstering bank capital and liquidity where needed.
  • Implement policies to address booming housing markets.
  • Avoid rolling back regulatory frameworks established since the global financial crisis; ensure regulations evolve with fintech.
  • Maintain and strengthen the global financial safety net, with the IMF playing a central role in helping countries cope with capital flow volatility.

Priority 3 — Foster Long-term Growth that Benefits Everyone

• Core concerns:
  • If advanced economies return to disappointing medium-term growth, inequality, debt concerns, and political polarization could worsen.
  • More than 40 emerging and developing countries are projected to grow more slowly in per capita terms than advanced economies.
• Two potential game-changers:

(i) Unlock the potential of the service sector, especially in developing economies

• Some service sectors—led by transportation, communications, and business services—can match the productivity levels of manufacturing (April 2018 World Economic Outlook, Chapter 3).
• Important for countries such as the Philippines, Colombia, and Ghana where employment and output are shifting from agriculture to higher-value services.
• Policy actions: increase public investment in education, training, and job-search assistance; open service sectors to more competition; reduce barriers to trade in services, including e-commerce.

(ii) Digital transformation of government

• Examples of digital government initiatives:
• India: subsidies and welfare payments delivered directly into bank accounts linked to unique biometric identifiers.
• Australia: tax authorities collect information on wages in real time.
• Hong Kong: a government-funded Faster Payment System will allow bank customers to use mobile phone numbers and email addresses for transfers and retail purchases; to be launched in September 2018.
• Scale and impact:
• One study estimates almost 20 percent of public revenues worldwide, or about $5 trillion, go missing each year because of tax noncompliance and misdirected government payments.
• Big data and digital tools can reduce leakages related to corruption and tax evasion, enabling increased priority spending.
• Digital government can deliver public services more efficiently and effectively; more households in developing countries now have access to digital technology than to clean water and secondary education.

• Policy recommendations:
  • Invest in education, training, and digital infrastructure.
  • Leverage digital tools to improve tax collection, reduce leakages, and increase fiscal space for priority spending.
  • Facilitate trade and competition in services to raise productivity and inclusive growth.

Conclusion

• Policymakers face a choice: repeat past policies that delivered mixed results or pursue a new landscape where:
  • trade is open, fairer, and more collaborative;
  • financial systems are safer and supportive of growth; and
  • the digital revolution benefits all people.
• Closing exhortation: greater courage is needed across government, business, and society to seize the current opportunity.

Source: Christine Lagarde, "Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy", Speech at University of Hong Kong, April 11, 2018.

References

• Christine Lagarde
• People's Republic of China - Hong Kong Special Administrative Region and the IMF
• People's Republic of China and the IMF
• India and the IMF
• United States and the IMF
• Speeches
• PRESS CENTER
• https://www.imf.org/en/home