'Steer, Don't Drift': Managing Rising Risks to Keep the Global Economy on Course

IMF News, October 1, 2018

Source details

Canonical URL: 'Steer, Don't Drift': Managing Rising Risks to Keep the Global Economy on Course

Other formats

Bibliographic details

Published: October 1, 2018

Changing Economic Weather

Global growth is "still at its highest level since 2011" with falling unemployment in most countries and the proportion of the global population living in extreme poverty at "less than 10 percent."
Signs that global growth has plateaued and become less synchronized; "fewer countries participating in the expansion."
IMF projection in July: "3.9 percent global growth for 2018 and 2019"; outlook has "become less bright" since then.
Trade tensions are translating into "actual trade barriers," hurting trade, investment, and manufacturing and raising uncertainty.
Regional notes:
- United States: growing strongly, supported by a "procyclical fiscal expansion and still easy financial conditions" which pose cyclical risks.
- Euro area and Japan: "signs of slowing."
- Emerging Asia: "continues to grow at higher rates than other regions," but indicators of moderation in China, to be exacerbated by trade disputes.
- Latin America, the Middle East, and Sub-Saharan Africa: mounting challenges, pressures from a stronger U.S. dollar and tightening financial market conditions; some facing capital outflows.
Current status: "We are not seeing broader financial contagion—so far" but acknowledge risks can materialize rapidly and further escalation of trade disputes could shock a broader range of emerging and developing economies.

Steer the Boat, Don’t Drift — Policy Priorities and Recommendations

Overarching message: "manage the risks, step up reforms, and modernize the multilateral system" — seize the opportunity while growth remains relatively strong.

a) Build a Better Global Trade System — findings and recommendations

Risk: fracturing global value chains could "have a devastating effect" and prevent emerging and low-income countries from reaching their potential.
Import restrictions impede trade’s role in boosting productivity, spreading new technologies, and reducing poverty.
Immediate policy objective: "de-escalate and resolve the current trade disputes."
Needed actions:
- Strengthen rules: address "distortionary effects of state subsidies," prevent "abuses of dominant positions," and improve enforcement of intellectual property rights.
- Use flexible trade deals where full agreement is not achievable: "like-minded countries agree to work within the framework of the World Trade Organization."
- Make the system "fit for the future" by unlocking e-commerce and tradeable services (engineering, communications, transportation) via flexible agreements.
Quantified potential gain: IMF analysis shows that "by reducing trading costs for services by 15 percent, we could boost total GDP of G20 countries by more than $350 billion this year." (Described as "the equivalent of adding another South Africa to the G20.")
Evidence of appetite: recent African trade agreement and ongoing bilateral negotiations.

b) Guarding Against Fiscal and Financial Turbulence — findings and recommendations

Progress since crisis: "Yes… but not safe enough." Need to "push on with the financial regulatory agenda—and resist backsliding."
Debt levels: "global debt—both public and private—has reached an all-time high of $182 trillion—almost 60 percent higher than in 2007."
Vulnerabilities: higher debt makes governments and companies more vulnerable to tightening financial conditions; emerging and developing economies are adjusting to monetary normalization and some face capital outflows.
IMF estimate: emerging economies—"excluding China—could potentially face debt portfolio outflows of up to $100 billion—which would broadly match outflows during the global financial crisis."
Policy recommendations for emerging economies:
- Reduce risks from high corporate debt.
- Make government borrowing more sustainable in low-income countries (note: "the median public debt level among low-income countries increased from 33 percent of GDP in 2013 to 47 percent" as a new IMF estimate).
- Allow flexible exchange rates to absorb capital flow pressures where appropriate.
- Strengthen monetary policy credibility and central bank communication (IMF analysis shows "countries with greater exchange rate flexibility experienced smaller output losses after the global financial crisis").
Policy recommendations for advanced economies:
- Reduce government deficits and place public debt on a "gradual downward path" through "more efficient spending" and shared burden of adjustment.
- Better manage public wealth: IMF analysis of 31 countries shows "total public assets of more than $100 trillion, well over twice their GDP"; improving management could "deliver additional revenues of about 3 percent of GDP per year."
Global coordination:
- Reduce current account imbalances via complementary national policies (increase public investment where fiscal positions are healthy; lower fiscal deficits elsewhere).
- Strengthen the global financial safety net: "a well-equipped and well-resourced IMF at its center" and further governance adjustments to better reflect changing economic dynamics.

c) Rebuild Trust in Institutions and Policymaking — findings and recommendations

Causes of declining trust:
- Persistent marginalization: "far too many people remain on the margins."
- Inequitable gains: "since 1980, the top one percent globally has captured twice as much of the gains from growth as the bottom 50 percent."
- Memory of the global financial crisis and perception that perpetrators did not face consequences.
- Corruption as an inhibitor of collective decision-making and economic dynamism.
Technological disruption:
- IMF analysis: "women could be especially hard hit—with 26 million of their jobs at risk in OECD countries alone" due to automation targeting routine tasks disproportionately done by women.
Policy responses to restore trust:
- Invest in people: health, education, and social protection systems.
- Additional spending needs in low-income countries: "about $520 billion per year by 2030" (across 49 low-income developing countries).
- Build a 21st-century education system; scale up training and social safety nets for worker transition and skill upgrades.
- Implement more progressive taxation and higher minimum wages where feasible; pursue "smarter taxation of multinational corporations."
- Promote family-friendly policies: parental leave, affordable high-quality childcare, and tax systems that do not penalize second earners.
- Pursue inclusive and sustainable growth: global cooperation to "tame the menace of climate change" and price carbon emissions to account for social costs.
Fintech and inclusion:
- IMF engagement with partners produced the "Bali Fintech Agenda" as a blueprint to manage fintech risks while harnessing benefits inclusively.

Conclusion and Strategic Imperative

Central metaphor: "To reach a port, we must sail sometimes with the wind and sometimes against it—but we must sail, and not drift, nor lie at anchor."
Call to action: "steer the boat, not drift"—manage risks, implement reforms, and modernize multilateralism (the "new multilateralism") to address trade, turbulence, and trust.
Emphasis on cooperation: invoking Indonesian motto "Bhinneka Tunggal Ika," "Unity in Diversity," as an argument that collective action makes economies "stronger, nimbler, better able to steer the ship through rough waters."

Christine Lagarde, Managing Director, IMF; October 1, 2018