A Delicate Moment for the Global Economy: Three Priority Areas for Action
IMF News, April 2, 2019
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- Authors: Christine Lagarde
- Published: April 2, 2019
Introduction
- Speech by Christine Lagarde, IMF Managing Director, delivered at the U.S. Chamber of Commerce, Washington, DC, April 2, 2019.
- Framing: global economy at a “delicate moment” requiring “unbending purpose” to solve pressing problems and to make growth more sustainable and inclusive.
The Global Economy: A Delicate Moment
- Recent IMF projections and outlook:
- In January, the IMF projected global growth for 2019 and 2020 at around 3 ½ percent.
- Only two years ago, 75 percent of the global economy experienced an upswing; for this year, the IMF expects 70 percent of the global economy to experience a slowdown in growth.
- The IMF does not see a recession in the near term and expects some pickup in growth in the second half of 2019 and into 2020.
- Drivers of the slowdown and sources of fragility:
- Global growth has been slowing largely because of rising trade tensions and financial tightening in the second half of 2018.
- Offsetting influences include a more-patient pace of monetary normalization by major central banks—led by the US Fed—and increased stimulus in China.
- The expected rebound is precarious and vulnerable to downside risks such as Brexit, high debt in some sectors and countries, tensions around trade policy, and unease in financial markets.
- A sharper-than-expected tightening of financial conditions could create serious refinancing and debt-service challenges, amplifying exchange rate movements and financial market corrections.
Three Areas of Policy Action
- Overarching message: three mutually reinforcing areas—domestic policies, cross-border policies, and coordinated efforts to tackle global challenges.
- (a) Domestic Policies to Build More Resilient and Inclusive Economies
- Macroeconomic guidance:
- Monetary policy should remain accommodative where inflation is below target and should anchor expectations.
- Exchange rate flexibility should be used, as needed, to help absorb shocks.
- Strengthen the financial sector and maintain the impetus of regulatory reform.
- Fiscal policy and structural reform priorities:
- Make smarter use of fiscal policy: balance growth, debt sustainability, and social objectives.
- Build fiscal buffers in good times and create fiscal space to act in bad times.
- Upgrade tax systems, mobilize domestic revenue, prioritize growth-friendly expenditure, and reduce public debt where needed.
- Address excessive inequality using progressive tax measures (country-specific) and stronger safety nets to manage dislocations from technological change and globalization.
- Focus on access to quality education, healthcare, and infrastructure—especially for young people and for women.
- Competition and market structure:
- New IMF analysis shows rising corporate market power in advanced economies had only a very small effect on investment, output, and the share of national income paid to workers.
- A small number of highly dynamic companies account for the highest price markups, producing a “winner-takes-most” dynamic—especially pronounced in the digital economy.
- Policy recommendation: reduce barriers to entry for new firms and reform competition frameworks to ensure a level playing field in all sectors.
- (b) Cross-Border Efforts to Provide a More Level Playing Field
- Trade and investment findings:
- Analysis of 180 countries over six decades finds trade integration boosts investment; trade barriers damage investment and employment.
- Scenario: if tariffs on all goods traded between the US and China went up by 25 percentage points, annual GDP would be reduced by up to 0.6 percent in the US and by up to 1.5 percent in China.
- Bilateral trade balances historically driven mostly by macroeconomic factors, not bilateral tariffs; tariffs tend to divert trade flows to other countries.
- Policy recommendations for trade:
- Avoid policy missteps and unilateral tariffs; work together to reduce trade barriers and modernize the global trade system.
- Address state subsidies, intellectual property, and data privacy; unlock tradeable services and digital commerce.
- Modernize the World Trade Organization’s key functions: negotiation, transparency, and dispute resolution.
- International corporate taxation:
- The international corporate tax system is described as fundamentally out-of-date; unilateral approaches are counterproductive.
- Non-OECD countries lose about $200 billion a year because companies shift profits to low-tax locations.
- Reforming international corporate taxation is urgent to help developing economies fund essential investment and meet the Sustainable Development Goals by the agreed target date of 2030.
- The IMF has put forward options to make the system fairer and fit for the future.
- (c) Partnership to Address Global Challenges
- List of shared challenges: demographics, migration, cyber-risks, and climate change.
- Climate and energy policy:
- Policy focus on pricing carbon emissions and reducing energy subsidies.
- Energy subsidies amount to about $5.2 trillion per year, or 6.5 percent of global GDP (based on 2017 estimates).
- Corruption and governance:
- Annual cost of bribery alone is over 1.5 trillion dollars—roughly two percent of global GDP (estimate for 2015).
- IMF research finds less corruption within similar economies is associated with higher tax revenues—up to 4 percentage points of GDP between countries.
- Better governance links to higher student test scores and more efficient spending on vital infrastructure.
- Transparency International’s Corruption Perceptions Index shows two-thirds of all countries score below 50, indicating serious problems in preventing corruption.
- Policy recommendation: international cooperation is required to address these transnational challenges.
International Policy Cooperation and the IMF
- IMF’s crisis response and engagement:
- During the global financial crisis, the Fund committed over $500 billion to help prevent another Great Depression.
- In the decade since the crisis, the IMF supported economic programs in over 90 countries.
- Recent country support examples cited: Egypt, Tunisia, Jordan, Ukraine, Argentina.
- Institutional considerations:
- The IMF relies on the support of its 189 member countries to remain sufficiently well-resourced.
- Continued member support is expected to be discussed at the IMF and World Bank Spring Meetings.
Key Statistics and Quantified Findings (preserved exactly)
- IMF projection (January): global growth for 2019 and 2020 at around 3 ½ percent.
- Share of global economy in upswing two years ago: 75 percent.
- Share of global economy expected to experience a slowdown this year: 70 percent.
- Scenario: US-China tariffs rising by 25 percentage points → annual GDP reductions of up to 0.6 percent in the US and up to 1.5 percent in China.
- Non-OECD countries lose about $200 billion a year to profit shifting.
- Global energy subsidies: about $5.2 trillion per year; 6.5 percent of global GDP.
- Annual cost of bribery: over 1.5 trillion dollars—roughly two percent of global GDP.
- IMF crisis lending commitment during the global financial crisis: over $500 billion.
- IMF membership count cited: 189 member countries.
- IMF research result: less corruption associated with higher tax revenues—up to 4 percentage points of GDP between similar countries.
- Analytical sample sizes and spans: analysis of experience from 180 countries over the past six decades.
Source: Christine Lagarde, "A Delicate Moment for the Global Economy: Three Priority Areas for Action", U.S. Chamber of Commerce, Washington, DC; April 2, 2019.