A Fresh Look at Globalization

IMF Blog, June 27, 2016

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Author: David Lipton
Date: June 27, 2016
Prompting event: the British referendum (Brexit) and dramatic headlines suggesting a reversal of globalization.
Historical reference points invoked: creation of the coal and steel community in 1951; creation of the euro; re-integration of central and eastern Europe.

Public skepticism driven by perceived lack of clear economic benefits and by social and cultural costs, including a sense of lack of control.
Specific economic experiences cited:
- The global financial crisis hit wealth and, for many, retirement prospects in advanced economies.
- Growth recovery remains sluggish in advanced economies.
- People feel the effects of income inequality, stagnating wages, and a lack of job security; they sense and fear market volatility.
Open macroeconomic questions highlighted:
- Are we in secular stagnation?
- Does the trend toward lower real interest rates over the last 15 years reflect a drying up of investment possibilities?

First: Globalization has lifted hundreds of millions of people out of poverty and raised living standards globally; it still holds promise for supporting rising living standards in advanced economies and in emerging markets and developing countries alike. To preserve this promise requires enhancing gains, limiting costs and vulnerabilities, and making the case to a skeptical public.
Second: Much needed action must occur at the individual country level. The Fund’s recommended three-prong approach to boosting growth:
- Support for demand coming from both fiscal and monetary policies.
- Structural reforms tailored to support demand in the short run and to boost potential growth over time.
- Recognition that individual governments see limits to their room for maneuver and so far have not made sufficient progress.
Third: Multilateralism is more necessary than ever because national leaders cannot solve many domestic problems alone when countries’ prospects depend heavily on global prospects. Coordinated action increases impact and reduces incentives for demand diversion.

Concern: A perverse slowdown in potential growth in emerging markets and developing countries; with present projections, many large emerging markets cannot expect to see convergence in living standards toward advanced levels.
Paradox noted: despite availability of technology, Internet communications, and ample funds for investment, convergence is not proceeding as expected.
Volatility and large short-term capital flows are causing emerging markets and developing countries to act defensively:
- Guarding against openness.
- Worrying about borrowing and current account deficits.
- Self-insuring with weak currencies and reserve accumulation.
Re-examination areas for the international monetary system:
- How macroprudential and capital flow measures can provide protection.
- How to promote growth-supporting equity flows.
- How to better promote technology transfer.
- Creating a better global financial safety net, including IMF coordination with regional financing arrangements and possibly new IMF lending facilities.
Openness to cooperation with new multilateral institutions such as the Asian Infrastructure Investment Bank.

Characterization of the current geopolitical environment: Ian Bremmer’s “G-zero” — a vacuum of global governance where hegemony no longer prevails.
Growing geo-political risks and their adverse impacts on economic growth and stability increase the need to pay attention to the interplay between economics and geopolitics (examples cited: events in the Middle East, Africa, and the refugee issue in Europe).
The IMF’s role:
- Be a voice for global cooperation and collective action.
- Rally its membership to act in harmony so each country doing its part magnifies the impact.
- Ensure the international monetary system supports individual country efforts, creating growth opportunities and lowering vulnerabilities.
- The IMF is described as “stronger than ever, and better able to deal with economic challenges,” and must pursue creative, multilateral solutions for rapidly changing global conditions.

At the national level:
- Pursue the Fund’s three-prong growth strategy: fiscal and monetary support for demand plus structural reforms to raise potential growth.
At the international level:
- Re-assess the international monetary system with attention to macroprudential measures, capital flow management, equity flow promotion, and technology transfer.
- Strengthen the global financial safety net through IMF coordination with regional financing arrangements and consider new IMF lending facilities.
- Promote coordinated multilateral action so growth is based on demand creation rather than demand diversion.
- Engage constructively with new multilateral institutions, including the Asian Infrastructure Investment Bank.
On politics and governance:
- Recognize and address the intersection of geopolitics and economics to mitigate risks to growth and stability.

Source: A Fresh Look at Globalization — David Lipton, June 27, 2016.