## We Need Forceful Policies to Avoid the Low-Growth Trap

_IMF Blog, September 1, 2016_

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**Canonical URL:** [We Need Forceful Policies to Avoid the Low-Growth Trap](https://www.imf.org/en/blogs/articles/2016/09/01/we-need-forceful-policies-to-avoid-the-low-growth-trap)

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## Bibliographic details
- Authors: Christine Lagarde
- Published: September 1, 2016

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### Overview: persistent weak global growth
- 2016 will be the fifth consecutive year with global GDP growth below its long-term average of 3.7 percent (1990-2007), and 2017 may well be the sixth.
- Not since the early 1990s—when ripple effects from economic transition caused growth to slow—has the world economy been so weak for so long.
- The political pendulum threatens to swing against economic openness, and without forceful policy actions, the world could suffer from disappointing growth for a long time.

### Advanced-economy dynamics and supply-side constraints
- Real growth in advanced economies is running almost a full percentage point below the average of 1990-2007.
- Key factors:
  - Crisis legacies such as private and public sector debt overhangs, and impaired balance sheets of financial institutions, leading to stubbornly weak demand.
  - Prolonged demand weakness risks harming long-term growth by reducing firms’ production capacity, driving workers out of the labor force, and eroding critical skills.
  - Weak demand depresses trade and contributes to disappointing productivity growth.
  - On the supply side, slowing productivity and adverse demographic trends have been weighing on potential growth—a trend that started before the global financial crisis.
  - Low expectations of future growth reduce firms’ incentives to invest, hurting both productivity and short-term growth prospects.

### Emerging-economy dynamics
- Emerging economies have been slowing, but this is often a return to historical norms after an exceptionally fast pace in the past decade.
- Developments are diverse across countries:
  - In 2015, GDP in two of the four largest emerging economies—China and India—grew between 7-7½ percent.
  - In 2015, GDP contracted by close to 4 percent in the other two—Russia and Brazil.
- Common factors affecting emerging economies:
  - Rebalancing of the Chinese economy from investment to consumption, and from external demand to domestic demand; the transition is costly for trading partners that rely on Chinese demand and can trigger financial volatility.
  - The large decline in commodity prices, which has reduced disposable income for many commodity exporters and requires difficult, protracted adjustments; in some cases a change in the growth model is needed.

### Inequality, politics, and reform fatigue
- Weak global growth interacting with rising inequality is contributing to a political climate where reforms stall and countries adopt inward-looking policies.
- In a broad cross-section of advanced economies, incomes for the top 10 percent increased by about 40 percent in the past 20 years, while growing only very modestly at the bottom.
- Inequality has also increased in many emerging economies, though strong general income growth has sometimes offset impacts on the poor.

### Policy agenda to avoid a low-growth trap
- Forceful policy actions are needed. Key elements of a global growth agenda:
  1. Demand support in economies operating below capacity
     - Monetary policy has largely carried this role, but is increasingly stretched as several central banks are operating at or close to the effective lower bound for policy rates.
     - Where there is fiscal space, record-low interest rates make for an excellent time to boost public investment and upgrade infrastructure.
  2. Structural reforms
     - Countries are not doing nearly enough: two years ago, G20 members pledged reforms that would lift their collective GDP by an additional two percent over 5 years.
     - In the most recent assessment, the measures implemented to date are worth at most half this amount—so more reforms are urgent.
     - IMF research shows reforms are most effective when prioritized along countries’ reform gaps and take into account the level of development and position in the business cycle.
  3. Reinvigorating trade
     - Reduce trade costs and roll back temporary trade barriers.
     - Policymakers should help those adversely affected through re-training, skill building, and assisting occupational and geographic mobility.
     - Curtailing free trade risks stalling an engine that has brought unprecedented welfare gains around the world over many decades.
  4. Ensuring more broadly shared growth
     - Taxes and benefits should bolster incomes at the low end and reward work.
     - In many emerging economies, stronger social safety nets are needed.
     - Investments in education can raise both productivity and the prospects of low-wage earners.

### Risk and the need for political courage
- Implementing this agenda takes political courage; inaction risks reversing global economic integration and stalling an engine that has created and spread wealth around the globe.
- This risk is judged too large to take.

*Christine Lagarde, September 1, 2016*

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## References

- [عربي](http://blog-montada.imf.org/?p=4464)
- [G20](http://www.imf.org/external/np/g20/090116.htm)

_Source: https://www.imf.org/en/blogs/articles/2016/09/01/we-need-forceful-policies-to-avoid-the-low-growth-trap_