Time to Act Now: It’s All About the Right Policy Mix

October 19, 2017

"The road ahead is not an easy one,’’ the IMF’s Executive Directors wrote after the IMF’s first ever Annual meeting in 1946.’’ We do not underestimate the difficulties facing us.’’

More than 70 years later, we’ve encountered many a storm across continents from the Latin American sovereign debt crisis to the Savings and Loans crisis to the Asian crisis. And then there was the global financial crisis of 2008.

Nine years later, the outlook is finally improving. We expect the upswing to continue into 2018. Global growth has recovered. Demand remains robust. Financial markets are buoyant. Risks are balanced in the near term. Confidence and market sentiment remain strong.

The IMF raised world growth forecasts to 3.5 percent this year and 3.6 in 2018, from 3.2 in 2016. Stronger activity, expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets are driving growth, according to the World Economic Outlook.

"We should not let a good recovery go to waste,’’ Managing Director Christine Lagarde said. "Everyone needs to look at their own house, inspect the roof and determine what parts—what policy areas—need fixing.’’

It is with this backdrop that we entered the 2017 Annual Meetings of the IMF and World Bank in Washington.

But all is not rosy

"Inequality is rising within countries,’’ said Deborah Greenfield, Deputy Director-General for Policy at the International Labour Organization (ILO), at a seminar during the Meetings. "We’ve also all recognized that productivity has gone up faster than wages have, which measures up with some of the global discontent we see. Workers are not getting their fair share of their efforts around the world.’’

The recovery remains weak in many countries, and inflation is below target in most advanced economies. Prospects for many emerging market and developing economies in sub-Saharan Africa, the Middle East, and Latin America are lackluster. Fuel exporters are hit by lower commodity revenues.

With high policy uncertainty, missteps, shocks, and crises could materialize.

In this post-oil world, "people could be the oil of the 21st century,’’ said Sherif Kamel, a professor of management at the American University in Cairo, Egypt. Kamel, who spoke at a panel during the Meetings, underscored the importance of how education and investment in youth can play a role in growth, especially in this world of evolving technology. "It’s a journey,’’ he said, and, "we are going in the right direction.’’

But that direction can only be the right one if it goes beyond the regular policy mix. Inequality, gender, corruption, and climate change are just some of the cross-roads that we need to acknowledge, pass, and conquer as globalization takes shape. In addition, the rapid rate of technological change brings with it new areas of focus, like Fintech. This was the strong message that resonated throughout the hallways, in sessions, and beyond, during the Meetings.

The "simple and ugly truth,’’ is that extreme inequalities are "the consequences of mistaken beliefs and misguided policies run amok,’’ said Winnie Byanyima, executive director of Oxfam International, during her Ted-style talk at the Meetings.

But we are in an upswing, and this is the time to use all policies—structural, monetary, and fiscal—to achieve strong, sustainable, balanced, and inclusive growth.

With growth in the global economy broadening, this is the right environment to address some of the economic issues facing us, David Lipton, the First Deputy Managing Director, told a panel on global imbalances. "Right now is the moment for action.’’

Seizing the moment

"Policy makers should seize the moment,’’ said Maurice Obstfeld, the Fund’s chief economist. And leaders are taking up that call.

"We have to enhance the resilience of our economies, and we should re-examine our current macroeconomic policy mix,’’ Jens Weidmann, President of the Deutsche Bundesbank, said during the meetings. Germany, the current chair of the Group of Twenty (G-20) helped shape the debate.

The latest International Monetary and Financial Committee (IMFC) communique underscored the importance of safeguarding the current growth momentum by maintaining the right policy mix, aligning monetary policy with IMF recommendations, and adopting fiscal policies that are in line with countries’ needs.

Tighter regulation, for example, has led to stronger global balance sheets with improved capital and liquidity buffers. Still, some banks are grappling with legacy issues and the current environment of monetary accommodation may lead to a search for yield in unchartered territories. This could pose risks to growth and calls for policy makers globally and nationally to further strengthen the financial and macroeconomic policy mix.

But for any positive outcome, joint action is needed. "Recognizing that all countries benefit from cooperation, we will work to tackle common challenges,’’ the IMFC said.

Indispensable voices

And voices, big and small, were heard.

Papua New Guinea, custodian of the third largest rainforest and 20 percent of world tuna stocks, aspired to contribute to a world of responsible sustainability and inclusive economic growth.

This year has been difficult for Papua New Guinea. In the wake of the El Nino drought and low oil and gas prices, the economy under-performed, government revenues declined, some operating costs rose, and foreign exchange imbalances affected commercial activity levels and confidence.

"Like many other developing countries, we know that we cannot, and should not, face these challenges alone and in isolation,’’ Charles Kauvu Abel, Governor of the Bank and the Fund for Papua New Guinea, said at the Meetings.

And if the Fund’s track record is anything to go by, this call for unity will backstop every step of the way. "An indispensable element in a prosperous world economy is cooperation among all countries for establishing and maintaining an enduring peace,’’ the IMF’s Executive Directors wrote in 1946.

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