IMF Survey: The Global Village: Connected World Drives Economic Shift

IMF News, August 30, 2012

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Article title: IMF Survey: The Global Village: Connected World Drives Economic Shift
By Marina Primorac, Managing Editor, Finance & Development
Date: August 30, 2012
Core claim: The world economy is undergoing a structural shift as emerging markets catch up to advanced economies; increased interconnectedness brings both benefits and contagion risks.

The economy is experiencing "new convergence" with emerging markets rapidly catching up to advanced economies (statement attributed to Kemal Dervis of the Brookings Institution).
The division between rich and poor countries "is blurring as technology becomes a global commodity that developing and emerging economies import and adapt to catch up with advanced economies."
Dervis identifies three fundamental shifts driving major adjustments in the balance between east and west:
- convergence of emerging and advanced economies’ economic growth;
- interdependence of countries’ fortunes; and
- divergence of incomes within countries

Benefits cited:
- The surge in information enhances human lives—improving health, education, and communication.
- Trade and financial integration have underpinned strong growth and job creation and helped narrow the gap between rich countries and poor.
Risks and contagion:
- The prolonged global financial crisis demonstrates that interconnectedness carries grave risks of contagion as well as benefits.
- "Small economies can bring down large ones, and a disaster in one country has ripple effects around the world."
Examples of interconnected vulnerabilities:
- Global supply chains mean a disruption on the other side of the world can affect consumer goods availability.
- Travelers can transmit disease across continents with a single plane ride.
- Global warming challenges all nations to work together.

As the world becomes more multipolar and interdependent, multilateral solutions are needed to fight risks and reap rewards (Dervis).
Kishore Mahbubani argues the global village increasingly requires a "new global ethic" and "global solutions to big emerging problems such as financial crisis, flu outbreaks, and climate change."
IMF Managing Director Christine Lagarde: the IMF is making progress "at mapping global financial risks and the links between the financial sector and the real economy," but the biggest challenge is persuading national policymakers to take a global perspective.

Regional financial arrangements are proposed as one way to help underpin global financial stability, possibly with IMF help (Masahiro Kawai and Domenico Lombardi).
Cited models:
- the Latin American Reserve Fund
- the Chiang Mai Initiative (created by the 10 countries making up the Association of Southeast Asian Nations or ASEAN plus China, Korea, and Japan)
Implication: emerging and developing countries should play a greater role in international institutions and regional mechanisms can complement global financial stability efforts.

Migration described as both a driving force and byproduct of globalization (Demetrios Papademetriou).
Post-crisis outlook: "the future will see much more selective migration, with advanced economies less willing to accept unskilled immigrants."
Policy recommendation: investing in immigrants’ language abilities, health, and job skills is an investment in the host country’s future.
Long-term demographic point: as advanced economies encounter aging populations, they will need skilled immigrant workers to perform jobs and pay taxes that support the elderly.