Boosting Growth and Adjusting to Change

IMF News, September 28, 2016

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Published: September 28, 2016

The State of the Global Economy: Still Weak and Fragile

Emerging and developing countries are home to 85 percent of the world’s population and have seen progress: child mortality is down, life expectancy is up, absolute poverty has declined, school enrollment is on the rise.
Digital access: Six billion people now have access to a cell phone, and 3½ billion can access the internet.
China is rebalancing and “will continue to grow at a robust rate of about 6 percent.”
India is “also embarking on significant reforms, at more than 7 percent.”
Emerging and developing countries will continue to contribute more than three-quarters of total global growth this year and next.
Signs of improvement: Russia and Brazil are showing some signs of improvement after severe contraction.
Major vulnerabilities and headwinds:
- Advanced economies: overall growth outlook remains subdued; U.S. had a setback in the first half of 2016 leading to a downgrade in the IMF U.S. forecast, though employment news was relatively good with hopeful signs of falling poverty and rising median incomes in 2015.
- Euro area: growth remains sub-par, with strain from high debt and bank weaknesses.
- Japan: small rebound but needs difficult reforms to maintain momentum.
- Commodity exporters and many low-income Sub-Saharan African countries hit by low commodity prices.
- Middle East: continued suffering from conflict and terrorism.
- Global risks: diverging monetary policy paths could trigger financial market volatility; low productivity growth and high debt could depress investment; geopolitical events such as terrorism and refugee surges pose hard-to-quantify risks.
Trade: trade growth fell below global GDP growth after 2008; increase in protectionist trade measures over the past five years plays a non-trivial role.

Adjusting to Change: Do No Harm

Core message: “First, do no harm.”
Positive impulses behind recent improvements include supportive monetary conditions, improved financial regulation and oversight, and deliberate structural reforms.
Caution against protectionism:
- Restricting trade would choke off a key driver of growth, deny families and workers economic opportunities, disrupt supply chains, raise the cost of basic goods, and disproportionately hurt the poor while worsening real income inequality.
- Need to reverse trend toward protectionism by completing multilateral trade agreements and pushing reforms in services and areas of the "new economy" such as regulatory cooperation and intellectual property rights.
Inclusive growth: policy must ensure gains from trade are widely shared and support those at risk of losing out.
Policy tools and examples that help inclusion:
- Public investment in education raises growth and human capital; education of girls is a proven high-return investment.
- Programs pairing retraining with active job counseling (example: some Nordic countries) shorten unemployment duration.
- U.S. measures advocated by the IMF: raising the minimum wage and extending the earned income tax credit.
Emphasis: no silver bullets; combination of measures needed to keep globalization working for the next generation.

Boosting Growth: The Immediate Response

Objective: emerge from the “new mediocre” of low growth, low inflation, and low interest rates by using structural, fiscal, and monetary policies in a mutually reinforcing, country-specific way.
Three-pronged strategy:

1. Structural reforms

Identify reforms that deliver the largest growth and productivity effects relative to political capital required.
Example: breaking down monopolies in retail and professional services has had positive effects on growth, especially during downturns.
Structural reforms should be supported by macroeconomic policies to accelerate short-term growth effects and improve political feasibility.

2. Fiscal policy

Invest in modern public infrastructure: roads, airports, power grids, high-speed internet.
Low-interest environment provides historic opportunity to finance necessary investments and boost growth.
Not calling for broad-based fiscal stimulus for all; principle: countries with fiscal space should use it (examples given: Canada, Germany, Korea).
For countries with stretched public finances, reallocate spending within existing envelopes (example: replace current spending with tax credits on R&D to support technology and innovation).

3. Monetary policy

Monetary policy in advanced economies needs to remain expansive at this stage.
Research shows monetary policy can add a further boost to GDP when infrastructure investment is debt-financed: “the impact on GDP would be almost twice as large and the debt ratio would fall, compared to the case without monetary support.”
Importance of adhering to medium-term monetary and budgetary frameworks to maintain credibility while allowing short-term expansion.

Coordination
- Domestic-only policymaking has returned post-crisis; the “new mediocre” calls for a more sophisticated and coordinated global approach.
- Principle: if all countries act decisively to stimulate growth, positive spillovers reinforce each other and everyone benefits more.
- IMF to provide more detail on the benefits of coordination in a staff paper being released later today.

Conclusion

Bottom-line policy prescriptions:
- First, do no harm: avoid restricting trade and limiting economic openness, which would worsen the growth outlook and harm the weakest citizens.
- Rethink how growth can be made more inclusive and act accordingly.
- Stronger, better growth is possible by using monetary, fiscal, and structural policies in concert—within countries, across countries, and consistently over time—so the whole is greater than the sum of the parts.
IMF role: assist countries in identifying fiscal space, medium-term anchoring, and sequencing of necessary reforms.
Closing thought: winning the “championship of growth and inclusive globalization” requires teamwork and collaboration across the world.

Remarks by Christine Lagarde, Managing Director of the IMF, Northwestern University, September 28, 2016.

Boosting Growth and Adjusting to Change

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Bibliographic details

The State of the Global Economy: Still Weak and Fragile

Adjusting to Change: Do No Harm

Boosting Growth: The Immediate Response

Conclusion

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