Global Economic Challenges and Opportunities

IMF News, September 25, 2017

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Speech to the 59th Annual Meeting of the National Association for Business Economics by Tao Zhang, Deputy Managing Director, International Monetary Fund; Cleveland, September 25, 2017.
IMF July forecast projected global growth at 3.5 percent this year and 3.6 percent in 2018, up from 3.2 percent in 2016.
U.S. growth projected accelerating from 1.6 percent last year to 2.1 percent this year and next; by early next year, the United States could be experiencing its second-longest expansion since 1850.
Over the past year in the United States, almost 2.2 million jobs were created.
IMF outstanding emergency loans are now one-half of their peak in 2012.
The sharp fall in commodities prices after 2015 contributed to higher borrowing under concessional facilities in the world’s poorest countries.
From a historical perspective, global growth of 3 and one-half percent is characterized as weak and requires policy action to reinforce labor and capital markets.

Finding: A slowdown in productivity growth across advanced, emerging market, and low-income countries following the global financial crisis.
Puzzling context: slowdown occurs despite significant innovation and technological change across sectors (IT, oil and gas, retail, renewable energy).
Possible explanations (no consensus on relative impact):
- Measurement error: data may not capture large parts of the new economy; evidence may explain levels but not the decline in productivity growth.
- Mismeasurement related to globalization: transfer pricing and other global factors.
- Increasing share of economic activity not included in GDP: non-market activities (household production, bartering, unpaid services).
- Innovation may be redistributive rather than productivity-enhancing: growth dividends shifting away from labor toward capital, producing little overall improvement in productivity.
Conclusion: One, or all, of these explanations could contribute; empirical research has yet to identify the dominant factors.

Evidence in advanced economies, notably the United States and parts of Europe:
- In inflation-adjusted terms, more than one half of U.S. households have lower incomes today than they did in 2000.
- Declining share of U.S. households earning between one-half and twice the median income (the “middle class”).
- Around two-thirds of those leaving the middle have fallen into the “bottom” (earns less than one half of the median wage).
- The share of the U.S. population earning less than 50% of median income is rising.
IMF research links a significant component of income polarization to technological change, specifically automation and off-shoring of semi-skilled tasks that once provided middle-class incomes.
Distributional impact on demand: growing concentration of income and wealth has reduced aggregate consumption—by about 3 and a half percent over the past 15 years.
Social and political ramifications: increased dissatisfaction and a swing of sentiment against globalization.

Well-targeted social assistance programs.
Improved access to education and retraining.
Expansion of the Earned Income Tax Credit, combined with a higher minimum wage.
Support for working parents to meet child-care costs.
Paid family leave.
Purpose: provide opportunities enabling people to take advantage of innovation and entrepreneurship and to mitigate severe social impacts.

Inflation observations:
- Core inflation in Europe somewhat below the ECB’s goal of below-but-close-to 2 percent.
- In Japan, headline and core inflation are close to zero.
- In the U.S., core and headline inflation are both now at 1.4 percent (a reversal after earlier progress toward the Fed’s 2 percent goal).
Wage growth: nominal wage growth remains relatively low despite labor market strength; United States, Germany, and Japan are assessed as now close to full employment, yet little evidence of wage pressure.
Structural forces contributing to low wage growth:
- Decline in productivity growth.
- Reduced labor market dynamism: job-to-job moves have declined by about 40 percent since the late 1980s; largest wage increases accrue to those switching jobs, so less switching reduces average wage growth.
- Demographic change (aging populations).
- Increasing consolidation of companies, strengthening employers’ bargaining power and compressing wages.
Policy implication: stronger nominal wage growth will be needed to return inflation toward central bank targets.

Problem: A more integrated and globalized world economy is no longer generating the jobs and higher living standards that were once promised, contributing to political and social tensions.
Argument against retreating from globalization or slowing technological change: such actions would neglect the positive outcomes (for example, the impressive reduction of poverty across the developing world).
Risks of protectionism: interrupting free flow of goods and investments would disrupt trade relations and supply chains and worsen outcomes.
Recommended course:
- Maximize benefits of globalization and technology while addressing their negative side effects.
- Promote a multilateral system that adjusts to an increasingly connected global economy.
- Ensure a level-playing field that avoids protectionist measures and distortive policies.
- Mitigate impacts of global transitions through international cooperation and policy coordination.
Responsibility: both individual countries and the international community should act; strengthening the multilateral system can safeguard the global economy and ensure strong, stable, and inclusive growth.

International Monetary Fund