Tag: Global Growth

The Case For “Inclusive Growth”

From the IMF Blog.

Four years ago, at the World Economic Forum in Davos, IMF Managing Director Christine Lagarde warned of the dangers of rising inequality, a topic that has now risen to the very top of the global policy agenda.

While the IMF’s work on inequality has attracted the most attention, it is one of several new areas into which the institution has branched out in recent years. A unifying framework for all this work can be summarized in two words: Inclusive growth. 

We want growth, but we also want to make sure:

  • that people have jobs—this is the basis for people to feel included in society and to have a sense of dignity;
  • that women and men have equal opportunities to participate in the economy—hence our focus on gender;
  • that the poor and the middle class share in the prosperity of a country—hence the work on inequality and shared prosperity;
  • that, as happens, for instance when countries discover natural resources, wealth is not captured by a few—this is why we worry about corruption and governance;
  • that there is financial inclusion—which makes a difference in investment, food security and health outcomes; and
  • that growth is shared just not among this generation but with future generations—hence our work on building resilience to climate change and natural disasters.

In short, a common thread through all our initiatives is that they seek to promote inclusion—an opportunity for everyone to make a better life for themselves.

These are not just fancy words; a click on any of the links above shows how the IMF is making work on inclusion a part of its daily operations.

Inclusion is important, but so of course is growth. “A larger slice of the pie for everyone calls for a bigger pie” (Lipton, 2016). So when we push for inclusive growth, we are not advocating as role models either the former Soviet Union or present day North Korea—those are examples of ‘inclusive misery,’ not inclusive growth. Understanding the sources of productivity and long-run growth—and the structural policies needed to deliver growth—thus remains an important part of the IMF’s agenda.

Globalization and inclusion

The IMF was set up to foster international cooperation. Hence, to us, inclusion refers not just to the sharing of prosperity within a country, but to the sharing of prosperity among all the countries of the world. International trade, capital flows, and migration are the channels through which this can come about. This is why we stand firmly in favor of globalization, while recognizing that there is discontent with some of its effects and that much more could be done to share the prosperity it generates.

Higher growth should help address some of the discontent, as argued by Harvard economist Benjamin Friedman in his book, The Moral Consequences of Economic Growth. Friedman shows that, over the long sweep of history, strong growth by “the broad bulk” of a society’s citizens is associated with greater tolerance in attitudes towards immigrants, better provision for the disadvantaged in society, and strengthening of democratic institutions.

However, designing policies so they deliver inclusive growth in the first place will be a more durable response than leaving matters to the trickle-down effects of growth.

Policies for inclusive growth

♦  Trampolines and safety nets: “More inclusive economic growth demands policies that address the needs of those who lose out … Otherwise our political problems will only deepen” (Lipton, 2016). Trampoline policies such as job counseling and retraining allow workers to bounce back from job loss: they help people adjust faster when economic shocks occur, reduce long unemployment spells and hence keep the skills of workers from depreciating. While such programs which already exist in many advanced economies, they deserve further study so that all can benefit from best practice. Safety net programs have a role to play too. Governments can offer wage insurance for workers displaced into lower-paying jobs and offer employers wage subsidies for hiring displaced workers. Programs such as the U.S. earned income tax credit should be extended to further narrow income gaps while encouraging people to work (Obstfeld, 2016).

♦  Broader sharing of the benefits of the financial sector and financial globalization: We need “a financial system that is both more ethical and oriented more to the needs of the real economy—a financial system that serves society and not the other way round” (Lagarde, 2015). Policies that broaden access to finance for the poor and middle class are needed to help them garner the benefits of foreign flows of capital. Increased capital mobility across borders has often fueled international tax competition and deprived governments of revenues (a “race to the bottom leaves everyone at the bottom,” (Lagarde, 2014). The lower revenue makes it harder for governments to finance trampoline policies and safety nets without inordinately high taxes on labor or regressive consumption taxes. Hence, we need international coordination against tax avoidance to prevent the bulk of globalization gains from accruing disproportionately to capital (Obstfeld, 2016).

♦  ‘Pre-distribution’ and redistribution: Over the long haul, polices that improve access to good education and health care for all classes of society are needed to provide better equality of opportunity. However, this is neither very easy nor an overnight fix. Hence, in the short run, ‘pre-distribution’ policies need to be complemented by redistribution: “more progressive tax and transfer policies must play a role in spreading globalization’s economic benefits more broadly” (Obstfeld, 2016).

Britain fails to understand the nature of globalisation at its peril

From The Conversation.

There remains great uncertainty in the aftermath of the UK vote to leave the European Union. Few seem to have a plan for what Brexit will look like and how the UK’s relationship with the outside world will take shape.

But while the desire for sovereignty and to “take back control” were top of many voters’ list of reasons to vote to leave, the fact that we live in a globalised world where economies and trade supersede national boundaries cannot be ignored.

Much of the confusion about how Brexit will affect the British economy has resulted from the inability of those for and against it to acknowledge the realities of the position of the UK in the contemporary global economy. This failure to understand the realities of globalisation is partly why there is such confusion about how to deliver the kind of post-Brexit UK demanded by those who voted leave. But regaining national sovereignty is extremely difficult, if not impossible, in today’s global economy.

The interconnected world

The recent global financial crisis should have sent a powerful message. The degree of interconnection between places in the global economy has reached unprecedented levels and attempts to “unpick” these interconnections are highly problematic.

Globalisation is complex. It is no longer a case of “us” and “them”. Capital, goods and services flow within, between and across national borders – and the flow is uneven. It is often directed through key cities. So when we talk about flows of foreign direct investment between the UK and Germany, we are actually discussing flows of people and money between cities such as London and Berlin.

In fact, cities are the key drivers in trade. It is no surprise therefore that there were significantly higher votes to remain in the EU in cities such as London and Manchester. This is because these cities are points in the global economy through which trade, services and people flow. It is in these locations that we can most easily see the benefits of interconnection with cities in the EU and beyond.

Cities have benefited disproportionately from globalisation. Andy Sedg, CC BY-NC-ND

Outside of the major cities, the regions of the UK have experienced a downward shift in the scale at which economic activity takes place and political power is exercised. The national shift from manufacturing to a service-based economy has had a geographically uneven impact. Many manufacturing industries in the UK’s regions have shrunk or disappeared. This has not been helped by UK national policy which focuses on the financial services sector (predominately in London).

Globalisation’s disconnect

Globalisation has brought with it disconnection between the way that economies and their management have been simultaneously downscaled and upscaled. So, as well as the concentration of decision making in Westminster, there are also a number of decisions being made abroad that affect regions across the UK – the evolution of the European Union epitomises this process.

This upscaling of power is necessary. Many of the most important issues of the last three decades are shared across national boundaries – take for example environmental concerns. The formation of supra-regions begins with an acknowledgement of the benefits of removing trade barriers and having free movement of goods and services, which should create opportunities for all regions of the UK.

Cross-border concerns are better shared. motiqua/flickr, CC BY

In fact, the best hope for deprived areas of the UK is not to place decision making squarely back in the hands of the UK government. This gives power back to the very institutions that created and exacerbated the regional inequalities seen in the UK today. Benefits such as investment in local enterprises and infrastructure, improvements in working conditions and levels of employment result from international engagement and cooperation.

Those who – justifiably – feel isolated and economically depressed should call for greater decision-making power at a more local level. Local power, combined with access to international resources and opportunities, can start rebuilding local economies. Globalisation makes this possible as cities and regions do not necessarily need to go via London for trade and investment. These connections are essential for local economies to compete in the globalised world.

But leaving the EU means leaving the hundreds of trade agreements the UK has with non-EU countries and also possibly the freedom of movement of goods and services there is within the EU. Until these are rearranged (which will take several decades), the UK’s constituent regions may struggle to access international markets. So the “take back control” rhetoric offers no solutions, only problems.

The UK government has consistently failed to articulate the rationale and benefits of upscaling in its relations globally (specifically in the form of EU membership), despite the economic benefits it has brought. It is not about the removal of national boundaries but rather an acceptance of how so much of what drives the global economy occurs outside of these strict boundaries.

Closer economic cooperation is the only logical response to globalisation and the best way to ensure stable growth. Indeed, the short, medium and long-term impacts of the Brexit vote will surely serve to provide the UK with a harsh lesson in the dangers of going it alone.

Author: Jennifer Johns, Senior Lecturer in International Business and Economic Geography, University of Liverpool

Why more finance is the wrong medicine for our growth problem

More finance is not the answer to driving growth harder. This was the essence of a striking keynote by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the Harvard Law School Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the US. He argues that new approaches to monetary policy are required and we need to move beyond finance-led growth emerged as the dominant political strategy in the 1980s.

2016 marks the 30th anniversary of the Program on International Financial Systems. That’s about the age when young people begin to realise that smoking, drinking and working late hours won’t leave their physique unscathed. Bad habits, happily ignored in younger years, catch up with them eventually. Some of us probably know what I am talking about.

You could say that today’s global economy has reached a similar point in its life. But it would be 38 today, having turned 30 back in 2008 when the financial crisis was raging. At that time, the global economy did realise that excess was detrimental to its long-term health. Now the world economy is eight years older – but is it also eight years wiser? In other words, have we cut back enough on our bad habits to thrive for another four or five decades? Or are we still leading a life of excess that will prove costly for tomorrow’s financial health?

In my remarks today, I will argue that we have not yet done enough to adapt. For the global economy to become healthy and prosperous again – and to stay that way – we need to adapt our policy habits. We have to move towards a more sustainable mix: fewer painkillers, less wine, more healing and greater abstinence.

2. Stricken by two illnesses at once

Our subject, the world economy, is still struggling to adapt to the new realities of being “thirtysomething”. It is stricken by two illnesses simultaneously.

The first is the result of the excessive lifestyle it led before the crisis. I’m referring to the overblown financial system and the extreme leveraging, which created a lasting liability in the shape of mountains of debt. It was this excessive leveraging which paved the way to the financial crisis. During the crisis itself, it was plain to see that leverage levels needed to be lowered, especially in the financial sector. But precious little headway has been made in this regard, leaving us with an unstable financial system.1

The second ailment is that global economic growth has been stubbornly stagnant over the past seven years.2 Most policy responses to the crisis have sought to put output levels and growth back on track. Yet growth has been stuck in the doldrums in most advanced countries.

Thus, the global economy has been stricken by both stagnating growth and excessive levels of debt. These twin illnesses are very difficult to treat – especially so given that it is not entirely clear what exactly is behind the growth problem. Is it the unhealthy lifestyle of excessive finance, or is it another, more fundamental condition? Or could it be a more complex complaint in which stifling debt and low growth fuel each other in a vicious circle?

3. Financial painkillers aren’t the cure

How are we supposed to treat these twin illnesses? Finance-led growth emerged as the dominant political strategy in the 1980s. That meant financial deregulation was high on the agenda to foster financial development, and monetary policy was used to counter financial turmoil.

In fact, monetary policy created a high degree of stability during the spell known as the “Great Moderation”, which ran from the 1980s until 2007. This episode was characterised by gratifyingly low volatility in growth and inflation rates. That outcome can still be regarded as a good thing. And many attribute it, at least in part, to systematic monetary policymaking by central banks. This, however, came at a price. Monetary expansion drove liquidity levels higher, which in turn facilitated balance sheet expansion and excessive risk-taking.

In the words of Ben Bernanke, “for the most part, financial stability did not figure prominently in monetary policy discussions during [the Great Moderation].”

Given this experience, a doctor treating a patient with these symptoms would stop prescribing painkillers. But as it turned out, the monetary “medication” actually started to be expanded in 2008. First via ultra-low interest rates, then through quantitative easing, followed, more recently, by even more monetary measures aimed at kick-starting inflation and the economy.

The liquidity provided stabilised the financial system, but it also inflated asset prices. The aftermath of the expansionary monetary policymaking before the crisis should serve as a reminder not to make the same mistake twice. Providing an endless flow of liquidity as a kind of painkiller does nothing to tackle the root cause of the economic challenges we are facing.

The second painkiller frequently administered to support financial development in the pre-crisis era was deregulation and a “light touch” in regulation and supervision. The idea behind this approach was that lenience would fuel increased investment. Unfortunately, it inflated the credit bubble.

Solid regulation and responsible supervision is the key to limiting future bubbles. Yes, we’ve already achieved a great deal since the crisis – Basel III and TLAC at the global level; Dodd-Frank in the US; the banking union in the euro area. And some are saying we’ve already gone too far. The evidence, however, tells a different story: it is higher standards that strengthen credit intermediation and economic development. That’s something worth remembering in the face of what are, intuitively, compelling claims about capital costs. These claims have been discredited by the experience gained during the crisis and by empirical evidence.

In sum, these policies did not constitute a sustainable lifestyle, nor did they deliver a systematic cure. Rather, they turned out to be painkillers. So the big question I’m asking myself is this: should we carry on treating the symptoms by taking more and more painkillers – or should we look for a fundamental change of lifestyle that might cure the underlying problems?

4. Finance is no panacea for growth

Put differently, do we need to treat the global economy with more monetary and financial stimulus? And, more fundamentally, do we need more finance to fix our economy?

For over three decades, the simple answer was “the more, the better”. And scientific evidence supported this intuition. Studies showed that financial development corresponded strongly with economic growth. Politically, there was a clear preference for finance-led growth. Thus, deregulation was high on the agenda.

I won’t remind you where all this led. We just need to remember the tremendous costs for banks and for society at large that followed the burst of the last credit bubble.

Moreover, recent scientific evidence based on historical data reveals that there is indeed such a thing as too much finance. Financial depth starts having a negative effect on output growth when credit to the private sector reaches 100 per cent of GDP. Most advanced countries far exceeded this level prior to the financial crisis – and continue to do so.

Thus, the diagnosis for advanced economies like the EU und the US is that increasing financial intermediation is beneficial, but only up to a point. This point has been exceeded in most developed economies.

5. What’s the right medicine? Fewer painkillers, a better cure

What’s the takeaway from all this? It’s that more finance is not the solution to our current problems.

Sticking to the simple “more finance, more growth” trajectory isn’t a sustainable solution. That would run the risk of focusing on what is currently our most pressing problem – lifting growth expectations – at the expense of our long-term – and fundamental – goal of achieving a stable financial system. And by doing that, we would also sacrifice sustainable growth.

Most doctors would probably agree that a sophisticated course of treatment aimed at the patient’s long-term wellbeing is better than a box of painkillers every week. But ask them what exactly they would prescribe, and the result will probably be rather like asking several economists for macroeconomic policy advice. You might end up with more treatment plans than you have doctors – or patients for that matter.

What we need is less, and better finance – finance that serves the real economy and sustainable development. How do we achieve that? There are several angles to that question, but the ones I would like to emphasise are financial regulation and supervision, and monetary policy.

As I said earlier, providing a flow of liquidity as a monetary painkiller does nothing to tackle the root causes of the economic challenges we are facing. In the absence of economic progress on the structural front, monetary easing is not the key to a sustainable economy. It does, however, affect financial stability, given that it can fuel bubbles. Therefore, we need to look for an exit strategy. It is important for central banks to think hard about how they intend to achieve an exit as soon as economic conditions make it viable to do so.

From a more general angle, integrating financial stability considerations into monetary policy while maintaining the primacy of the price stability goal will be a key challenge for the future. I welcome the fact that central banks are moving in that direction.

Rock-solid regulation and responsible supervision is likewise indispensable for a stable financial system. Over and above the progress we have made since the crisis erupted, there are three more steps we need to take. First, we must credibly implement the agreed reforms – for example, the new bail-in instruments need to be credible so that politicians do not pre-empt the bail-in during times of crisis. Zombie banks should not be kept alive for political reasons. Uncertainty over the bail-in instruments will only exacerbate market uncertainty.

Second, supervision must be steadfast. Either banks are capable of managing their risks adequately, or supervisors must force them to do so – or, ultimately, they must take disciplinary measures. As such, it is up to a supervisor to increase an individual institution’s capital requirements, if need be. At the same time, however, we must be careful that risky activities do not move to unregulated areas.

Finally, we must not discontinue our reform efforts prematurely. We need to put an end to the privileged treatment of sovereign exposures. We must regulate shadow banking. And we must finalise Basel III in a sound manner. Yes, there has been a commitment to not raise capital requirements significantly on average, as the Basel Committee and the G20 have clarified. But several German banks, for example, have already lifted their regulatory equity by more than 100 per cent between December 2010 and June 2015 – that’s an increase from 58 billion to 118 billion euros. So we have already achieved a substantial increase in capital. But make no mistake: high-risk portfolios will end up with higher requirements. Moreover, a pledge to not significantly increase capital requirements certainly doesn’t mean that requirements will fall back to their low pre-crisis levels.

The bottom line is this: we must not lapse back into bad old habits when we’re finalising, implementing and enforcing the reforms aimed at restoring financial stability. Financial intermediation is important for our advanced economies. But if it’s not or insufficiently regulated, it can do more harm than good. That should be borne in mind in each and every decision we take.

But talking about rules and their enforcement is one thing – they will only lead to better finance if banks and investors change their behaviour accordingly. Banks, especially European ones, have to adapt their business models. They need to set themselves sustainable profit targets which do not undermine ethical behaviour.

Without a doubt, such financial policies need to be complemented by fundamental economic policy reforms. But I’m certain that sound financial and monetary policy will be a cornerstone of a stable financial system that serves the development of the real economy over the long term.

6. Conclusion

Esteemed colleagues

We are facing two challenges simultaneously: to reanimate economic growth, and to build a sustainable financial system that is fit for the 21st century.

I am convinced that our policies need to set their sights on a long-term solution – a lasting cure, if you will, not an endless supply of painkillers. We should not turn a blind eye to the short-term challenges we face, of course. But what we must do is refrain from solutions that encourage excessive indebtedness. Finance will be an important ingredient in the cure for growth – but it will need to be of a better quality, not a greater quantity.

IMF Lowers Global Growth Forecasts by 0.3%

Even with the sharp oil price decline—a net positive for global growth—the world economic outlook is still subdued, weighed down by underlying weakness elsewhere, says the IMF’s latest WEO Update.

Global growth is forecast to rise moderately in 2015–16, from 3.3 percent in 2014 to 3.5 percent in 2015 and 3.7 percent in 2016 (see table), revised down by 0.3 percent for both years relative to the October 2014 World Economic Outlook (WEO).

Recent developments, affecting different countries in different ways, have shaped the global economy since the release of the October WEO, the report says. New factors supporting growth—lower oil prices, but also depreciation of euro and yen—are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries.

“At the country level, the cross currents make for a complicated picture,” says Olivier Blanchard, IMF Economic Counsellor and Director of Research. “It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

Cross currents in global economy

In advanced economies, growth is projected to rise to 2.4 percent in both 2015 and 2016. Within this broadly unchanged outlook, however, is the increasing divergence between the United States, on the one hand, and the euro area and Japan, on the other.

For 2015, the U.S. economic growth has been revised up to 3.6 percent, largely due to more robust private domestic demand. Cheaper oil is boosting real incomes and consumer sentiment, and there is continued support from accommodative monetary policy, despite the projected gradual rise in interest rates. In contrast, weaker investment prospects weigh on the euro area growth outlook, which has been revised down to 1.2 percent, despite the support from lower oil prices, further monetary policy easing, a more neutral fiscal policy stance, and the recent euro depreciation. In Japan, where the economy fell into technical recession in the third quarter of 2014, growth has been revised down to 0.6 percent. Policy responses, together with the oil price boost and yen depreciation, are expected to strengthen growth in 2015–16.

In emerging market and developing economies, growth is projected to remain broadly stable at 4.3 percent in 2015 and to increase to 4.7 percent in 2016—a weaker pace than forecast in the October 2014 WEO. Three main factors explain this downward shift.

• First, the growth forecast for China, where investment growth has slowed and is expected to moderate further, has been marked down to below 7 percent. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation. This lower growth, however, is affecting the rest of Asia.

• Second, Russia’s economic outlook is much weaker, with growth forecast downgraded to –3.0 percent for 2015, as a result of the economic impact of sharply lower oil prices and increased geopolitical tensions.

• Third, in many emerging and developing economies, the projected rebound in growth for commodity exporters is weaker or delayed compared with the October 2014 WEO projections, as the impact of lower oil and other commodity prices on the terms of trade and real incomes is taking a heavier toll on medium-term growth. For many oil importers, the boost from lower oil prices is less than in advanced economies, as more of the related windfall gains accrue to governments (for example, in the form of lower energy subsidies).

Risks to recovery

The distribution of risks to global growth is more balanced than in October, notes the WEO Update. On the upside, lower oil prices could provide a greater boost than assumed. Other risks that could adversely affect the outlook involve the possible shifts in sentiment and volatility in global financial markets, especially in emerging market economies. The exposure to these risks, however, has shifted among emerging market economies with the sharp fall in oil prices. It has risen in oil exporters, where external and balance sheet vulnerabilities have increased, while it has declined in oil importers, for whom the windfall has provided increased buffers.

Policy priorities

The weaker global growth forecast for 2015–16 underscores the need to raise actual and potential growth in most economies, emphasizes the WEO Update. This means a decisive push for structural reforms in all countries, even as macroeconomic policy priorities differ.

In most advanced economies, the boost to demand from lower oil prices is welcome. It will also lower inflation, however, which may contribute to a further decline in inflation expectations, increasing the risk of deflation. Monetary policy must then stay accommodative to prevent real interest rates from rising, including through other means if policy rates cannot be reduced further. In some economies, there is a strong case for increasing infrastructure investment.

In many emerging market economies, macroeconomic policy space to support growth remains limited. But lower oil prices can alleviate inflation pressure and external vulnerabilities, giving room to central banks to delay raising policy interest rates.

Oil exporters, for which oil receipts typically contribute a sizable share of fiscal revenues, are experiencing larger shocks in proportion to their economies. Those that have accumulated substantial funds from past higher prices can let fiscal deficits increase and draw on these funds to allow for a more gradual adjustment of public spending to the lower prices. Others can resort to allowing substantial exchange rate depreciation to cushion the impact of the shock on their economies.

Lower oil prices also offer an opportunity to reform energy subsidies and taxes in both oil exporters and importers. In oil importers, the saving from the removal of general energy subsidies should be used toward more targeted transfers to protect the poor, lower budget deficits where relevant, and increase public infrastructure if conditions are right.