Friday, November 28, 2014

The Future Global Economy

WASHINGTON, DC – As the world enters yet another year in the shadow of continued financial and economic crisis, a broader view of the contours of the future global economy is required.

The longer-term trends are clear. Dynamic emerging markets from Asia to Latin America are rising in prominence. The United States and Japan remain important drivers of the global economy but face major debt and deficit challenges. Europe is going through a difficult but historic process of re-engineering and integration. The Middle East is transforming before our eyes. Sub-Saharan Africa is breaking through to sustained development – creating a new frontier of growth after decades of stagnation.

These changes are shaping our future in a positive way. Yet there are still considerable roadblocks to overcome. The global economic recovery remains too weak. With more than 200 million unemployed around the world, prospects for job creation are still too dim. And the gap between rich and poor, exacerbated by the crisis, is still too wide.

There is a tough road ahead if we are to turn optimism into reality. I see three key milestones.

First, and most obviously, we need to put the crisis behind us, once and for all. And we know how to do that: accommodative monetary policy; fiscal adjustment in all advanced economies that includes concrete and realistic plans to reduce debt over the medium term, but does not undercut short-term growth; completing the banking-sector cleanup; and reforms to boost productivity and growth potential. All of this should be complemented by a rebalancing of global demand toward dynamic markets, including emerging economies.

Perhaps the greatest obstacle will be the huge legacy of public debt, which now averages about 110% of GDP in the advanced economies – the highest level since World War II. This leaves governments highly exposed to subtle shifts in confidence. It also ties their hands, especially as they seek to build the physical and institutional infrastructure of the twenty-first century while respecting social promises. The needs of aging populations will add to these pressures.

History offers two clear lessons: reducing public debt is incredibly difficult without growth, and increasing growth is incredibly difficult with a huge burden of public debt. So we face a twofold imperative – securing growth while reducing debt. The key now is not only to move from deliberation to action on the policies that we know are needed, but to move together and on all fronts.

The second milestone is a better global financial system. We need to move beyond the system that gave us the crisis – a financial sector in which some, as the ancient Greeks might say, toyed with hubris and unleashed nemesis. Of course, there has been important progress, especially on the Basel III agenda to create more resilient capital and liquidity buffers. But momentum is flagging, both on implementing the agreed reforms and on progress in areas like derivatives and shadow banking.

As a result, the system as a whole is not yet much safer than it was in September 2008, when Lehman Brothers collapsed. It is still too complex; activities are still too concentrated in large institutions; and the specter of “too big to fail” remains. Continuing excesses and repeated scandals show that the culture of finance has not really changed.

Many in the financial-services industry are concerned about the costs of new regulations. A recent IMF study shows that better regulation would indeed nudge banks’ lending rates up, but by relatively little. We also found that increasing capital buffers to appropriate levels helps, rather than hurts, economic growth. Reforming financial-sector taxation would also help to reduce excessive risk-taking and leverage.

The bottom line is that the costs of reform are affordable. The costs of complacency are not.

The third milestone relates to the quality and inclusiveness of growth. While growth is essential for the future global economy, it must be a different kind of growth – inclusive and not simply the fallout of unfettered globalization.

The policy implications of such a reorientation are profound. It requires a fiscal policy that focuses not only on efficiency, but also on equity – particularly on fairness in sharing the burden of adjustment, and on protecting the weak and vulnerable. It means expanding access to credit and financial services everywhere. And it means more transparency and better governance.

Achieving these milestones presupposes greater global cooperation. A world that is bound closely together must be a world that works closely together if it is to prosper together. There is simply no other choice. We are multiple players, but we are engaged in a single game – a game that must be cooperative, not simply competitive. In such a world, multilateral institutions like the International Monetary Fund play a vital role in boosting economic cooperation.

The year 2013 offers the chance to put the economic crisis behind us and to shape the world for the better. Policymakers must seize this chance. The IMF will support them in building a fairer and more prosperous future.

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    1. CommentedWaleed Addas

      The IMF and many central bankers are playing with fire. The biggest global problem is that they are not aware of it!! If they continue "business as usuall", then more imbalances and more crisis will come. There is a need to return to basics and to understand the function of money. I am inspired by the Islamic philosophy of economics and finance which looks at the whole from an integrative approach. Please let's stop kicking the can further down the road. Food for thought!

    2. CommentedJoshua Ioji Konov

      Market Development Verses Economic Growth

      The global industrial overproduction capabilities have been gaining momentum accelerated by ongoing globalization, rising productivity, Chinas industrialization, the Internet and mostly by the vastly improving high technologies in manufacturing, communications, and international trade. The Transnationals have been given great advantages to find new cheaper markets that they could relocate or outsource industrial production, whereas the huge Chinese marketplace has provided them the needed demand to expand and aggregate their capitalization and economic health even in the time of 2007-9 Recession and post recession time. Simultaneously to the rising profit of the transnationals and big investors, declining industrial employment, middle class, and fiscal reserves have been observed in the United States, many European countries, and Japan, the manufacturing jobs that used to replenish fiscal reserves and maintain large middle class have largely disappeared being moved and outsourced, moreover the industrial jobs still left in there have been highly robotized bringing down salaries and numbers of employed. The low paid jobs that have been gaining in post recession time could not compensate to the lost high paid industrial jobs from the past. In general, capitalism relied on industrial jobs and high interest lending rates to raise profits, boost economic growth and replenishes fiscal reserves; however, none of these three points is working under the conditions of most recent market developments, whereas aggregated super-production, moving, outsourcing, the long-term and deep 2007-9 recession and post recession time, and e.g., made these three points, which are founding for the capitalism, obscure and underperforming. Hence, the governments are keeping their discount tier one interest rates close to zero, but the poor transmissibility of the economies is establishing the condition for new market bubbles instead of boosting higher percentage economic growth with high employment and salaries in manufacturing. The idea that manufacturing will come back to the US, or most European countries to employ the high single and double digits unemployed is unrealistic in its nature. The austerity measures in UK and Europe, the quantitative easing and stimulus packages in the US, UK and Japan, and the stimulus programs in China are temporarily economics tools capable of reviving business activities of mostly lower paid jobs in service sector, however the majority highly paid industrial jobs are gone forever being undercut by high technologies, and moved or outsourced elsewhere, therefore the capitalism could not work out these economies to sustain adequate economic growth to balance rising fiscal social and infrastructural expenses.

      The main carriers of economic growth in the capitalism are big transnational corporations and big investors, which were suppose to stir economic growth by raising productivity supported by trickling down capital. Moving and outsourcing industrial production to wherever cheaper and qualified labor is found, these two economic agents are considered the noise in (1=f noise) formula for every country/market economic development that is suppose to close underdeveloped economies to the developed industrial ones. Hence, low taxes, low regulations, shady not particularly clear business laws, and corporate contracting are the keys to progress, industrial employment, and economic growth. However, for the last 20 years the system of capitalism greatly underperformed the 1=f noise formula has not worked, the middle class deteriorated, the manufacturing jobs are gone, and the business activities are shrinking lacking demand balanced marketplace.

      Moreover, the economic growth, which was suppose to keep at the least as high as to compensate for the natural energy related price rising could not keep up marginalizing into the very low, or like in EU into the recessionary minuses. The deflationary forces have been gaining strength, whereas Japan is the good example of it. Thus, the market forces pressure has degenerated economic growth into market development, however neither the overall financial system, business laws, lending approaches or market security have been adapted to the natural processes of this ongoing change, thus instead of a sustained market development be succeeded and maintained the economies continue accumulating fiscal debt, and underperforming with high unemployment and underemployment. The ideologies are ruling over the clear indicators of a system, which has exhausted its growth generating powers.

      Economic growth differentiates from market development by its fundamental change of priority from big business and investors as main economic agent for economic growth to small and medium businesses and investors as main market agent for market development. Hence, the economic tools such as high lending rates, shady business laws, deregulated financial system, tax breaks for the rich, limited liability corporate structures, cutting down on social and infrastructural expenses, e.g. that worked to boost economic growth are to change into more sophisticated deleveraging diverse business environment using market tools such as enhanced business laws, unlimited liability corporate structures (to the decision making corporate structures – not to the investors), higher market security allowing lower lending rates, using social and infrastructural expenses as an extra equity demand, e.g. that overall will provide better balance to demand-to-supply markets. Market development is an enhanced version of the trickle down capitalism that rely basically on market forces to balance markets demand-to-supply but uses indiscriminately market tools to keep this balance in marginal proximity.

      Working Papers
      1. 2001 & 2007 Recessions prompted remaking of the international organizations
      MPRA Paper, University Library of Munich, Germany View citations (1)
      2. Piercing the Veil’s Effect on Corporate Human Rights Violations & International Corporate Crime (Human Trafficking, Slavery, etc)
      MPRA Paper, University Library of Munich, Germany

      Joshua Ioji Konov, 2012

    3. CommentedNathan Coppedge

      1. The idea that debt has "not been so high since WWII" may fail to show that in real dollar terms debt is greater than it has ever been. There is less potential to "tweak" the system, as I think government and economists have realized.

      2. If I'm not mistaken GDP is not understood in terms of government earnings, so 2013 only offers the prospect of minimizing, not destroying, the potential for damages.

      3. The developing world offers real potentials in unreal terms, because only a small segment of industry can translate raw resources into economic potential.

      I hope these points stand considering.

    4. CommentedPaul A. Myers

      This is the single-best tour de horizon I have read of the worldwide financial and economic situation--true statesmanship. I think Lagarde has correctly identified that simultaneously achieving high levels of cooperation with high levels of competitiveness will define the high performing economies of the future. Germany has recently been quite successful at this.

      The other notable observation is that reducing debt without growth is exceptionally difficult while achieving growth with high levels of debt is difficult. That means simple minded panacea solutions pandered about by the right wing are worse than irrelevant on the one hand, while pragmatic efforts will require hard work and making real resource choices in the intermediate term.

      The final acute observation is that the financial system is still deeply dysfunctional because they have used money to capture the governments in the advanced western economies. Legislative bodies lack both drive and competence to make banks responsive to broader public goals. The American House of Representatives is a very sick child; the crochety old Senate is only slightly better.

    5. CommentedLuke Ho-Hyung Lee

      A serious and fundamental flaw has been made in the modern information age economy. I think the IMF should recognize what that flaw is. Please see: