The Distributional Challenge

MILAN – Assessing the recent past and looking forward to the near term is a natural end-of-year exercise. When it comes to the global economy in 2013 and 2014, it may well be a necessary one as well.

In the past year, systemic risk declined. Europe came together around the need to stabilize the eurozone, with the European Central Bank and Germany playing the leading roles. China’s leadership transition was completed and a relatively clear policy direction has been established, featuring a more level playing field for the private and state sectors and an expanding – indeed “decisive” – role for markets. Germany’s general election pointed to policy continuity, though an extended period of slow growth and high unemployment seems unavoidable.

Emerging economies (excluding China) were only temporarily destabilized by anticipation of monetary tightening in the United States. They are, however, preparing for a higher-interest-rate world, one marked by a transitional slowdown in growth.

In the US, the annual growth rate crept up and unemployment inched down. Widespread public disgust with a polarized, dysfunctional Congress may have contributed to a bipartisan budget agreement and a reduction in political risk. Though it would be premature to announce a trend, one can hope that pragmatism and compromise will prevail over the moral righteousness of political extremes. No one likes living with second- or third-best alternatives, but that is America’s reality for now.