IMF Managing Director Christine Lagarde called on policymakers to steer clear of protectionism, guard against rising fiscal and financial risks, and foster long-term growth that benefits everyone. The IMF in January projected 3.9% global growth for 2018 and 2019.
Advanced economies are expected to grow above their medium-term potential this year and next. In Europe, for example, the upswing is now more widely spread across the region. But challenges remain in some emerging and developing countries, including Africa, even if commodity exporters are moving up economically modest.
“In other words, fix the roof while the sun is still shining” she said.
These reforms are often politically difficult, but they are more effective and easier to implement when economies are moving up, not down.
Some governments have taken action, but more needs to be done.
The global momentum – driven by stronger investment, a rebound in trade, and favorable financial conditions – which is encouraging companies and households to increase their spending.
The United States is already at full employment, and growth will likely accelerate further due to expansionary fiscal policy.
Meanwhile, here in Asia the outlook remains bright – which is good for everyone, because this region contributes close to two-thirds of global growth.
She determined three priorities that can make a difference.
Three priorities for the global economy
1. Steer clear of protectionism
First – governments need to steer clear of protectionism in all its forms.
History shows that import restrictions hurt everyone, especially poorer consumers.
Not only do they lead to more expensive products and more limited choices, but they also prevent trade from playing its essential role in boosting productivity and spreading new technologies.
2. Guard against fiscal and financial risk
New IMF analysis shows that, after a decade of easy financial conditions, global debt – both public and private – has reached an all-time high of $164 trillion.
Compared to its 2007 level, this debt is now 40% higher, with China alone accounting for just over 40% of that increase.
A major driver of this buildup is the private sector, which makes up two-thirds of the total debt level. But that is not the whole story.
Public debt in advanced economies is at levels not seen since World War II. And if recent trends continue, many low-income countries will face unsustainable debt burdens.
High debt in low-income countries could jeopardize development goals as governments spend more on debt service and less on infrastructure, health, and education.
The bottom line is that high debt burdens have left governments, companies, and households more vulnerable to a sudden tightening of financial conditions. This potential shift could prompt market corrections, debt sustainability concerns and capital flow reversals in emerging markets.
This is about creating more room to act when the next downturn inevitably comes – or as the economists like to say, it is about “building policy buffers.”
For many economies, it means reducing government deficits, strengthening fiscal frameworks and placing public debt on a gradual downward path. This should be done in a growth-friendly way through more efficient spending and progressive taxation.
It also calls for more exchange rate flexibility to cope with volatile capital flows, especially in emerging and developing countries.
3. Foster long-term growth that benefits everyone
Fostering stronger and more inclusive growth is a key challenge.
If, as projected, advanced economies return to disappointing medium-term growth, this would worsen economic inequality, debt concerns and political polarization.
At the same time, more than 40 emerging and developing countries are projected to grow more slowly in per capita terms than advanced economies.
This means slower improvements in living standards and a widening income gap between those countries and the advanced world.
As I said earlier, the window of opportunity is open. But to boost productivity and potential growth, countries need to step up economic reforms and policy actions.
Let me touch on two potential game-changers:
(i) First, unlock the potential of the service sector, especially in developing economies.
In moving from an agriculture-based to a service-based economy, many of these countries are bypassing a traditional industrialization phase.
This raises concerns that countries could get stuck at lower-productivity levels, with little chance of catching up to advanced economy incomes.
Our latest research shows, however, that some service sectors – led by transportation, communications and business services – can match the productivity levels of manufacturing.
This is critical for countries such as the Philippines, Colombia and Ghana where employment and output are shifting from agricultural production to higher-value services.
It is also important for the economic wellbeing of millions of women, who often account for the majority of service industry workers.
Unlocking this potential is not an easy task. It requires more public investment in education, training, and job-search assistance. It also means opening service sectors to more competition.
At the global level, there is work to be done as well. We need to increase trade in services, including e-commerce, by reducing barriers in this area – which are still extremely high.
(ii) The second potential game-changer is the digital transformation of government.
When it comes to cutting-edge technologies and systems, public sectors can lead the way – and we are seeing great examples here in Asia.
In India, citizens receive subsidies and welfare payments directly into their bank accounts, which are linked to unique biometric identifiers. In Australia, tax authorities collect information on wages in real time, which gives them immediate insight into the state of the economy. And here in Hong Kong, bank customers will soon be able to use their mobile phone numbers and email addresses to transfer money or make retail purchases, thanks to a new, government-funded payment system.
These initiatives are just the beginning. Governments across the world are now also looking at ways of generating efficiency gains.
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