How the IMF Can Save the Global Economy
As they converge on Washington this week for the annual meetings of the International Monetary Fund and World Bank, officials from around the world may wonder which issues ailing the global economy will be highlighted and even end up in their joint communiques for follow-up action.
After all, the policy elites should have little doubt that the world is operating well below potential. Day after day, inequality, long-term unemployment and youth joblessness are getting more deeply embedded in too many places and are therefore much harder to solve. The "new mediocre," as Christine Lagarde, the IMF's managing director, has called it, is holding back economic prosperity and eats away at countries' social and political cohesion.
To make things better, policy makers need an accurate and actionable evaluation of the underlying problems. This is where things become trickier because, as a Financial Times editorial noted on Monday, "the world economy is not so much suffering from a global malaise as a host of local ailments."
Such "a host of local ailments" doesn't readily fit with the formats that will govern discussions this week and over the weekend. Overall, the construct of the Washington gathering is much better suited to discuss a few big macro issues that are deemed of importance to the majority of IMF member countries, or at least to the subgroup that drives the agenda. This approach can be highly consequential, as it was in 1982, 1998 and 2008, when the annual meetings provided a catalyst for effective responses to financial crises that could have derailed the global economy.
There may be a way, however, to make the 2014 meeting less challenging and more productive: by employing a technique that econometricians have found useful called "the reduced form equation."
The objective is to identify a handful of factors that, while not explaining the entire problem, speak to a critical mass to make the outcome relevant and actionable. Such an approach would address five themes that substantially aggravate the "host of local ailments":
- First, the failure by policy makers to deliver a proper cyclical pickup in growth. This is due to unbalanced macroeconomic policies within and across major economies, as well as to residual debt overhangs that hold back new investments.
- Second, insufficient investments in longer-term drivers of growth such as infrastructure, labor market changes and pro-growth tax and spending reforms.
- Third, the failure of established national institutions, particularly in the public sector but also some in the private sector, to adjust quickly enough to how a growing segment of the population is using the Internet, social media and mobility to empower a host of individual activities.
- Fourth, the need for the multilateral bodies, particularly the IMF and World Bank, to better reflect the realities of today rather than those of 70 years ago. Giving more countries realistic representation and voice is crucial to engendering the institutional legitimacy needed for effective coordination of global policy.
- Finally, inadequate political appreciation of what is at stake if the world inadvertently continues on the path of what Lawrence Summers has labeled the "secular stagnation" -- that is, an even longer period of inadequate economic growth.
By addressing these five issues, the impressive collection of finance ministers and central bank governors would help provide a much better context to resolve the many local ailments that undermine both national and global prosperity.
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Mohamed Aly El-Erian at firstname.lastname@example.org
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