What the G-20 Should Be Talking About
Resilience is fast becoming the new buzzword in global economics. International Monetary Fund chief Christine Lagarde has warned that we need to do more to protect and enhance the global economy's ability to withstand shocks. According to German finance minister Wolfgang Schaeuble, that involves "empowering people to bounce back after a crisis."
The G-20 have made “global economic resilience” a priority for their summit this week. And yet, for all the focus on the subject, there is too little talk about the areas that potentially have the broadest impact on resilience: migration, adult education and data-collection.
Governments now have a fairly standard toolkit, much advocated by the G-20 and IMF, for building economic resilience: structural reforms to increase market flexibility, a broader tax base, greater use of what are called countercyclical policies, including automatic stabilizers and macroprudential policies such as capital buffers. But beyond these tested measures, other recent recommendations for resilience make little sense. It is too much, for example, to expect governments or economists, as the IMF advises, to “anticipate the effects of technological progress and economic integration, [and] equip their populations with tools to reap the benefits.” The future is not entirely knowable, a fact which Keynes identified as being the driving force behind economic instability. Expecting public officials to have a crystal ball is a recipe for further undermining the public’s trust in elites and capitalism itself.
Some have suggested that improving social cohesion will enhance resilience. That sounds appealing: Research has long suggested that an economy's ability to adjust to a major shock depends on its degree of, and its ability to manage, social conflict. The problem is finding ways to encourage change. How trusting people are of their wider communities, and how happy they are to help the less advantaged by contributing to a common pool of resources, is deeply rooted and not easy for a government to change, as a new NBER paper helps to show. Some countries will, as a result, be naturally far better positioned when it comes to managing shocks.
While the G-20 are looking at the issue, two additional shock-adjustment avenues deserve their attention: migration and education, particularly adult education.
Migration as a tool to balance national or regional shocks now faces increased resistance from politicians eager to appease anti-immigrant strands in public opinion. But in the late 19th and early 20th centuries, 30 million mostly poor Europeans fled to the U.S. in response to shocks to their home economies, including the Irish potato famine. The ability to migrate acted as a release valve that helped individuals respond to unemployment and poverty, often benefiting others who were left behind.
Adult education can help alleviate the suffering of people in sectors that lose out from technological change and trade-based shocks. With hindsight, much more such support should have been provided to America’s rust belt and to deindustrializing northern England.
Governments and multilateral bodies can help here, beginning with data collection. Measuring and comparing countries by the presence of obstacles in the way of mobility and, by building on the work of the OECD on the availability and support for adult education, governments can help identify where support and policy change is needed.
The case for thinking ahead is compelling. While 2008 may be foremost in mind, history is filled with examples of one shock after another: the Iron Age, the Black Death, the Florentine banking crisis of the 14th century, the explorations of Christopher Columbus, the Irish potato famine, 1929, the Latin American Debt crisis, and the 1997 East Asian Crisis. According to the World Economic Forum's Global Risks Report there are five types of risks to watch out for: economic, environmental, geopolitical, social and technological; as one risk recedes, another moves center-stage.
There is a limit to what government can do to build up resistance. However, acknowledging that economies are not naturally stable, and taking action to measure and compare economies in terms of the basic policy measures that can help them adjust to an ever-changing landscape, would be a good start for the G-20 this week.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Therese Raphael at email@example.com