New IMF econ­o­mist sees ma­jor chal­lenges to global econ­omy

Kuwait Times - - BUSINESS -

WASH­ING­TON: Just a few months into the job, the chal­lenges are al­ready piled high for the In­ter­na­tional Mon­e­tary Fund’s new chief econ­o­mist Mau­rice Ob­st­feld. There’s the Fed­eral Re­serve’s plan to raise in­ter­est rates-which poses a deep test to economies world­wide. There’s Europe’s mi­gra­tion cri­sis. And not to be for­got­ten is Bri­tain’s threat to leave the eu­ro­zone when the re­gion’s econ­omy is al­ready frail.

That’s all on top of slow global eco­nomic growth and cli­mate change. In an in­ter­view with AFP, Ob­st­feld, an eco­nomic ad­vi­sor to US Pres­i­dent Barack Obama be­fore be­ing named to the IMF, spoke of a “night­mare sce­nario” in which var­i­ous pres­sures con­spire to weaken the eco­nomic bonds of Europe.

“I worry a lot about the strong trend in Europe to pull back from mar­ket in­te­gra­tion,” he said. “One fac­tor is the refugee cri­sis, where there’s a lot of pres­sure on open bor­ders and work­ers’ mo­bil­ity,” he added. “There is a lot of po­lit­i­cal pres­sure com­ing from the ex­tremes, which could undo a lot of the eco­nomic in­te­gra­tion that has occurred.”

Speak­ing in his IMF of­fice just a few blocks from the White House, Ob­st­feld, 63, said other pres­sures were also stress­ing the 28-coun­try EU bloc. “An­other ob­vi­ous one is Bri­tain want­ing to pos­si­bly leave the Euro­pean Union,” he said, rais­ing the “Brexit” is­sue that is in­creas­ingly making head­lines in Europe. Ob­st­feld ar­rived at the Fund in Septem­ber to re­place French econ­o­mist Olivier Blan­chard, who held the chief econ­o­mist job through­out the un­prece­dented fi­nan­cial crises in the United States and Europe. Ob­st­feld, whose po­si­tion en­tails ad­vis­ing the man­age­ment and mem­ber coun­tries of the global cri­sis lender on eco­nomic con­di­tions, faces some dif­fer­ent chal­lenges from Blan­chard, par­tic­u­larly the im­pact of the sharp slow­down in the world’s sec­ond largest econ­omy, China.

Cli­mate change threat An in­ter­na­tional eco­nomics spe­cial­ist who stud­ied at Cam­bridge and MIT and taught at Har­vard and the Univer­sity of Cal­i­for­nia, Berke­ley, Ob­st­feld has to keep watch on mul­ti­ple hot is­sues and broader long-term trends. “Cli­mate change is a ma­jor eco­nomic threat. Warm­ing re­duces pro­duc­tive ef­fi­ciency, cli­mate dis­as­ters can be deeply dis­rup­tive to eco­nomic ac­tiv­ity,” he said.

The Fund looks at how cli­mate change will hit the economies and bud­gets of coun­tries im­pacted the most, and tries to help them pre­pare. With an up­com­ing global sum­mit in Paris on ac­tion against warm­ing, Ob­st­feld said coun­tries need to understand it is a col­lec­tive ac­tion prob­lem. If it isn’t solved, he said, warm­ing “can threaten their pop­u­la­tion and im­pose macroe­co­nomic risks.”

The fo­cus of the COP21 sum­mit is ob­tain­ing pledges for car­bon emis­sions. Ob­st­feld said lim­its can have ad­verse ef­fects for some in­dus­tries. But, for one, many in­dus­tries es­sen­tially get a sub­sidy by be­ing able to pol­lute with­out pay­ing for it, he added. In ad­di­tion, he said, im­ple­ment­ing car­bon diox­ide lim­its “stim­u­lates a lot of in­no­va­tion and a lot of in­vest­ment.”

He said in­cen­tives need to be changed to fa­vor emis­sions re­duc­tion, in­clud­ing es­sen­tially putting a tax on car­bon. That “would be the most ef­fi­cient way to re­duce emis­sions at the low­est cost,” he said. “Un­for­tu­nately, many coun­tries, es­pe­cially the United States, don’t want to put in taxes. But that’s really the ef­fi­cient way to do it.”

Fed­eral Re­serve risks At the same time, Ob­st­feld has his eye on US plans to tighten mon­e­tary pol­icy even while else­where, in­clud­ing Ja­pan and the EU, cen­tral banks need to loosen theirs, he said. He said the US Fed­eral Re­serve, ex­pected to raise in­ter­est rates in De­cem­ber for the first time in nine years, might be bet­ter hold­ing off a lit­tle longer. The risks of the Fed act­ing sooner “are cer­tainly higher,” he said, adding:

“I don’t see huge risks at all to wait­ing.” “If for any rea­sons the Fed had to re­verse that first in­ter­est rate in­crease, mar­kets would in­ter­pret it as a big deal.” As for the Fed’s coun­ter­part in the eu­ro­zone, he said the Euro­pean Cen­tral Bank “should be fol­low­ing the strat­egy of ex­pand­ing as­set pur­chases and low­er­ing the in­ter­est rate.” — AFP

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