The world econ­omy needs ac­tion, not words

The Pak Banker - - OPINION - David Ship­ley

FI­NANCE min­is­ters and cen­tral bank gov­er­nors of the Group of 20 ma­jor economies ended their meet­ing in Shang­hai this week­end with the usual prom­ises to bol­ster the global econ­omy. They re­solved to take all ap­pro­pri­ate mea­sures and no in­ap­pro­pri­ate ones. It's a fa­mil­iar in­can­ta­tion. What's needed is some ac­tion to match th­ese end­lessly re­peated words. The world econ­omy is frail, and in­vestors ev­ery­where are ner­vous. The U.S. is do­ing rel­a­tively well -- but only be­cause the prospects are so poor else­where. Much of the Euro­pean Union is stag­nant. Ja­pan's re­cov­ery is fal­ter­ing. Fears of a wors­en­ing slow­down in China haven't abated. Many emerg­ing-mar­ket economies are reel­ing from the fall in com­mod­ity prices. Growth in the vol­ume of world trade is slug­gish. In Jan­uary, the In­ter­na­tional Mon­e­tary Fund again cut its pro­jec­tions for growth in world out­put to 3.4 per­cent this year and 3.6 per­cent next. It says an­other down­ward re­vi­sion is likely soon.

Can any­thing be done to im­prove this dis­mal out­look? In­deed it can. Two kinds of pol­icy are needed: one to sup­port de­mand and the other to boost po­ten­tial sup­ply. On the sup­ply side, the dif­fi­culty is more political than eco­nomic. Gov­ern­ments ought to stim­u­late com­pe­ti­tion by cut­ting ex­ces­sive regulation, es­pe­cially of la­bor mar­kets, and by re­new­ing their ef­forts to lower bar­ri­ers to trade and mi­gra­tion. Trade agree­ments such as the Trans-Pa­cific Part­ner­ship and the Trans-At­lantic Trade and In­vest­ment Part­ner­ship should be con­cluded and put into ef­fect as though the need is ur­gent -- be­cause the need, as tepid growth in trade proves, could hardly be more so. There's al­ways re­sis­tance to such re­forms, and dim­ming eco­nomic prospects strengthen it. This vi­cious cir­cle of pes­simism is ap­par­ent wher­ever you look, not least in the U.S. It's up to gov­ern­ments to break it, by press­ing the case for growth. Boost­ing de­mand poses a dif­fer­ent prob­lem. In many coun­tries, in­ter­est rates have been cut to noth­ing -- in some cases, to less than noth­ing. Cen­tral banks have also bought bonds on an enor­mous scale, a pol­icy that can't safely be ex­panded any more. Mon­e­tary pol­icy can do only so much. The an­swer is fis­cal pol­icy. The right kind of fis­cal stim­u­lus works on de­mand and sup­ply si­mul­ta­ne­ously. Tax cuts and in­vest­ment in in­fra­struc­ture raise spend­ing and ex­pand pro­duc­tive po­ten­tial at the same time. In some coun­tries, to be sure, any such in­crease in pub­lic bor­row­ing would be im­pru­dent, be­cause it would raise doubts about the sus­tain­abil­ity of pub­lic debt. This is not the case in the U.S. (nor in Ger­many, though its govern­ment says oth­er­wise). Other coun­tries also have fis­cal space for tax cuts and new pub­lic in­vest­ment, and the cost of bor­row­ing is cur­rently so low that the pol­icy is bar­gain-priced.

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