Maybe globalisation isn't the answer
LAST week, Christine Lagarde, the International Monetary Fund's managing director, warned that if countries do not act together, the global economy could be derailed. Likewise, the OECD has warned that countries must move "urgently" and "collectively" to boost global growth prospects. Yet the G20 finance ministers and central-bank governors to whom these entreaties were directed failed to agree any such action at their recent meeting in Shanghai.
To be sure, the communiqué released after the meeting includes a pledge to use "all policy tools - monetary, fiscal, and structural - individually and collectively" to "foster confidence and preserve and strengthen the recovery." But the communiqué also reflects distinct divisions - particularly with regard to the role of monetary and fiscal policy in stimulating growth - among the finance ministers and central bankers who agreed on its text.
On monetary policy, the communiqué offers the empty statement that the G20 would "continue to support economic activity and ensure price stability, consistent with central banks' mandates." That avoided the central question: Should central banks be attempting to stimulate growth through "unconventional" monetary policies?
The Bank for International Settlements thinks not, arguing in its 2015 annual report that "monetary policy has been overburdened" in an attempt to reinvigorate growth, a reality that is reflected in "the persistence of ultralow interest rates."
The result is a vicious cycle of too much debt, too little growth, and too-low interest rates that, to quote the BIS's Claudio Borio, "beget lower rates."
This sobering analysis has not stopped the Bank of Japan or the European Central Bank from further monetary easing. Nor did it deter People's Bank of China Governor Zhou Xiaochuan from expressing a willingness to shoulder more of the growth-stimulating burden in Shanghai.
But not everyone is ignoring the writing on the wall. Reserve Bank of India Governor Raghuram Rajan has called on the IMF to examine the effects of unconventional monetary policy not just on the countries that implement them, but also on the rest of the world. Likewise, Bank of England Governor Mark Carney has pointed out that countries using negative interest rates (including, most recently, Japan) are, by forcing currency devaluation, exporting weak demand - ultimately a zero-sum game.
When it comes to fiscal policy, agreement is similarly lacking. The IMF is urging surplus countries like Germany to pursue more stimulus. The OECD, too, has called upon its wealthier members to take advantage of their current ability to borrow for long periods at very low interest rates to increase growthenhancing investment in infrastructure.
These calls provoked a sharp rebuttal from German Finance Minister Wolfgang Schäuble, who condemned the "debt-financed growth model." The result of this conflict was a vague declaration by the G20 that it would use "fiscal-policy flexibly to strengthen growth, job creation, and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path."
In light of the statements by the IMF and the OECD, this distinct failure to agree on monetary and fiscal policy seems highly dangerous. But both institutions may be overstating the problem.
In fact, despite widespread uncertainty - volatile capital flows, plummeting commodity prices, escalating geopolitical tensions, the shock of a potential British exit from the European Union, and a massive refugee crisis - the stalling of global cooperation may be less risky today than it was even a decade ago.
The key factor in this context has been widespread recognition of the risks inherent in economic globalisation, and concerted efforts to build up the needed resilience on a national, bilateral, or regional basis.
Consider finance. Twenty years ago, a catastrophic financial crisis began in Thailand and quickly spread across East Asia. Since then, those economies, and others in the emerging world, have self-insured against crisis by building up huge stockpiles of foreignexchange reserves.