Fixing the roof of the global economy while the sun is still shining
“Fix the roof while the sun is still shining” has become the unofficial slogan of the 2018 IMF and World Bank annual spring meetings in Washington DC. The phrase used by IMF Managing Director Christine Lagarde during her recent address in Hong Kong has been reiterated by IMF and its officials who warn of a potential derailment of the current global economic upswing.
The phrase that has become so central to the meetings this year originates from US President John F. Kennedy, who used the phrase to urge US Congress to implement forward-looking economic reform during one of the most prosperous economic times in US history. In essence, it means to deal with a problem or potential problem while conditions are favorable.
Right now, the global economy is in a very favorable condition and IMF expects to continue for at least two to three more years. The global economy’s gradual recovery from the 2008 global financial crisis helped bring an onset of what economists have called an economic upswing.
But the underlying theme of this year’s meeting is that all of that recent prosperity could be jeopardized with the potential onset of a trade war between two of the world’s largest economies, China and the US.
The potential for a global trade war and how it might affect their respective countries has been a major topic for the central bankers, ministers of finance, bankers, and academia that have gathered in Washington DC.
Even without taking into account the potential for a trade war, IMF’s World Economic Outlook was rather pessimistic beyond the next two to three years. The outlook projects global growth will fall as central banks tighten monetary policy, the US. fiscal stimulus subsides, and China’s gradual economic slowdown continues.
In addition, more foundational problems are expected to plague the world economy moving forward. For advanced economies, an ageing population, lower labor participation, and a weaker productivity growth will prevent improved per capita growth.
IMF forecasts that developing countries that rely on commodity exporting such as Mongolia should not expect longer-term growth rates despite some improvement in the outlook for commodity prices.
“Many of those countries will need to diversify their economies to boost future growth and resilience,” said Maurice Obstfeld, IMF chief economist.
Lagarde has underlined three priorities in the global economy that could help offset some of these lurking issues in both advanced and emerging markets. According to IMF, there are three big holes in the roof that need to be fixed during this current period of sunshine. Protectionism, financial and fiscal risk, and lack of social inclusivity in economic growth are seen as the three biggest culprits to the current positive trajectory in growth.
One of the more alarming figures
Panelists Bridget van Kralingen Senior Vice President, Global Industries, Platforms and Blockchain, IBM, Alec Ross, Author, former Senior Advisor for Innovation to US Department of State and Richard White, Professor of American History, Stanford University participate in the New Economy Forum: Digitalization and the New Gilded Age during the 2018 IMF/World Bank Spring Meetings on Wednesday
is that total global debt, both public and private, has surged 40 percent since 2007 to its current level of 164 trillion USD. Public debt in advanced economies is at levels that have not been seen since the Second World War. And if recent trends continue, many low-income countries are likely to face unsustainable debt burdens.
High debt in low to middle income countries such as Mongolia could jeopardize development goals as governments spend more on debt service and less on infrastructure, health, and education.
Mongolia is not alone in needing to prioritize reducing government deficits, strengthening fiscal frameworks, and gradually lowering public debt. It has been encouraging for Mongolia that the overall fiscal deficit in 2017 was 1.9 percent of GDP compared to an alarming 17 percent in 2016.
Another aspect of the concern was the social inclusivity of economic growth in both developed and developing countries. Despite conventional belief, IMF has underlined that by shifting towards a service-based economy, many countries have and will be able to bypass a traditional industrialization phase.
The IMF’s World Economic Outlook has highlighted transportation, communications, and business services as having the potential to match the productivity levels of manufacturing.
This especially rings true for Mongolia, a small economy with a limited labor force. While many have long held the belief that manufacturing is the key to unlocking economic potential, the increasing automation of production coupled with the concentration of manufacturing in a few countries has forced some countries to reconsider their paths of development.
One thing that has been for certain is that an economy simply cannot be resilient if its solely depends on high commodity prices. With several boom and bust cycles, Mongolia has prioritized diversifying its economy along with most countries in the world.
Perhaps the biggest takeaway from the 2008 global financial crisis was the increasing interconnected nature of the global economy. Boom and bust cycles for commodity exporting countries are a large part of that system and a consequence of that interconnectivity. Along with that, the wellbeing of the global economic system has become significantly more consequential to every country.
What started out as a mortgage crisis in America had long-reaching effects all over the world and to some extent is still felt today. The world is dangerously close to forgetting the tough lessons learned from the crises of the past. The inevitable slowdown of the global economic growth, a resurgence of protectionism, and the volatility that comes with rapid technological advancement all serve to underline the importance of global cooperation.
In the global political arena, an era of surging populism and mistrust amongst nations threatens to further spillover to the economy, further highlighting the necessity of international dialogue. Despite the criticisms of bureaucracy and institutional problems that IMF and World Bank have received over the years, the work that is done by these institutions and the dialogue that they help to create still play a large role in the future development of the world.