Building a more resilient and inclusive global economy
Curtain raiser speech ahead of the 2017 IMF Spring Meetings delivered at Bruegel by the Managing Director of the International Monetary Fund.
Thank you, Jean-Claude Trichet and Guntram Wolff, for your kind introductions. And thank you to Bruegel for hosting this event here at the wonderful Bibliothèque Solvay.
As I experience this beautiful building, it reminds me that good architecture is not about geometry or design in the first instance—it is about fostering human relationships in private and in public spaces.
I hear about this often from my son who is an architect—and I also thought about it when reading about the Pritzker Prize – the “Nobel prize” of architecture.
Last month, when a little-known firm in Catalonia was announced as the winner of this year’s prize, the jury said:
“More and more people fear that because of international influence, we will lose our local values, our local art, and our local customs. The prize winners help us to see that we can aspire to have both—our roots firmly in place and our arms outstretched to the rest of the world.”
Being concerned with the global economic and financial architecture, we should take inspiration from this statement.
We are at a moment where the global economy needs both—a foundation of sound domestic policies combined with a steadfast commitment to international cooperation.
We need these two elements – the domestic as well as the international – to create a more resilient global economy with sustainable, more durable, and more inclusive growth.
The good news is that, after six years of disappointing growth, the world economy is gaining momentum as a cyclical recovery holds out the promise of more jobs, higher incomes, and greater prosperity going forward.
But just as we see this momentum unfolding, we also see—at least in some advanced economies—doubts about the benefits of economic integration, about the very “architecture” that has underpinned the world economy for more than seven decades.
These issues will be on the minds of finance ministers and central bankers from the IMF’s 189 member countries when they meet in Washington next week for our Spring Meetings.
They will assess the state of the global economy and, as usual, we will release our World Economic Outlook a few days before the meeting. Today, I will touch on some broad trends.
- For advanced economies, the outlook has improved with stronger manufacturing activity. This upswing is broad-based across countries—including in Europe—although some countries here still face high debt and weaknesses in some banks.
- The prospects for emerging and developing economies also bode well for global growth. These countries have driven the global recovery in recent years, and they will continue to contribute more than three-quarters of global GDP growth in 2017.
- Meanwhile, higher commodity prices have brought relief to many low-income countries. However, these economies still face difficult challenges, including revenue levels that are projected to stay well below the boom years.
Putting all this together, we see a global economy that has a spring in its step—benefiting from sound policy choices in many countries in recent years.
At the same time, there are clear downside risks: political uncertainty, including in Europe; the sword of protectionism hanging over global trade; and tighter global financial conditions that could trigger disruptive capital outflows from emerging and developing economies.
And underneath those short-term issues lies a weak productivity trend that continues to be a severe drag on strong and inclusive growth—largely because of population aging, the slowdown in trade, and weak private investment since the 2008 financial crisis.
We estimate that, if productivity growth had followed its pre-2008 crisis trend, overall GDP in advanced economies would be about 5 percent higher today. That would be the equivalent of adding a country with an output larger than Germany to the global economy.
This suggests that there is no room for complacency when it comes to economic policies.
We need to build on the policies that have delivered so much for the world. And at the same time, we must avoid policy missteps—or as I have described them, “self-inflicted wounds.”
How do we do this? I see three dimensions of economic policies:
- Supporting growth, with an emphasis on productivity;
- Sharing the benefits more equitably; and
- Cooperating across borders through a multilateral framework that has served the world well.
The first dimension is to maintain the current growth momentum. This requires what we at the Fund have called a “three-pronged strategy” — the right mix of fiscal, monetary, and structural measures tailored to individual country needs.
For example, in a number of economies, demand is still weak and inflation is not yet durably back to target. This calls for continued monetary support and a greater emphasis on growth-friendly fiscal policies—revamping tax and benefit systems to improve incentives and boosting high-quality infrastructure investment in countries that have room in their budgets.
These measures should be combined with structural reforms to lift potential growth. Here in the euro area, a good example is lowering barriers to entry in retail and professional services.
More fundamentally, policymakers need to reinvigorate productivity. Over the long term, this is the most important source of higher income and rising living standards.
But what can governments do to boost productivity?
They should start by fostering innovation. This includes investing more in education and infrastructure, and providing tax incentives for research and development.
Our analysis shows that, if advanced economies increased private R&D by 40 percent on average, they could increase their GDP by 5 percent in the long term.
And just as we need more innovation, we also need more trade. Why? Because trade promotes innovation-sharing and encourages firms to invest in new technologies and more efficient business practices.
For example, we estimate that China’s integration into the global trading system accounted for as much as 10 percent of the average overall productivity increase in advanced economies between the mid-1990s and mid-2000s.
Enormous gains like that translate over time into higher living standards. Today, billions of people enjoy longer, healthier, and more prosperous lives, largely because of our ability to harness the power of trade and productivity.
But we also know, of course, that technology and trade come with negative side-effects—from job losses in shrinking sectors to social challenges in those communities and regions that have been left behind by structural change.
Making Growth More Equitable
That brings me to the second policy dimension—inclusive growth.
To put it simply, when the benefits of growth are shared more broadly, growth is stronger, more durable, and more resilient.
You may ask: “So, if we know this, why have countries not undertaken to share economic benefits more widely? Why has inequality grown in so many countries in recent years?”
Think of technology. While it has brought enormous benefits to societies, we have found that technology has been the major factor behind the relative decline of lower- and middle-skilled workers’ incomes in recent years, with trade contributing to a much lesser extent.
And there are concerns that automation will progressively jeopardize employment growth in emerging and developing economies as well.
When economic winds shift, we must find better ways of supporting workers.
There is no magic formula. But we do know that greater emphasis on retraining and vocational training, job search assistance, and relocation support can help those affected by labor market dislocations.
The United States, for example, could focus more on well-designed assistance for job search and job matching, including through online tools. Emerging economies could also design technological solutions, such as advertising job openings through personalized text messages on mobile phones, just to give you one example.
Looking ahead, all governments need to do more to help citizens prepare for major technological advances. As the futurist Andrew McAfee put it: “The key to winning the race is not to compete against machines but to compete with machines.”
That requires a commitment to life-long learning—from early childhood education, to workplace training, to online courses for seniors. Singapore, for example, offers training grants to all adults throughout their working lives.
We at the IMF help policymakers to upgrade their expertise and practical skills through a growing number of regional training centers and through technology. Almost 17,000 people—from 185 countries—have successfully completed our online training courses.
In countries with population aging, there is also a sense that today’s policies should not disadvantage future generations, who would be left to pay for the imprudent actions of today’s generation. That includes a damaged environment, dilapidated infrastructure, and high public debt.
Today, average public debt in advanced economies is at a post-war high—108 percent of GDP. So we need strong fiscal policies frameworks and greater efforts to bring public debt back to a safe level, especially in aging societies.
And again, the impact of aging societies, especially through pension systems and healthcare costs—is not just an advanced economy phenomenon. Many emerging economies also need to make their systems safe for the next generation.
My third point is also a simple one: In our hyperconnected world, national policies tend to have major spillovers across borders. We are all sitting figuratively in the same boat. Which is why we need to encourage countries to support strong international cooperation.
For more than 70 years, the world has responded to challenges through a system of rules, shared principles, and institutions, with the Bretton Woods system at its center. John Maynard Keynes, one of the IMF’s chief architects, called it “that bigger thing we are bringing to birth”.
It is a prime example of the international cooperation that has underpinned a phenomenal rise in incomes and living standards around the world.
More recently, we worked together to ensure that the Great Recession did not become another Great Depression. Cooperation through a multilateral framework has benefited every country.
Fostering more resilient growth therefore requires more international cooperation—not less.
Cooperating to reduce excessive external imbalances, for example, is crucially important because unsustainable policies in one country can impact others. In this context, cooperation means working together to ensure that countries observe a level playing field, including by avoiding protectionist measures as well as distortive policies that give rise to competitive advantage.
Restricting trade would be a “self-inflicted wound” that disrupts supply chains, hurts global output, and inflates the prices of production materials and consumer goods. And low-income households are hurt the most as they consume the largest part of their incomes.
We also need to cooperate to ensure financial stability—including a stronger global financial safety net to help emerging and developing countries better cope with capital flow volatility in times of distress.
Financial stability requires that we complete the reform of global financial regulations. These rules—especially on bank capital, liquidity, and leverage—have made the financial system safer—and have made taxpayers safer as well, since they are less likely to be on the hook for excessive risk-taking.
And there is further work to be done in fighting money laundering and combat the financing of terrorism. More broadly, we are supporting reforms to improve governance and to fight corruption—including to combat tax evasion and avoidance—to help ensure that all pay their fair share.
Last but not least, we need to work together to accelerate gains in living standards where needs are greatest. Helping low-income countries achieve the Sustainable Development Goals is not only a humanitarian question, but will also help billions of consumers to participate fully in the global economy.
Standing together is essential to face global challenges such as refugee and humanitarian crises, natural disasters, and climate change.
Role of the Fund
As you know, the IMF’s raison d’être is to foster such international cooperation. We continue to focus on customized support to our membership through policy advice, lending when needed, and capacity development.
This is our “bread-and-butter” work, which we are continuously upgrading to keep it relevant and member-focused.
At the same time, we are adapting to new macro-relevant areas to help our membership address excessive income inequality and other side-effects of 21st-century technology and trade.
Whether through increasing macrofinancial analysis, emphasizing the role of gender policies for macroeconomic outcomes, or strengthening the global financial safety net—our objective is to maintain economic stability and help build a stronger global economy that works for all.
Let me conclude by returning to architecture and the three principles proposed by the great Roman architect Vitruvius:
- Durability—it should stand up robustly and remain in good condition;
- Utility—it should be useful and function well for the people using it; and,
- Beauty—it should delight people and raise their spirits.
Let us be good architects.
Together let us build a more resilient and inclusive global economy.
 RCR Arquitectes, owned by three friends: Rafael Aranda, Carme Pigem, and Ramon Vilalta.
 Adler and others (2017), IMF Staff Discussion Note 17/04, “Gone with the Headwinds: Global Productivity.”
 Ahn, Jaebin, and Romain Duval (forthcoming), “Trading with China: Productivity Gains, Job Losses”, IMF Working Paper.
 WEO Chapter III.
 A case in point is Chile’s fiscal responsibility law, which includes a structural balance rule, various funds (pension and stabilization funds) and requires increased reporting of contingent liabilities.
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