IMF Chief Warns of Productivity Slowdown, Calls for Boosting Trade
A continued state of mediocre productivity growth could have harsh implications for social stability and living conditions around the world, said International Monetary Fund (IMF) Managing Director Christine Lagarde this week, who called for making trade part of the solution.
“Another decade of weak productivity growth would seriously undermine the rise in global living standards. Slower growth could also jeopardise the financial and social stability of some countries by making it more difficult to reduce excessive inequality and sustain private debt and public obligations,” said Lagarde on 3 April during a speech at the American Enterprise Institute.
The IMF chief flagged older populations in more advanced economies, slower trade growth, and the “unresolved legacy” of the global financial crisis as being among the “headwinds” that are hindering productivity growth going forward.
On trade, the WTO issued a forecast last September predicting that global merchandise trade growth would hit 1.7 percent that year and fall in the range of 1.8-3.1 percent this year – a downward revision from prior estimates. (See Bridges Weekly, 29 September 2016)
Trade key for high living standards
Lagarde also referred to the ongoing debate over the potential negative effects from new technologies or trade liberalisation, while making some recommendations to help address those problems.
“We know that technological gains, trade, and structural reforms have come with job losses in shrinking sectors,” she said on Monday. “But now we are seeing entrenched economic and social problems in some disadvantaged regions when economic inequality has already been rising in many countries.”
Furthermore, she also argued that trade can be a boon from everything from making companies perform better to the evolution and sharing of new technologies.
“The lack of global demand and the gradual increase in trade restrictions have led to a slowdown in trade growth in recent years. This, in turn, has hurt the productivity and living standards of all citizens,” she said.
Education, “clear signals” essential
Lagarde particularly highlighted job training and other educational efforts, along with arguing in favour of upgrading tax and income policies, as part of her recommendations for tackling the productivity problem.
“To encourage investment and risk-taking, governments need to give clear signals about future economic policy. High-quality public investments in education and training, [research and development], and infrastructure, including in the United States, could help provide those signals, catalysing private investment while boosting productivity and economic potential,” she said.
Meanwhile, the Fund has released a “staff discussion note” on productivity, with its authors arguing that the financial crisis has caused unexpectedly long-lasting effects that will require some heavy lifting to undo.
“Addressing crisis legacies may be the most promising avenue for boosting productivity growth in the near term, particularly in continental Europe, where the scars from the global financial crisis remain greater than in most other advanced economies,” the IMF economists said.
Furthermore, they note that the future for productivity growth is hard to envision at this stage. In the meantime, the “discussion note” urges policymakers to “proactively address the effect of headwinds, including by advancing structural reforms and nurturing open trade and migration policies.”
Indeed, Lagarde mentioned the topic of migration in her speech, particularly in light of the potential of refugees to contribute to economic growth and productivity. These people could help be part of “a younger and more dynamic workforce,” she said, in a nod to the problem of aging populations in several of the world’s most developed economies.
Spring meetings coming up
The IMF is gearing up to hold its Spring Meetings with the World Bank Group later this month, which brings together finance and development ministers for high-level discussions on the global economy, as well as central bankers and representatives from the private and academic world.
The Washington-based agency is also due to release the semi-annual World Economic Outlook (WEO) this month, building on an interim update issued in January which suggested that while economic growth may improve this year and the following, forecasts remain difficult to pin down in light of policy uncertainty in key economies such as the United States.