Spotlights: How to Jump-Start Global Growth
- International Monetary Fund
- Published Date:
- October 2017
IMF activities in FY2017 focused on pressing global issues:
Trade, its positive impact on growth and those left behind
Productivity, whose low growth has contributed to stagnating incomes
Inclusive Growth policies, to address rising inequality due largely to technological changes
Gender Equality, for the global economy to reach its potential
Debt Management, to help countries adjust to lower commodity revenues
The Challenges of World Trade
Trade has played an instrumental role in driving global growth, helping to produce unprecedented advances in productivity and living standards, to lift millions out of poverty, and to lower prices. However, the growth of trade—along with productivity and incomes—has slowed. This trend partly reflects, and has contributed to, the slackening of economic growth in the wake of the 2008 global financial crisis.
For all its benefits, trade has had a negative impact on groups of workers and communities, particularly in Europe and the United States. These dislocations, which also reflect the impact of technological innovation, have been intensified by slower growth, and the resulting backlash has undermined support for global economic integration.
At the 2016 Group of Twenty (G20) financial and economic forum summit in China, leaders called for domestic policies that would enable the gains from trade to be shared more widely.
A paper jointly prepared by the IMF, World Bank, and World Trade Organization for the March 2017 G20 Sherpas meeting in Germany discussed policies that can respond to this call.
In its April 2017 communiqué, the IMF’s International Monetary and Financial Committee acknowledged that “the prolonged period of low growth has brought to the fore the concerns of those who have been left behind,” and stated that “it is important to ensure that everyone has the opportunity to benefit from global economic integration and technological progress.” The IMF staff is increasingly focused on the impact of trade on labor market outcomes.
Staff Paper Summary: Making Trade an Engine of Growth for All: The Case for Trade and for Policies to Facilitate Adjustment
Increased trade integration helped drive economic growth in advanced and developing economies in the latter part of the twentieth century.
Since the early 2000s, however, the pace of trade, productivity, and income growth has slowed, leaving many behind, most notably in advanced economies.
With the right policies, countries can benefit from trade, lift up those who have been left behind, and strengthen overall economic flexibility and performance.
Prepared by the IMF, World Bank, and World Trade Organization
Trade Is Closely Linked to Growth…
From 1960 to the 2008 global financial crisis, trade in goods and services grew at an average annual rate of about 6 percent—roughly twice the rate of GDP growth (Figure 1.1). The expansion was supported by reductions in trade costs, including tariffs and technology, and led to the emergence of global supply chains that drove advances in manufacturing and productivity. Across the globe, the rising living standards that accompanied trade lent support to the view of trade as a key engine of growth. More recently, however, trade has slowed, reflecting to a large extent weak economic activity—in particular, investment—as documented in Chapter 2 of the October 2016 World Economic Outlook.
Figure 1.1Real trade and real GDP growth, 1960–2016
Source: IMF staff estimates.
…But Doubts about the Benefits of Trade Have Grown…
Concerns about the impact of trade are on the rise among some in many advanced economies. This shift has been reflected in public opinion surveys and some elections. Attitudes toward trade are generally more favorable in emerging market and developing economies.
Emerging markets are seeing more growth
Trade and economic growth have slowed globally since 2008, but emerging markets and developing economies have had greater increases in GDP and imports than advanced economies.
Productivity growth slowed sharply across the world following the global financial crisis (Figure 1.2). This trend has contributed to stagnating incomes in many advanced economies and has added to the political backlash against globalization.
Figure 1.2Productivity growth by country group, 1990–2016
Sources: Penn World Trade Table 9.0; IMF World Economic Outlook; and IMF staff calculations.
Note: Group averages are weighted using GDP at purchasing power parity.
This pattern has been visible in labor productivity (output per worker) as well as total factor productivity, which measures the overall efficiency of an economy’s use of labor, capital, and elements such as technology. If the trend continues, it would threaten progress in raising global living standards, addressing private and public debt, and ensuring the viability of social protection systems. Declining productivity growth could also affect the ability of policymakers to respond to future economic shocks.
An IMF paper, “Gone with the Headwinds: Global Productivity,” that addresses the issues surrounding productivity was published in April 2017. These issues were also the subject of an article in the March 2017 issue of Finance & Development.
There are structural and crisis-related reasons for the slowdown. Structural forces include the fading impact of the information and communication technology boom, weaker labor and product market reform efforts, skills shortages and mismatches, and demographic factors such as aging populations. In addition, the lingering effects of the global crisis continue to be felt—weak corporate balance sheets, tight credit conditions in some countries, soft investment, weak demand, and policy uncertainty.
The global trade slowdown is another long-term drag on productivity: trade since 2012 has barely kept pace with global GDP. This could point to lower productivity gains in the future—even without taking into account the possibility of trade restrictions.
Staff Paper Summary: Gone with the Headwinds: Global Productivity
Productivity growth—a key driver of living standards— was already in decline in advanced economies before the global financial crisis drove it down sharply.
Structural headwinds include a waning boom in information and communications technology, partly reflecting an aging workforce, slowing global trade, and weaker human capital accumulation.
Reviving productivity growth requires addressing remaining crisis legacies in the short term while pressing ahead with structural reforms to tackle longer-term headwinds.
Prepared by Gustavo Adler, Romain Duval, Davide Furceri, Sinem Kiliç Çelik, Ksenia Koloskova, and Marcos Poplawski-Ribeiro
How to Improve Productivity
To address the issues contributing to declining productivity growth, policymakers need to focus on strengthening innovation and education, advancing structural reforms, and continuing to reap the gains from open trade and migration, while implementing policies that address inclusiveness. But because much of the slowdown reflects the scars of the global financial crisis, action must be targeted at crisis legacies.
Among the policy measures to be taken are the following:
• Boost demand where it remains weak, particularly in the area of investment, through carefully selected public investment projects and by removing obstacles to private investment. This will support capital accumulation and the adoption of new technologies
• Restructure corporate debt and strengthen bank balance sheets to ease access to credit and stimulate investment in physical and intangible capital. Aggregate productivity will benefit as well—especially in Europe, where balance sheet repair has been slower than in the United States. Corporate restructuring and better banking supervision will also improve capital allocation
• Give clear signals about future economic policy, particularly fiscal, regulatory, and trade policies. This will support investment
Productivity growth has slowed significantly around the world since the 2008 global financial crisis.
It was already in decline in advanced economies before the crisis drove it down sharply.
Structural forces and demographic factors also contributed to the trend.
Promoting Inclusive Growth
Concern over income inequality and inclusive growth has emerged as an issue of global importance (Figure 1.3). Over the past 30 years, inequality has risen in many countries, in large part because of technological change. Governments worldwide are now devoting attention and resources to the challenges of making growth more inclusive.
Figure 1.3Advanced economies, per capita real market income, 1980–2012
Sources: World Wealth & Income Database; IMF, World Economic Outlook; and IMF staff calculations.
Note: The sample includes Australia, Canada, Denmark, France, Germany, Ireland, Italy, Japan, Korea, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Market income refers to individuals’ income before taxes and transfers.
The wealthy are getting wealthier
In advanced economies, the incomes of the top 1 percent have grown three times faster than those of the rest of the population.
IMF research in this area has shown that rising inequality poses risks to the durability of economic growth, that the design of government policies has an impact on income distribution, and that government also can help address the situation. An IMF paper released in January 2017 extended that research to the impact of macro-structural policies in low-income developing countries (Figure 1.4). Other research has focused on the implications of budget deficits, labor market liberalization, and cross-border capital movements.
Figure 1.4Low-income developing countries, growth and inequality, 1996–2013
Sources: IMF, World Economic Outlook; PovcalNet; World Bank Socio-Economic Database for LatinAmerica and the Caribbean; World Bank World Development Indicators; and IMF staff calculations.
Note: The Gini coefficient measures the income distribution of a country’s residents. The higher the index, the greater the inequality. The Gini calculation is based on 40 low-income countries.
Growth does not help all
The economy has been growing and poverty has been on the decline, but inequality remains stubbornly high in low-income countries.
The Fund is now shifting its work toward the concrete ways in which this deeper understanding of the roots of inequality can translate into policies that advance inclusive growth—with a focus on equitable ways to tax and spend. Decisions in this area need to be made by country authorities.
For the past two years, the IMF staff has worked with a group of pilot countries spread across all regions and income groups to bring inequality issues and policy responses into discussions during the IMF annual health checkup with its member countries. The issues are now featured in the reports prepared as part of the Article IV consultation process.
Staff Paper Summary: Macroeconomic structural Policies and Income Inequality in Low-Income Developing Countries
Despite strong growth over the past two decades, income inequality remains high in many low-income developing countries (LIDCs), which can impair both the future pace and the sustainability of growth and macroeconomic stability.
Features such as high levels of informality, limited geographic or intersectoral labor mobility, large intersectoral productivity differences, lack of access to finance, and low levels of infrastructure can make growth-inequality trade-offs particularly challenging for these economies.
Growth-oriented policies such as fiscal reforms (tax policy measures, higher public infrastructure investment), financial sector reforms, and reforms to the agricultural sector can have important distributional consequences in LIDCs. Targeted policy interventions, implemented in conjunction with progrowth reforms, can be deployed to contain any adverse distributional effects of the reform measures.
Prepared by Stefania Fabrizio, Davide Furceri, Rodrigo Garcia-Verdu, Bin Grace Li, Sandra V. Lizarazo, Marina Mendes Tavares, Futoshi Narita, and Adrian Peralta-Alva
The wealthy are getting wealthier
In advanced economies, the incomes of the top 1 percent have grown three times faster than those of the rest of the population.
Snapshots of Inequality Pilot Countries
In a country that once had one of the highest levels of inequality in Latin America, high commodity prices combined with government policies spurred a significant improvement. As commodity prices dropped, Bolivia sought to hold on to that progress. The IMF’s 2015 and 2016 consultations with Bolivia focused on inequality, drawing on a household income study. The IMF staff developed a model that simulates the evolution of inequality and tests policies to preserve Bolivia’s gains. The 2016 consultation determined that the most effective policy response would be to maintain infrastructure investment, better target cash transfers, and expand access to financial services.
Ethiopia’s financial sector is relatively underdeveloped, with about two-thirds of total bank credit channeled to government enterprises. Deposit rates are negative in real terms. The 2016 Article IV consultation outlined steps the authorities are taking to increase financial inclusion. A separate analysis discussed reforms to decrease lending to the public sector and increase deposit rates. It showed that the reforms likely would increase inequality by benefiting manufacturing and services. This pointed to the need to improve financial access and increase labor mobility.
Malawi’s fertilizer subsidy program for small farmers has been central to the country’s poverty reduction effort. But the program had become increasingly costly and rife with abuses—without significantly lifting maize production or reducing poverty—partly because of a severe drought. The IMF, in collaboration with the World Bank, is working with the government to shift subsidy resources to cash transfers to the rural poor. Meanwhile, spending on agricultural research and development and irrigation is intended to raise small farm productivity and strengthen resilience to weather shocks. This effort, combined with cash transfers, is expected to be a more effective means of reducing inequality.
“Gender equality is more than a moral issue; it is a vital economic issue. For the global economy to reach its potential, we need to create conditions in which all women can reach their potential.”
—IMF Economic Counsellor Maurice Obstfeld, March 23, 2017
The Fund has rapidly advanced its work on gender issues in recent years across policy analysis and advice, research, and knowledge sharing. This range of activities deepened during FY2017. Managing Director Christine Lagarde provided a framework for the commitments made at the United Nations High-Level Panel “Women’s Economic Empowerment” in September 2016. The commitments encompassed the following:
• Policy advice and analysis to support female labor force participation
• Work on gender data gaps focused on financial inclusion
• Gender budgeting
• Research on the discriminatory effects of legal restrictions
• Research on the links between gender inequality and growth and the impact of policies on gender inequality
Developments on Gender Work in FY2017
Gender equality goals in policy dialogues with countries: Twenty-three country and regional pilot studies were completed, and four others were underway. This work focuses mainly on increasing female labor force participation and quantifying the macroeconomic losses from gender inequality. In emerging market and developing economies, recommendations emphasize increasing access to finance, to education and training, and to basic infrastructure such as electricity and sanitation; in advanced economies, recommendations emphasize shifting tax systems to avoid penalizing secondary earners in families and access to high-quality, affordable child care.
IMF loans: Gender considerations are now included in programs. In Egypt and Niger, for example, programs include a goal of increasing women’s economic participation by improving the availability of public nurseries and developing a gender strategy, respectively.
Gender budgeting: The IMF published the paper “Gender Budgeting in G7 Countries” in early FY2018 for the Italian Presidency of the Group of Seven (G7) to inform the G7 discussion on gender equality. The Fund now provides an online database on global gender-budgeting efforts and two gender equality indices. The work on gender budgeting will continue, including as part of technical assistance in the public financial management area.
Financial inclusion: The IMF conducted pilot studies on women’s access to banking and other financial services in 28 countries. The results were used to assess how to reduce data gaps, and a toolkit was developed.
Publications: In February 2017, the IMF published a book titled Women, Work, and Economic Growth: Leveling the Playing Field.
Conferences: The IMF held two conferences on gender issues: a one-day event on Fiscal Policies and Gender Equality, and a three-day conference on Gender and Macroeconomics. There were more than 200 participants at each event. The Gender and Macroeconomics conference was preceded by a peer learning event for sub-Saharan African researchers and practitioners.
Capacity building: The IMF’s technical assistance on gender budgeting is growing in importance. Examples include Cambodia (financial reporting), Ukraine (medium-term budget framework), and Austria (fiscal transparency evaluation).
Gender and Growth
IMF studies have shown significant macroeconomic gains when women are able to participate more fully in the labor market and given the same opportunities (legal rights, education, health, access to finance [Figure 1.5]). Despite significant progress, female labor force participation remains lower than that of males across most advanced, emerging market, and developing economies. Wage gaps are high, and women are overrepresented in the informal sector and among the poor. In 90 percent of countries, legal restrictions constrain women from developing their full economic potential. While equality between men and women is in itself a significant development goal, women’s economic participation is also important to growth, output and exports, diversification, and more equal income distributions.
Figure 1.5Women’s labor force participation and GDP
Source: IMF staff estimates.
Note: USA: United States of America; UAE: United Arab Emirates.
What Is Gender Budgeting?
gender budgeting is an approach that uses fiscal policy and public financial management instruments to promote gender equality and development. It is not just about funding explicit gender equality initiatives. It is also about analyzing fiscal policies and budgetary decisions to understand their impact—both intended and unintended—on gender equality, and using this information to design effective gender equality policies. Some countries focus on spending allocations or the structure of fiscal policies, others on administrative changes to budget planning and monitoring. The most successful efforts encompass both areas. The IMF now provides an online database on global gender-budgeting efforts and two gender equality indices.
Staff Paper Summary: Women, Work, and the Economy: Macroeconomic Gains from Gender Equity
Women make up a little over half the world’s population, but their contribution to measured economic activity, growth, and well-being is far below its potential, with serious macroeconomic consequences.
In rapidly aging economies, higher female labor force participation can boost growth by mitigating the impact of a shrinking workforce. In developing economies, better opportunities for women can also contribute to broader economic development, for instance, through higher levels of school enrollment for girls.
Implementing policies that remove labor market distortions and create a level playing field for all will give women the opportunity to develop their potential and to participate in economic life more visibly.
Prepared by Katrin Elborgh-Woytek, Monique Newiak, Kalpana Kochhar, Stefania Fabrizio, Kangni Kpodar, Philippe Wingender, Benedict Clements, and Gerd Schwartz
Gender equality would increase economic growth
Countries of all income levels would see significant increases in GDP if women’s labor force participation were increased to match men’s.
Capacity Development for Debt Management
Saudi Arabia Builds Debt Management Expertise
In the wake of the steep decline in global oil prices, the Saudi Arabian government set out plans for a bold transformation of the country’s economy under its Vision 2030 and the National Transformation Program. Plans include diversifying the economy, creating private sector jobs, taking gradual steps to balance the budget, and further strengthening investment capabilities. To achieve these goals, the government needs to deepen liquidity in the capital markets and fortify the role of the debt market.
Until recently, oil producer Saudi Arabia had no need to borrow because it did not face any significant funding gaps. But the decline in revenue receipts due to the drop in oil prices has resulted in fiscal deficits (Figure 1.6), though oil prices have recovered to some extent. In these circumstances, the government made a fundamental policy shift and adopted a two-pronged approach to safeguarding macroeconomic stability: drawing on its sizable fiscal reserves and borrowing money by issuing debt.
Figure 1.6Saudi Arabia, fiscal balance, 2010–16
Sources: Country authorities; and IMF staff calculations.
Establishing a debt management office was the first step toward developing debt capital markets. In 2016, the government asked the IMF to share its expertise in establishing the office. After analyzing the financing situation and determining how the establishment of a debt management office could improve macroeconomic management, the IMF and the government worked together to do the following:
• Establish a debt management office under the Ministry of Finance, responsible for developing the legal, governance, and risk-management frameworks for debt management
• Develop a medium-term debt strategy to assess trade-offs of alternative debt strategies
• Promote policies that facilitate local debt market development
The drop in oil prices in recent years has meant declining revenue.
The resulting fiscal deficits have prompted a shift in government policy.
The Saudi Arabian Debt Management Office began operations in October 2016. Its main objective is to secure the country’s financing needs with the best possible combination of costs and risks compatible with the government’s policies. As part of the debt management strategy, government debt instruments will gradually be registered, listed, and traded on the Tadawul, the Saudi Arabian stock exchange.
The IMF’s engagement with Saudi Arabia could be a useful model for a range of other oil- or commodity-exporting countries that need a comprehensive and strategic approach to debt management.
Uruguay’s Innovative Asset and Liability Management Reduces Risks
Companies manage their consolidated assets and liabilities as a core element of managing risk across their balance sheets. But many governments, with diverse assets and liabilities—some explicit and some implicit or contingent—don’t typically compile full balance sheets or even statements of their financial positions, as public assets and liabilities don’t lend themselves to such conventional analysis. This makes assessment of public balance sheet risks difficult.
Uruguay has taken an innovative approach to this challenge. The Uruguayan debt management unit and the IMF worked together to take a more comprehensive look at the government’s debt management in the context of the wider public sector balance sheet, and to assess the role of the domestic bond market in managing potential public portfolio risks. This work, which involved reviewing balance sheets across the government, including the central government, the Central Bank of Uruguay, major state-owned enterprises, and the State Insurance Bank (Figures 1.7 and 1.8), helped identify key mismatches and possible policy changes.
Figure 1.7Uruguay, public sector debt, 2011–16
Sources: Banco Central del Uruguay; Haver Analytics; IMF, World Economic Outlook; and IMF staff calculations.
Figure 1.8Uruguay, public sector debt composition, 2015
Sources: Banco Central del Uruguay; Haver Analytics; IMF staff calculations; and IMF, World Economic Outlook.
Uruguay’s debt management unit identified key mismatches.
Gross debt increased in 2015 mostly because of the depreciation of the peso, given the large share of foreign-currency-denominated debt.
For instance, the US dollar liabilities exceeded US dollar assets, indicating that the country should establish a strategy to reduce US dollar debt by further developing the local currency bond market. This also indicates that Uruguay should hedge prevailing foreign exchange risks by using deeper forward markets. That would necessitate further coordination between debt management and the implementation of monetary policy, as well as consolidation in the types of debt instruments issued. Also, that would require addressing inflation-linked and wage-linked indexation in the context of a maturing pension system, and improving global custody and settlement arrangements.
The Uruguayan authorities are determined to reduce foreign currency mismatches and enhance the country’s resilience to foreign currency risk, thus strengthening financial stability. “By thinking about the country’s consolidated balance sheet,” said IMF Technical Assistance Mission Chief Michael Papaioannou, “the authorities can have an integrated view of the sovereign’s balance sheet risks and possibly be able to hedge associated exposures in a more cost-efficient manner.”
“By thinking about the country’s consolidated balance sheet, the authorities can have an integrated view of the sovereign’s balance sheet risks and possibly be able to hedge associated exposures in a more cost-efficient manner.”
— IMF Technical Assistance Mission Chief Michael Papaioannou