By Pedro Sousa
* The third in a series of five articles
Anemic global economy, inequality, and the call for collective action
The most significant issues that international macroeconomic policy coordination must solve are the global economic slowdown and rising inequality. Research shows that excessive income inequality actually drags down the economic growth rate, making it less sustainable over time. Almost eight years after the crisis, growth remains anemic in the majority of countries. The world economy is struggling with slow growth AND constrained government budgets. With the current productivity weakness, countries increasingly look to strengthen economic performance while also promoting inclusiveness. Despite considerable increases in wealth and in global economic output in the past thirty years, there is substantial evidence of rising income inequality instead of a reduction. The price of this inequality is a hefty one, which brings a growing number of economic, wellbeing, social and political unrest issues. According to the International Labour Organization, more than 76 million jobs have been lost since the start of the global economic crisis in 2007, projecting more than 200 million people to be unemployed globally in 2016. Youth unemployment and underemployment are a severe problem for the current and future economy. It is no wonder that, since the financial crisis of 2008, there has been a significant drop in levels of public trust and confidence in financial institutions. To function efficiently, governments and the whole of the financial sector need to regain and be worthy of that trust. Taxpayers already paid for a crisis, they can’t and won’t pay for another. A healthy working population with access to the job market is a key driver of economic growth. It is vital that the G20 commits to making the financial system more resilient and able to withstand shocks in the market. Additionally, international trade and investment – major drivers of economic growth – need to be addressed. A lack of long-term investment has serious implications for global growth. With the changes in size and shape of the world economy that we are seeing, the international regulatory framework needs to adapt and be effective. Many have lamented the outbreak of currency wars or competitive depreciation. Why? If all countries try to depreciate their currency to gain export competitiveness and boost their economies, all will fail – race to the bottom behaviour. The intervention by China and other emerging markets to prevent currency appreciation is a good example. Some international attempts to address competitive depreciation have been made, the type of agreements backed up by the threat of trade sanctions. Due to all of this, several warnings have been made for countries to act together and move urgently in order to boost global growth prospects. The risk is that the global economy – that is slowly coming out of a great recession – could be derailed again. The global economy will perform better if major countries agree to act together and pull it out of recession and up to speed. Finance ministers and central-bank governors to whom these messages were directed have been failing to reach agreements to boost global growth. It reflects distinct divisions and geoeconomic games, particularly with regard to the role of monetary and fiscal policy in stimulating growth. There’s widespread uncertainty with 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, so the stalling of global cooperation is too risky. The German government “austerity at all cost” mantra has been contrary to this rationale, as it demands fiscal discipline from Eurozone members, by agreeing to limit their budget deficits, first and foremost. This goal could be justifiable in other economic conditions but, given what has happened since 2008 and Eurozone growth weakness, flexibility would be more apt. Given the lack of collective action by governments, central bankers are trying to create inflation via monetary policy to counteract the development of a Japanese-style deflationary trap. Quantitative easing, negative interest rates, and “helicopter money” are the tools being discussed inside the offices of central bankers. Has monetary policy been overplayed in an attempt to reinvigorate growth, thus creating the persistence of ultra-low interest rates? Some analysts believe so. However, that monetary policy might be what is currently keeping economies afloat. Of course, monetary policy cannot work alone. The IMF and the OECD have urged surplus countries like Germany to pursue more stimulus and to take advantage of their current ability to borrow for long periods at very low interest rates to increase growth-enhancing investment in infrastructure. Public spending must be boosted, particularly, in countries with fiscal space. The G20 should also ignite this multilateral action. Unfortunately, the results of the G20 Summit held in Shanghai at the end of February – just a soft statement about pursuing structural reforms and avoiding beggar-thy-neighbour policies – are not enough. Again: Failure to act collectively could indeed derail the global economy.