When economic growth matters

A global economy, wobbling six years after the financial market crash of 2008, cannot need anything better than a firm commitment of the world’s financiers to build a more robust, sustainable, balanced, job-rich economic order. Global unemployment is at its all-time peak, especially in Europe and large parts of developing world.

Finance ministers of 188 nations met at the 2014 Annual Meetings of the IMF and World Bank (Oct 10-11) against the backdrop of uneven pace of growth of the global economy, heightened geopolitical factors, and an overhanging threat of Ebola originating in Africa, with its social human and economic impact.

They ended deliberations with a communique of their highest policy-making Committee (IMFC), setting out a ‘bold and ambitious’ agenda involving ‘appropriate macroeconomic policies and critical structural reforms’, to remove supply constraints and invigorate demand. Other commitments are to place debt on a sustainable track, safeguard financial stability and reinforce cooperation to manage spillovers.

But how far the advanced nations with primary responsibility to undo damage inflicted on world economy by their pre-crisis policies, would do their part to overcome the glaring disparities, remains the big question mark at the end of 2014 Fund-Bank Annual Meetings. A mixed picture of uneven pace of growth and undiminished risks colours the outlook.

US leads the recovery among developed with a fall in unemployment rate to 5.9 per cent in September, the lowest in over six years, and growth stabilising at a little over two per cent for 2014 but EU is flirting with incipient recession and deflation. Emerging markets, though slowed down, and other leading developed countries still contribute to holding global growth at above three per cent.

Even as US Fed may be about to end its asset purchases, ECB has begun its quantitative easing to bail out weaker economies of euro-zone while similar monetary stimulus continues in Japan. Eventual normalisation of monetary policy in the context of strengthened growth and price stability will be needed, says the IMFC communique. The ministers said carefully calibrated and well-communicated normalisation by central bankers would minimise adverse spillovers and spillbacks and be beneficial to the global economy, thus reflecting serious concerns voiced by India and other developing economies. The Communique expects emerging market economies to rebuild policy buffers. Wherever required, and also favours exchange rates being allowed to respond to changing fundamentals to facilitate external adjustment.

India in recent months has done fairly well in this regard, especially on current account, though its growth in fiscal 15 is yet to gain traction toward the targeted plus 5.5 per cent. But the challenges remain for emerging economies, especially Asian, namely a possible sudden rise in financing costs with an impending US monetary policy normalisation and, secondly, a negative impact from continued sluggishness in Japan and expected slowdown in China.

IMF economists have urged countries not only to further strengthen resilience to possible global financial market risks but also begin, in the near term, delivering on structural reforms to lift medium-term growth prospects. At the fund-bank meetings, strong actions were also urged on infrastructure development. Even if debt-financed, infrastructure investment would be justified as it can help demand in the short run and supply in the longer run. The ministers, sitting on the development committee of fund-bank, welcomed the bank’s Global Infrastructure Facility (GIF) to launch a platform to facilitate the mobilisation of private capital for infrastructure projects. GIF, they hoped, will soon acquire the required scale and ambition.

The challenges being encountered, according to Raghuram Rajan, governor of RBI and India’s alternate governor at the fund-bank meetings, flowed in the wake of a prolonged period of low interest rates in advanced economies (AEs) and continuing uncertainty about the smooth exit from unconventional monetary policies of central banks in AEs. They should display policy sensitivity to spillover risks so that the global economy can collectively be placed on a sustainable growth.

He cited financial stability risks from rising asset prices, compressed yields, low volatilities and rising corporate debt. Also, low interest rates have facilitated excessive risk taking and increased overall risk in the system. Financial markets have diverged from fundamentals. Dr Rajan noted there is also the risk monetary policy normalization by AEs could trigger re-pricing of risks and lead to turbulence with potential to derail the global recovery. To sustain the recovery, he agreed, financial stability risks should be addressed in both AEs and EMEs, the former with well-communicated policies.  

Despite his forceful advocacy for emerging economies on the spillover effects of monetary policies in AEs, at the Fund-Bank meetings, Rajan later conceded at an event on the sidelines of Annual Meetings that Fed normalising interest rates ‘will be good for the rest of the world which will benefit from US growth’. Initially there could be currency volatility but afterwards there would be differentiation and financial investors would see ‘where is some macro-stability.  My hope is India comes out in (that) group,’ he said.

Concern was voiced by all countries over USA’s failure so far to ratify the 2010 Reform of Fund Quotas and Voice and Representation for countries relatable to their current weights in global economy thus stalling the process. USA is the largest quota-holder with decisive voice. If US Congress does not act to ratify this reform, IMFC communiqué said, ‘we will call on the IMF to build on its existing work and stand ready with options for next steps’.

On India’s economy presentations, the tone differed somewhat in what Arvind Mayaram, Finance Secretary, told the Fund-Bank joint session and how Raghuram Rajan, Alternate Governor for the Fund, projected at the IMFC meeting. Mayaram said, ‘the pillars of the Modi government’s approach’ on the economy have been put in place already. ‘What you’ll see is a lot of action which is preparatory to the (next) budget but which includes many of the announcements that the prime minister has made recently’.

Rajan said economic activity in India is ‘beginning to look up’ and RBI projects the growth at 5.5 per cent in 2014-2015. Business and consumer confidence is fast improving after the new government was formed in May. Economic outlook ‘beyond this year looks still better’.