Christine Lagarde:Policy Steps Toward a Full-Speed Global Economy.

29 Jul

Christine Lagarde:Policy Steps Toward a Full-Speed Global Economy.

I had earlier posted a panel discussion  on global economic outlook from World economic forum and a talk by Christine Lagarde. I find Christine largarde both forth right and prescient. In a way glad that Dominique Strauss-Kahn screwed up. Its also nice to have a woman as IMF Chief. She of course is fighting her own battles in her native  France.  I am believer in diversity and find Ms. Lagarde impressive. Though am not very sure of IMF and World bank’s brand of supply side economics works every where. In this talk given at Brookings institution, Madam Lagarde gives broad strokes of global economic trends from a policy formulation perspective. She goes on to elaborate  what IMF calls ” three speed” global economy.

To quote Ms Lagarde ,”Broadly, we are still seeing the three speeds, with countries splitting off into: (i) those that are doing well; (ii) those that are on the mend, and; (iii) those that still have some distance to travel.” Ms. Lagarde states global recovery has been fragile and has not translated into job growth and overall prospects of people.

Madam lagarde talks about potential remedial measures of each of the groups of three speed pyamid.

The first-speed group : Emerging markets: developing countries (BRIC countries) and sub -saharan Africa. The Economist magazine in a recent opinion piece termed emerging markets “the world economy’s 21st-century sprinters”. Ms. Lagarde says ” Today, developing Asia and Sub-Saharan Africa are the two fastest-growing regions of the world. Moreover, a recent IMF study suggested that today’s growth in the low-income countries is more robust that in the past, and less vulnerable to pitfalls and setbacks.” She goes on to say ” of course, we must not get too carried away on a wave of optimism. In the past few months, we see signs of slowing momentum in some emerging markets. In China, recent activity has been weak and growth remains too reliant on credit, property investment, and infrastructure. Investment prospects also look less bright in key markets like Brazil, India, Russia and South Africa.

These countries need to implement policies to protect what they have accomplished—and stay strong. In part, this means looking inwards and getting to grips with domestic vulnerabilities and structural obstacles to sustained growth—including infrastructure and regulatory bottlenecks, as well as governance. It also means looking outwards, keeping a watchful eye on spillovers from the advanced economies, especially from an extended period of unconventional monetary policy.”

The Second -speed group : United states,Australia, Canada, New Zealand, Sweden and Switzerland. The countries who braved the meltdown and now are on slow growth trajectory. Ms. Lagarde says “The US has certainly come a long way in a short time. Just five years ago, it was the triggering point of the crisis, geared by financial excess. Thanks to good progress in fixing its financial system, we are seeing a steady increase in private demand, driven by a recovery in the housing sector and in the automobile industry, and easing financial conditions. Because of this, we believe growth will be almost 2 percent this year, and higher still next year.” She further states “The US also needs a durable solution to raise the debt ceiling. This would help avoid financial market instability and the possibility of undermining the recovery with another self-inflicted wound.

Turning to the longer-term fiscal horizon: the US has made steady progress, reducing its fiscal deficit by some 7 percentage points of GDP since 2009. We believe that the deficit will continue to shrink over the next few years, as revenues recover with faster economic growth. The public debt ratio should also start declining in 2015, as growth picks up and provided interest rates stay low.Nevertheless, the longer-term debt profile remains a major concern.”

The Third -speed group : Euro Zone and Japan. Ms. Lagarde says “Let me start with the Euro Area, first by acknowledging just how far it has come in a short space of time. Consider the list of achievements: the European Stability Mechanism, the ECB’s Outright Monetary Transactions, steps toward a single supervisory mechanism, and the agreement to help relieve the debt burden of Greece, not to mention the nascent European banking union.

Yet the Euro Area economy is still stuck in low gear. Activity has continued to shrink in the beginning of this year, and we expect negative growth—of -0.3 percent—for the year as a whole. Overall, the region is operating at “zero speed”.” Further ” Going forward, the indicators are not encouraging either. Lending to firms is rising only gradually in countries like Germany, and not at all in countries like Italy or Spain. The periphery is still mired in recession, with financial conditions that are unduly tight. Unemployment is still rising. This weakness—combined with lingering uncertainty over the Euro Area growth outlook and the evolution of Euro Area institutions—is draining momentum even from countries like Germany and France.”

Ms lagarde states Euro zone needs a real banking union to further strengthen foundations of monetary union. On Japan, Ms lagarde feels because of policy stimulus ( please refer to Abenomics in an earlier post on panel discussion from Davos) to fight a deflationary environment with a fiscal- monetary mix. She says ” We project growth of 1.6 percent for the year as a whole. If this trajectory continues, we might be able to move Japan from the third to the second speed country group.”

In coclusion she says ”  there are other overarching issues affecting all groups that we must not neglect. A reformed financial sector that supports rather than undermines stability and growth. A more balanced pattern of global demand between the regions of the world. More attention to growth, jobs, and equity in economic life—the issues that really matter to people.”

Please also see a article on deceleration of emerging markets from  “The Economist”

My feeling is political will over arches economic policy. Just to take India’s case.India growth rate is pegged at 5 %,decent by world average but its lowest in few years. I always wonder if this growth is inclusive and does it lead to job creation. My own opinion is that growth as much as it is a necessary  phenomenon does not trickle down. Also the harbinger of economic liberalization two decades ago, Dr. Manmohan Singh’s and his UPA government has been at helm for last two terms. Nothing  much has happened. I think policy formulations have to be inclusive and has might only when preceded by political will and robust implementation. I think its political class that holds the key to global economy.

Thank you and have a nice day!


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