The FINANCIAL -- First Deputy Managing Director David Lipton sat down with Shekhar Aiyar of the IMF’s European Department to discuss some of the key themes from the October 2016 Annual Meetings in Washington D.C., and the way forward.
One of the dominant outcome of the meetings, Lipton said, was the need for a stronger policy mix, using all policy levers (monetary, fiscal, and structural policies), individually and collectively, to fight subdued growth and ensure that everyone has the opportunity to benefit from globalization and technological change.
Aiyar: What are the main messages coming out of the 2016 Annual Meetings?
Lipton: I think the main message is that the international community is going to have to work together, both to strengthen growth in the global economy, but also to deal with the rising discontent that we see mainly in advanced economies, where a slowdown in trade and changes in technology are affecting jobs and incomes.
We need to balance two issues: trying to strengthen growth and maintain globalization on the one hand, and trying to deal with the disruptions and dislocations that come from interconnectedness and from economic change, on the other hand.
Aiyar: It is apparent that there was more focus than usual on the political backlash against globalization. People have talked about how that might be linked to rising inequality and a surge in international migration. What are your views on how to make growth more equitable and to combat this rise in protectionist sentiment?
Lipton: First, I think it is quite notable that people are more open to discussing the links between political issues and economic issues. They recognize that these issues have to be examined thoroughly, analyzed, and treated explicitly. The IMF staff explained the institution’s analysis and economic assessments of the situation.
Of course, we need help from politicians and leaders to make the changes in individual countries necessary to deal with problems: through donor support to help countries in the Middle East and North Africa region dealing with refugees and displaced persons; and with various forms of support for those who are affected by either technological change that is displacing workers—or by inequality.
These are steps that require action on the part of national leaders. A very good agenda has been laid out with work to be done by the IMF as well as policymakers in our member countries.
Aiyar: The global economic recovery has been characterized as feeble and uneven. There has been some concern about whether we are running out of policy ammunition. The Federal Reserve has started tightening, but interest rates remain at historic lows in the euro area and Japan. Could you say something about what policy tools are available for global policymakers?
Lipton: The IMF has recommended a three-pronged approach—using monetary, fiscal, and structural policies—and there was a very broad acceptance of our assessment and recommendations here at the meetings.
Monetary policy has been the first line of defense in dealing with the problems of low growth and low inflation in advanced economies, but it is being overstretched. So we have tried to explain that we saw synergies—that is, combining monetary support that is indispensable with growth-friendly fiscal and structural policies. And putting together in a differentiated way a package for each country, while also acknowledging that when many countries act together in a coordinated way, the whole will be greater than the sum of the parts.
There is going to be a lot to discuss about who does what, when, and where, because this really does have to be a differentiated approach, but I believe that people have come together behind our recommendations. There is considerable concern about growth being low, the prolonged low-interest rate environment, and the negative consequences of over-reliance on monetary policy.
Aiyar: Turning to emerging markets, it looks as if several major economies have bottomed out, while capital inflows to several emerging economies have picked up. How do you see trends and prospects for that group of countries?
Lipton: Our projection for growth this year has not been revised, and it is the first time over a long period where that has been the case. Part of that forecast is advanced economies may be growing a bit more slowly, but emerging market countries are doing a bit better. Some countries are doing very well—India is a prominent example. Other countries are coming out of recession, and there is further differentiation depending on whether a country is a commodity exporter or not.
I think you are right about the fact that capital flows to emerging markets are continuing—but perhaps not as strongly as in the past—and the overall capital environment has not been adverse for emerging markets so far this year.
I would say the short-run picture is okay. What the IMF has warned about, however, is that if the longer-run challenges of strengthening growth, of trying to restore inflation toward targeted levels in advanced economies fall short, then the advanced economies won’t be holding up their end of the work—and that will be debilitating over time.
Aiyar: Some have expressed concern that the pickup in capital inflows to emerging markets may be driven by the very low policy rate environment in advanced economies. Is there a risk that these capital inflows could be destabilizing for emerging markets?
Lipton: We have done what we can to analyze the interactions between monetary policy in advanced economies and capital flows, and to provide policy recommendations to the affected countries. For the most part, countries have followed our advice, broadly speaking. They are using exchange rate flexibility, while also trying to build buffers against potentially destabilizing financial flows.
Aiyar: Let’s turn to low-income countries. You mentioned earlier that depressed commodity prices have had negative consequences for a number of countries, among which are several low-income countries. What is your analysis, or what is the mood about the prospects for low-income countries?
Lipton: There is widespread disappointment, especially in Africa, that the continent is going to have a very low growth rate on average. It is not the case for all countries. There are some—especially those that are not oil and commodity exporters—that continue to grow at quite rapid rates. But I think it feels like a setback, or a risk, to many countries. We are working to help our members get through this period.
We are more optimistic about their long-run prospects. Many countries are taking the steps to build buffers, to use their capacity development to improve their ability to make economic policy, and to undertake the kinds of hard and soft infrastructure, health, and education spending that will provide for growth in the long run. This period of low growth is a challenge, but I believe countries are responding in a way that is going to provide for better prospects for the future.
Aiyar: Summing it all up, where do we go from here?
Lipton: What is most important is that we are able to make the case to the world, to our members, that there is still a great promise from globalization. There are negative side effects, there are spillovers. We will have to manage those if we are going to convince the member countries to stay the course and not shy away from the integration, interconnectedness, and openness that have been such a source of support and growth for the world economy.
It is vital—especially for emerging markets and developing countries—that they remain interconnected, because that is going to be their source of demand for exports, the source of investment capital and of technology that will help them lift living standards over the coming years and even decades.
So this is the job for us. There is a lot for our members to do as well to strengthen growth and to deal with the side effects of technological change and of interconnectedness.