We Need Forceful Policies to Avoid the Low-Growth Trap: ... Forceful policy actions are needed to avoid what I fear could become a low-growth trap. Here are the key elements of a global growth agenda as I see them:
- The first element is demand support in economies that operate below capacity. In recent years, this task has been delegated mostly to central banks. But monetary policy is increasingly stretched, as several central banks are operating at or close to the effective lower bound for policy rates. This means fiscal policy has a larger role to play. Where there is fiscal space, record-low interest rates make for an excellent time to boost public investment and upgrade infrastructure.
- The second element is structural reforms. Countries are not doing nearly enough in this area. Two years ago, the members of the G-20 pledged reforms that would lift their collective GDP by an additional two percent over 5 years. But in the most recent assessment, the measures implemented to date are worth at most half this amount—so more reforms are urgent. IMF research shows that reforms are most effective when they are prioritized along countries’ reform gaps and take into account the level of development and position in the business cycle.
- The third element is reinvigorating trade by reducing trade costs and rolling back temporary trade barriers. It is easy to blame trade for all the ills afflicting a country—but curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades. However, to make trade work for all, policymakers should help those who are adversely affected through re-training, skill building, and assisting occupational and geographic mobility.
- Finally, policies need to ensure that growth is shared more broadly. Taxes and benefits should bolster incomes at the low end and reward work. In many emerging economies, stronger social safety nets are needed. Investments in education can raise both productivity and the prospects of low-wage earners.
It takes political courage to implement this agenda. But inaction risks reversing global economic integration, and therefore stalling an engine that, for decades, has created and spread wealth around the globe. This risk is, in my view, too large to take.