Question

Discuss some of the global economic challenges and suggest a remedy

Answer 1

Solution:

Overall, global growth is continuing, but slowing down. The advanced countries in particular are facing an anemic and bumpy recovery, with unacceptably high unemployment. The euro area debt crisis has worsened. Financial strains are rising. And again—without collective, bold, action, there is a real risk that the major economies slip back instead of moving forward.

Low-income countries have been experiencing reasonable growth, but remain highly vulnerable to economic dislocation from elsewhere in the world—including from commodity price volatility, which comes with heavy social costs. I want to draw particular attention to the human suffering from the drought in the Horn of Africa, a devastating catastrophe. These countries need the help of the international community, urgently.

Global economic challenges:

1.         Energy and Environmental Security

2.         Conflict and Poverty

3.         Competing in a New Era of Globalization

4.         Global Imbalances

5.         Rise of New Powers

6.         Economic Exclusion in the Middle East

7.         Global Corporations, Global Impact

8.         Global Health Crises

9.         Global Governance Stalemate

A key short-run issue in advanced countries is that balance sheet pressures are knocking the wind out of the recovery. There is still too much debt in the system. Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States. Weak growth and weak balance sheets—of governments, financial institutions, and households—are feeding negatively on each other, fueling a crisis of confidence and holding back demand, investment, and job creation. This vicious cycle is gaining momentum and, frankly, it has been exacerbated by policy indecision and political dysfunction.

This relates to the second, more long-term issue—the risk of core instability. In our inter-connected world, economic tremors in one country can reverberate swiftly and powerfully across the globe, especially if they originate in systemic economies. IMF research has shown that financial linkages transmit such tremors rapidly and broadly. And because of lingering debt problems, financial stability risks have risen significantly.

What is the solution?

First, repair. Before anything else, we must relieve some of the balance sheet pressures that risk smothering the recovery—on sovereigns, on households, on banks.

On sovereigns, advanced countries need credible medium-term plans to stabilize and lower public debt ratios. This must come first. But consolidating too quickly can hurt the recovery and worsen job prospects. So the challenge is to navigate between the twin perils of losing credibility and undermining growth. There is a way to do this. Credible measures that deliver and anchor savings in the medium term will help create space for accommodating growth today—by allowing a slower pace of consolidation.

Of course, the precise path is different for each country. Some have no choice but to cut deficits today, especially if they are under market pressure. Others should stick to their adjustment plans, but be ready to change course if growth falters further. Others still are probably pushing too hard today, and could slow down a bit.

In the short run, policymakers must focus on measures with the biggest bang-for-the-buck, that create jobs and kick-start growth, and that take distributional considerations into account. The how of adjustment is also important in the medium term, where fiscal plans should seek to support growth? I’m thinking of issues like tax reform, including by broadening bases. Equally, entitlement reforms will be essential in establishing long-term debt sustainability in virtually all advanced economies.