(By David Lipton) With the New Year, we all hope to put the global financial crisis behind us. We also need to do more to secure our future.
Beyond our current economic and financial problems, there are long-term issues that we all know about, but that get too little attention in an era when policymakers are so fully engaged in slogging away at more immediate problems. Unfortunately, long-term issues unaddressed today will become crises tomorrow.
So we had better lengthen our focus, see what looms on the horizon, and do more to steer the global economy in a better direction.
Die Another Day
Policymakers around the world have been hard at work mending their economies. In the coming year, they will need to carry on supporting growth while correcting imbalances by:
- providing accommodative monetary policy;
- striking a balance on fiscal adjustment—tightening where possible but taking care to support short-term growth;
- completing banking sector cleanup and making financial systems safer;
- implementing reforms to boost productivity and growth potential.
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A rebalancing of global demand toward dynamic markets, including emerging economies, should also help complement all of these efforts.
These are the core issues of the day and we will all focus on them. But we must also put several long-term issues onto our action agenda.
The World Is Not Enough
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Some pundits today look at the world in the wake of the financial crisis and predict a future of de-globalization. More likely, just as early auto travel adapted to accidents, we will see globalization continue but with the economic equivalent of speed limits, bumpers, and seat belts. In that world, rising standards of living will depend on all economies making the most of their potential, while integrating into the global economy in an orderly way.
Over the next generation or two, the greatest untapped potential to drive global growth comes from the emerging and developing countries. While we are accustomed to thinking of the development challenge, we need to shift our thinking to the convergence challenge. A top priority will be helping emerging and developing countries achieve growth trajectories that produce a sustained convergence of living standards toward rich country levels. That means modernizing economic structures and institutions, along with supportive political institutions, that are crucial to fostering growth and employment.
Globalization with convergence will not be easy, as it will mean a continuation of the shifting patterns of production and demand that we have seen over the last generation bring rising living standards in emerging economies, but disruption in advanced economies. It also means adapting to new technologies and their global dispersion. In addition, all forms of policy coordination, from financial market regulation to taming externalities, such as carbon emissions and pollution, will likely grow more complex.
Tomorrow Never Dies
But that is the future we need to anticipate and to begin to prepare for. In that respect, there are three key issues that I believe warrant more attention and action than they currently get. They include:
- Encourage and help countries modernize economic structures and institutions that are crucial to fostering growth and employment.
- Harness the technology and growth nexus so that countries can stay competitive and create, not destroy jobs.
- Face up to the challenges of climate change. With global warming continuing, a failure to mitigate emissions will bring costs and hardships that will likely prove irreversible.
Policymakers need to modernize and revitalize their economies by undertaking key structural reforms. Of course, every country is different. But some challenges affect us all, whether we live in advanced or developing economies.
We know that the policy space and readiness on the part of government and society to address these issues varies widely. The challenges are particularly acute in the Middle East and North Africa, where countries have to embark on difficult reforms aimed at boosting growth over the medium term, while also stabilizing their economies in the short term.
Necessary reforms include making labor markets more responsive to the needs of enterprises and at the same time more inclusive for employees. Policies to increase competition in product and service markets, notably in Europe but also elsewhere, are also needed. In the euro area, implementation of all the steps needed for both a fiscal and banking union should also have priority.
Policymakers face the immediate challenge of finding the right balance between satisfying peoples' high expectations and carrying out tough decisions to bring public finances under control and restore the strength of weakened financial systems.
Technological change is profoundly affecting the relationship between people and their contribution to a country's economic growth. One can only marvel at the spread of mobile computing and at all that you can now accomplish away from your desk. But technology is also driving business models, both expanding possibilities and directing decisions on costs savings and investment strategies. As we look at what pervasive computing means for our economies and for our lives, countries need to find the right balance, investing in technology to stay competitive but dealing with the implications for wages and jobs.
Expert analysis has concluded that climate change and global warming pose real risks to economic performance, especially for some of the countries least able to deal with it, including by increasing the number and frequency of major weather events.
Such events often come at great human and economic cost. Hurricane Sandy is a reminder of how damaging such events can be, with its costs climbing close to $70 billion for the damage done to New York and New Jersey alone. If hurricanes of such devastation become common, even a country like the United States would see serious economic and fiscal implications from Mother Nature, likely making an already grim budget picture worse.
Important steps to deal with the climate challenge include ending fossil fuel subsidies in all countries and implementing strong, credible carbon pricing to encourage conservation and the use of cleaner fuel around the globe (and provide a much-needed contribution to sounder public finances). Newer technologies may also be helpful. Progress in this area has been much too slow.
A Quantum of Solace
We can manage a bright future if everyone—governments, civil society, and the private sector —gets to work now. While it is possible that these long term issues mean a more unstable outlook going forward, complicating the already difficult tasks at hand, it is not inevitable.
Together, we can make more of our economic potential, including through new technologies, and we can coordinate to achieve sustained and balanced growth.
At the start of a new year, it's time for us to look up and look ahead.