What were the main conclusions from the IMF and World Bank annual meetings in Lima last year?
The ongoing global recovery remains moderate and uneven, and there remains a lot to do if we are to achieve higher and sustainable growth. There are three key forces driving the current global economic outlook, starting with China's transition to slower but safer and more sustainable growth. Significantly lower global commodity prices are also important. Since the middle of 2014, global oil prices have declined more than 50%, while metal prices have fallen almost 30%, reflecting both demand and supply factors. Diverging monetary policies across the major central banks, and especially the normalisation of US interest rates, are also key. This divergence has had a strong impact on exchange rate movements, notably in Brazil, Japan, India and the eurozone.
Legacy problems associated with the crisis and longer-term factors, including persistently high unemployment and public debt in a large part of the world, and lower medium-term potential growth, also matter. Policy options and upgrades are needed to lift today's growth and tomorrow's potential.
What is your view of China's transition?
China's transition to safer and higher quality growth is challenging but needed. It is both healthy and necessary in the longer term, though in the near term there are important implications both for China and its trading partners. We have seen some positive progress in the process, with the service sector surpassing manufacturing and becoming the largest sector in China's economy. Consumption, meanwhile, is playing a more important role in driving growth. The country was the centre of all policy discussions during the IMF annual meetings.
Is the legacy of the crisis behind us?
It is still with us. Unemployment and public debt remain persistently high in a large part of the world. Youth unemployment in some advanced economies is particularly serious, at about 50%. Government debt is another challenge. In 2007, the debt-to-GDP ratio in major advanced countries was largely below 60% of GDP. Today, many countries are suffering their highest levels of government debt since the Second World War.
For many emerging economies, rising corporate debt warrants urgent and careful attention. As a share of GDP, corporate debt in emerging economies has increased from 78% in 2009 to about 110% in 2015. More worrisome is that, of this debt, the proportion in foreign currencies is large and still increasing. Companies that borrow externally face the risk of tighter global financial conditions, meaning higher interest rates and borrowing costs.
Additionally, much of the external borrowing is subject to the risk of further US dollar appreciation. In the eurozone, while signs of recovery are encouraging, the high level of non-performing loans is a serious issue that needs to be addressed. In nominal terms, the stock of non-performing loans was estimated at about €900 billion at end-2014, which is very large by any standard.
Setting the crisis legacy aside, what long-term factors are at play?
Most importantly, the estimated potential growth – that is, the pace at which an economy will or can grow in the future – has declined in both advanced and emerging economies. This change is important because it affects tomorrow's growth, thus also affecting today's investment and consumption decisions.
The reasons behind this slowdown are not entirely clear. It seems slowing total factor productivity growth, which measures technological change and efficiency gains, is a major contributor. So is weak capital investment. Some analysis shows total factor productivity growth had already declined in advanced economies before the crisis, but the crisis has made it worse. The change in total factor productivity growth is also poorly understood. But likely reasons include slower human capital accumulation, a shift of GDP toward services and – at least in the US – a gradual decline in the positive effect of the IT revolution.
What can policymakers do to address these challenges?
There is no easy answer. We need a combination of strong efforts to maximise growth while minimising risks. We need to use all available tools to strike the right balance between supporting short-term demand and implementing structural reforms to lift potential growth. In short, we need to secure faster growth while safeguarding financial stability.
A lot has been said about structural reforms. This is a very important area but also a difficult one to understand and act on. What are the right structural reforms for a particular country or region? How should these be designed and implemented? How should the potential gains be measured?
IMF analysis shows there are different payoffs across the many different possible reforms, dependant on country circumstances. For low-income countries, lowering trade tariffs and barriers and promoting agriculture are likely to be the most productivity-enhancing measures. For emerging economies, competition policies and labour market reforms would be particularly important and necessary; and for advanced economies, innovation is key. For all countries, an efficient financial and banking sector, along with infrastructure investment, will be most critical.
Lin Jianhai is secretary general of the IMF