Hope and gloom clash at IMF meetings

“Uneven and brittle” have been Christine Lagarde’s two buzzwords for describing the global recovery, as she presides over the International Monetary Fund’s annual meetings.

This week, the IMF’s managing director has repeatedly cautioned that global economic growth is too slow and future prospects are dimming. She has also warned that member countries are slow at reforming their economies and struggle to profit from obvious opportunities to improve infrastructure, consigning hundreds of millions to the misery of unemployment or stagnant wages.

Ms Lagarde’s resolutely gloomy outlook is shared by many delegates from the US or the eurozone. But this view is far from the whole story on display in Washington this week. Officials from the developing world have an alternative, relatively upbeat, narrative.

In their eyes, global growth is faster than its average over the past 30 years and the outlook is changing rapidly, with China now the largest economy in the world. Inequality is falling and though reform is difficult and some countries are struggling badly, most are striding towards greater prosperity.

How can two such different views coexist without one side being horribly wrong? The answer lies partly in measurement and partly in the location from which people develop their global outlook.

Ms Lagarde’s concern stems from repeated downgrades to the IMF’s estimates for growth in many advanced and emerging economies. Not only has demand been weaker than expected year after year, the fund has also belatedly realised that its previous estimates for potential world growth were too high.

This latter disappointment has come for both advanced and emerging economies and reflects greater pessimism about the rate at which economies can improve their efficiency and prosperity. As John Fernald, a senior researcher at the San Francisco Federal Reserve, explained to an IMF seminar, the evidence across many countries shows that productivity growth has slowed and that this deceleration began before the financial crisis.

All the talk of efficiency miracles from IT, he added, confused the reality of a step-up in output per worker with a persistent increase in productivity growth. IT “has the flavour of a one-off benefit”, he said.

The IMF’s assessment is that, in the face of these problems, countries are again “lagging” in introducing necessary structural reforms, with the result of continued high unemployment and rising inequality.

This narrative would be compelling if it were not for an equally plausible and more positive narrative about the world economy. This view is not articulated by many of the IMF’s top brass, but appears in its own statistics.

The fund expects the world economy to grow 3.3 per cent this year, only a touch below the 3.5 per cent average since 1980. Rather than slowing, the past decade has seen above-average expansion, even including the years of the financial crisis.

This finding follows a statistical rebalancing of global growth numbers to reflect new calculations of the goods and services money can buy. According to the new estimates of purchasing power parity, China’s economy is much larger than previously thought. Not only does this put Beijing in top spot in the ranking of the world’s largest economies, it also raises global growth rates because China’s rapid expansion now has a higher weight in the world total.

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Meanwhile, income inequality – which is increasing within many states – is falling in the world, as incomes in emerging economies are rising faster than those in rich countries. Finance ministers from countries such as Indonesia and South Africa all came to an IMF panel with stirring stories about their success in implementing structural reform within their economies, despite the difficult politics of implementing change. None was overly concerned about fragile growth and nor was Min Zhu, the Chinese IMF deputy managing director, who was also on the panel.

It is also possible that productivity growth might be only temporarily low in rich countries, a view expressed by professor Paul Romer of the Stern School of Business at New York University. He said it was “possible we’re really missing a huge opportunity by not being more aggressive on the demand side right now”, and called for a more aggressive monetary stimulus.

The one unifying idea at the meetings was that infrastructure spending might help. Ms Lagarde and her fellow pessimists think it would boost demand now and potential growth in the medium term. Optimists, such as Ngozi Okonjo-Iweala, Nigeria’s finance minister, said her country’s already fast annual growth rate could rise another 2 percentage points if the nation had robust electricity supplies.

When consensus even over the state of the world economy is so difficult to reach, this unity of view about infrastructure spending makes it the idea whose time is most likely to have come.