By John Lipsky in Jackson Hole
In my first two Jackson Hole blogs, I addressed some of the key challenges to restoring growth. Yet whatever shape the recovery takes once the Great Recession ends, several significant long-term problems will have to be faced if a solid expansion is to be sustained.
In particular, the principal sources of growth in many economies will shift, structural hurdles to growth will have to be overcome, the legacy of anti-crisis fiscal policies will have to be dealt with, and the governance of global economic policy will have to adjust to new realities. In other words, the agenda will be packed for many Jackson Hole Symposiums well into the future.
At present, growth in the principal economies is being restarted with the help of massive fiscal and monetary stimulus. As has been noted widely, a sustained expansion will require a shift back to private demand. Yet the U.S. recession has been marked by a significant increase in U.S. household saving out of current income that has been associated with the substantial losses in household net worth suffered during the past two years.
An immediate result has been weak consumption spending, and a significant decline in the U.S. current account surplus. Not only did these shifts appear to be inevitable even before the current crisis, but they almost certainly are going to be long-lasting.
In other words, it was the case prior to the crisis that sustaining a global expansion will require strengthened demand growth outside the United States, an aspect that the current crisis has served to make clear to all. This premise already underpinned the IMF-sponsored Multilateral Consultations on Global Imbalances that took place in 2006/07. The aim of that exercise was to develop mutually consistent policies that would support sustained growth while reducing global imbalances by facilitating an appropriate shift internationally in the sources of growth, especially in economies that have relied on export-led growth. Whether the current crisis might have been moderated if the agreed policy programs had been fully implemented is moot, but the Consultation’s broad policy goals will remain relevant in the post-crisis period.
Moreover, IMF research indicating that the current crisis likely will leave a legacy of reduced potential growth was echoed by other Jackson Hole presentations. One implication of this analysis is that prospects for productivity-boosting restructuring and other reforms will assume heightened importance in coming years, as they will be crucial in helping to compensate for the expected dampening impact of the crisis on growth potential. This consideration applies to advanced economies like Japan and those in core Europe, as well to emerging market economies.
While the formal program at Jackson Hole this year addressed the impact of fiscal stimulus on economic performance, the participants were well aware of the longer-term fiscal policy challenges that will have to be faced in the coming years, especially in economies with aging populations. Moreover, the large anti-crisis increases in fiscal deficits will leave a leagcy of substantially increased public debt outstanding.
As IMF research has underscored, reversing the crisis-related increases in the debt-to-GDP ratio in the G-20 countries will require a substantial and sustained strengthening in budget performance. For example, for advanced economies with debt above 60 percent of GDP, an improvement in the primary balance by a projected 5½ percentage points from 2014 would be needed to reduce the debt-to-GDP ratio back to that benchmark over 15 years. When the anticipated spending increases associated with population aging are taken into account, it is clear that the coming decade will be accompanied by acute budget challenges.
The breadth and scope of the evident post-crisis challenges—and the shifting relative roles of advanced and emerging economies—has created an obvious need to reassess the institutions of global governance. The creation of the G-20 Leaders Summit as a new and effective venue for addressing economic and financial issues has been an important crisis-inspired innovation. The upcoming Pittsburgh Leaders Summit no doubt will mandate new efforts to adjust existing institutions, in anticipation of the need to deal decisively with the set of post-crisis challeneges that loomed over the horizon at this year’s Jackson Hole Symposium.
Next week, this Blog will explore how the crisis is affecting low-income countries and the IMF’s response.