The World Economic Forum (WEF) recently launched the 15th edition of one of its flagship reports ‘The Global Risks Report 2020’, which is based on the WEF’s annual ‘Global Risks Perception Survey’. According to the President of the WEF, Børge Brende, the Report ‘comes as long-mounting, interconnected risks are being felt. The global economy is faced with a “synchronized slowdown”, the past five years have been the warmest on record, and cyber attacks are expected to increase this year– all while citizens protest the political and economic conditions in their countries and voice concerns about systems that exacerbate inequality… This comes as G20 economies hold record high levels of debt and exhibit relatively low levels of growth. Ammunition to fight a potential recession is lacking, and there is a possibility of an extended low-growth period, akin to the 1970s, if lack of coordinated action continues.’
As per the Report, according to the IMF (International Monetary Fund) expected the global economic growth at 3 percent to be at its lowest level since 2008–2009. Moreover, one of the main policy tools to help boost economic growth, trade, on the other hand has not been able to play much its part at the back of becoming more a source of ‘rivalry’ than bringing ‘global coordination in the form of global trade’, whereby ‘World Trade Organization (WTO) projected that growth in merchandise trade will slow to 1.2 percent in 2019 from 3.0 percent in 2018.’
To give an example, the US – China trade tensions ‘could cost US$700 billion in lost output in 2020’. This is indeed no small number, since according to the Report this amount of lost output is ‘almost the amount of GDP lost by the entire European Union due to the financial crisis (US$757 billion between 2008 and 2009). With regard to economic risks, the Report highlights ‘Low trade barriers, fiscal prudence and strong global investment– once seen as fundamentals for economic growth– are fraying as leaders advance nationalist policies.’
As indicated earlier, there is a need to revisit the traditional macroeconomic policy tools. This is also important for the government and the IMF should look to re-think the policy emphasis of neoliberal economics in the current Extended Fund Facility (EFF) programme
An important aspect being highlighted in the Report is about the effectiveness of traditional macroeconomic policy tools, whereby it points out, ‘The margins for monetary and fiscal stimuli are also narrower than before the 2008–2009 financial crisis, creating uncertainty about how well countercyclical policies will work. Moreover, there is growing discontent overall with the way governments are attending to economic crises, where it is indicated Disapproval of how governments are addressing profound economic and social issues has sparked protests throughout the world, potentially weakening the ability of governments to take decisive action should a downturn occur. Without economic and social stability, countries could lack the financial resources, fiscal margin, political capital or social support needed to confront key global risks.’
The above is clear indication that national policymakers and global multilateral institutions will have to look beyond the traditional Neo-liberal/ Washington Consensus style of policies, which are entrenched in economic orthodoxy. Rather a heterodox and political economic approach to formulating economic policy will have to be adopted. Already, there is strong debate over increasing the role of government and fiscal policy, and on the other hand diminishing somewhat the role of monetary policy, to better approach macroeconomic and growth targets.
At the same time, 78 percent of the respondents of the Survey on which this Report is based ‘expected “economic confrontations” to increase in 2020’. In this regard, the Report pointed out the importance of the USA and China in helping global economic recovery, whereby it indicated, ‘Together, these two countries account for over 40 percent of global GDP, and they are the world’s leading innovators. They are also the world’s top two emitters of greenhouse gases. Expanding the global economy, addressing climate change and realizing the full benefits of technology, therefore, depend on their ability to coordinate as part of a common global system that is capable of including other stakeholders.’
Having said that, as per the Report, rather than coming much together, the signs are on the contrary whereby ‘However, the trend today is not one in which these two countries are just competing across common domains but one in which each is looking to design its own systems– its own supply chains, 5G networks and global investment institutions. Already investment flows between the two have dropped, each has moved to restrict technology from the other, and some analysts predict China will look to reduce its dependence on the US dollar by holding more foreign currencies. Even if the current trade tensions cool, we risk heading towards an era in which the two countries disentangle their economies and create barriers between one another.’ This trend needs to change, and should give way to more collaboration, so that global economic issues could be dealt with more effectively through a unified effort.
The outlook for investment as per the Report is also not bright, primarily because ‘Globally, investment has been affected by low expected returns, uncertainty about economic policy in major economies, and ongoing and emerging geopolitical tensions. In our survey, “protectionism regarding trade and investment” and “populist and nativist agendas”– two major obstacles to the free flow of foreign direct investment (FDI)– were rated as the fifth and sixth risks most likely to increase through 2020.
The Report highlighted that according to the IMF, globally private and public debt has been accumulating since the crisis… the global ratio of debt-to-GDP increased by 11 percentage points between 2009 and 2017. Across G20 economies, public debt is expected to reach 90 percent of GDP in 2019– the highest level on record– and to grow even more, to 95 percent in 2024.’ Moreover, as per the Report ‘The IMF has listed “rising corporate debt burdens” as a key vulnerability in the global financial system.’
As indicated earlier, there is a need to revisit the traditional macroeconomic policy tools. This is also important for the government and the IMF should look to re-think the policy emphasis of neoliberal economics in the current Extended Fund Facility (EFF) programme. In fact, the Report emphasizes revisiting in particular the new challenges facing monetary policy in particular, whereby with regard to this and to the overall needed re-think, it highlights ‘Financial market stress and strained public finances are creating uncertainty as to whether conventional monetary and fiscal policy instruments, which have worked to boost growth in the past, could be as effective in the future. As the IMF has signalled, interest rate cuts have helped boost growth, but they have also fostered higher debt and riskier rent-seeking, which affect financial market stability. In 2019, monetary policies worldwide saw profound reversals, with most central banks persistently cutting interest rates to very– sometimes historically– low levels… The role and reach of monetary policies are also challenged by wider factors such as technological change, climate change and rising inequality.’