Every important economic question for the world was raised at the annual meetings of the International Monetary Fund and the World Bank last weekend in Washington. But as usual, on the sidelines the more urgent and interesting questions arose: What will happen if Donald Trump is elected U.S. president, and is Deutsche Bank the next “too big to fail” bank, needing a rescue by the German government?
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These questions were left unanswered, so it was easier to dive into the formal issues that worry the world’s economic decision-makers. These questions too are linked to the political dramas such as the U.S. election and Britain’s planned exit from the European Union.
The officials spoke about the slow global economic growth and the “new normal” that’s not so new anymore: low interest rates for the past eight years, high national debts, inequality within and between nations, immigration to Europe, and of course the political implications of each of these issues.
An event that reflects these processes is the Brexit referendum. German Finance Minister Wolfgang Schäuble linked the British vote to the possibility that Trump may be elected, saying the two events show a lack of faith in the ruling economic, political and media elites.
“Inclusive growth” is a term taken from the standard lexicon of these meetings in recent years. It has replaced “trickle-down economics,” in which investments and incentives for businesses supposedly create growth and trickle down to the poorest. This theory has become much less fashionable in the wake of the global financial crisis of 2008, when the villains were the rich bankers, and the bill payers were the taxpayers and the millions who lost their jobs.
So now everyone is repeating the need for inclusive growth, including Christine Lagarde, the managing director of the IMF, and Mark Carney, the governor of the Bank of England. They took part in a panel with Schäuble and Yi Gang, the deputy governor of the People’s Bank of China.
To Carney, inclusive growth begins with trust; the Brexit vote was a shock to the financial markets, but not to the public. “Growth has been too low, but also sharing the fruits of growth has not been there,” he said.
Canadian Finance Minister Bill Morneau told a different session how inclusive growth looks in North America. “We want to make sure that middle class Canadians see benefits from our investments,” he said.
“If other countries look at their situation and conclude they have the same opportunity and make investments that make a difference, then that will be a positive outcome for the world and then a positive outcome for Canada, because we think it will enhance global growth, which is positive for Canadians.”
He gave the example of affordable housing as a long-term investment that has a quick effect on people’s lives.
The clear impression is that inclusive growth has to be concrete and visible from the common person's vantage point. Otherwise, entire groups will lose faith in their leaders and the economic elites.
Expanding the pie
It’s basic math: The fewer people who enjoy the fruits of economic growth, the easier it will be to convince them of ideas that the economic elites don’t like, such as the Brexit or electing Donald Trump. These are protest votes more than intelligent voting.
So what can the elites do? They’re trying to convince people that the problems are global and must be solved together. Lagarde, who has headed the IMF for five years, described the importance of investments in the poorest African countries.
Investment in both Africa and infrastructure is critical, she said. It’s important to solve the world’s problems, whether climate change, immigration problems or anything else. Everyone is in it together. After all, the rich will remain rich and the elites will remain elites, so greater growth is necessary to allocate the pie better, Lagarde said.
She said average world growth over the two decades before the 2008 financial crisis was 3.8%, while this year it will be 3.1%. She said this wasn’t enough to create jobs for the hundreds of millions of people joining the workforce, so she called on world leaders to come up with incentive packages to encourage economic growth.
“The first thing that is needed is to have some growth – my grandmother used to say that everything is better with butter,” Lagarde said last month. “If you have more growth, you can deal with your debt more jobs are being created, it’s much easier.”
So at the conference, it was easy to reach a broad agreement on inclusive growth, but when it came time to discuss solutions, disagreements abounded.
One fear raised was that the 2008 financial crisis caused a retreat in globalization. Many countries responded to the crisis with protectionism and kept out immigrants. The Brexit is just one example of this, as is the U.S. election campaign; for example, Trump’s statements on China. A number of European countries will hold elections soon, and parties that promote protectionism and anti-immigration are expected to do well.
This is a chicken-and-egg problem. The global financial crisis caused low growth and worsened economic problems such as unemployment and low wages. So politicians felt pressured and chose solutions that stung globalization and trade even more, and of course this stung growth even more.
A number of finance ministers at the meetings said this policy, when taken by developing nations, stoked disaster. Colombia’s Mauricio Cardenas said inequality in Latin America was high, but most countries have reduced inequality. While developed nations also have an inequality problem, their policies of protectionism and closing borders to immigrants prove disastrous.
Nary a protester
In the years before the global economic crisis, anti-globalization protesters would demonstrate in the neighborhood where the meetings were held – at the IMF and World Bank headquarters near Pennsylvania Avenue. But these protests are no longer held; there wasn’t one protester this year.
Still, undercover or even declared opponents of globalization lurk inside the fancy headquarters. This kind of opposition is more effective, even if there are no photo ops for hipsters climbing the barricades.
What the IMF really is worried about is the closing of borders. David Lipton, the first deputy managing director at the fund, described the current situation as a weakness of leadership. The world needs cooperation during crises such as immigration, refugees, climate change and handling the Islamic State, but if weak leaders let the public put pressure on politicians to close borders, this will harm the global economy and economic growth, he said.
Only cooperation between world leaders can prevent such a process, Lipton added. The world needs open borders and integration, not fragmentation.
The Germans received great praise for their handling of the migrant crisis in Europe after they absorbed some 900,000 newcomers over the past year. Of course, some people at the conference said the Germans could have been more generous with their fiscal policy in order to boost the Continent’s economies.
Schäuble explained how Germany’s policies aren’t ones of closing borders, and countries must look beyond their narrow national interests. They must work together to find solutions.
“Without European integration we would have never overcome the disaster of Hitler and the end of German history, we would never have overcome the division of Europe in the Cold War,” Schäuble said. “Only if Europe is doing well can Germany do well.”
It’s a compliment that everyone is expecting Germany to do more, he said. He declined to answer a question on whether the government would bail out Deutsche Bank if it asked for help.