Agenda for lifting growth: macro, structural, or macro-structural?


This page in:

Global growth has repeatedly disappointed in the past few years. Successive forecasts of an acceleration of global growth have failed to materialize, with outcomes consistently falling short of projections. In what has become a familiar pattern of late, forecasts for global growth were lowered again in the latest editions of the World Economic Outlook, the OECD Economic Outlook, and the Global Economic Prospects recently released by the IMF, the OECD, and the World Bank, respectively. Defying forecasts of a rebound, global growth has stagnated around 2.5 percent p.a. in the past three years. While the growth trajectory varies across countries, the slowdown in growth has been quite generalized, affecting not just advanced economies but also emerging economies that initially showed a spark of resilience in the aftermath of the global financial crisis.

The recovery from the global financial crisis has been slow. Experience tells us that recoveries from major financial crises can be protracted. But seven years after the global financial crisis, is a slow cyclical recovery still the right framing for the continuing weakness of the global economy? Or should it now be seen more in terms of a deeper, longer-term slowing of growth? The persistence of slow growth has prompted increasing concerns about the risks of secular stagnation.  

Raising the level of ambition on the growth agenda

Against this background, lifting global growth has been a central focus of the policy agenda of the Group of Twenty (G20) countries, which account for around 85 percent of the world GDP. Growth strategies prepared by all G20 countries last year aimed to lift G20’s collective GDP by at least 2 percent in the five-year period to 2018 through new policy actions. This is equivalent to about 0.4 percent higher average annual growth over the period than would otherwise be the case. Countries committed to implementing a mix of macroeconomic and structural measures to achieve that objective. The “2-in-5” objective was seen as a minimum agenda. More recent developments have made it clear that more action will be needed to restore robust growth.

Estimates of both actual and potential growth have been lowered further. Global GDP is now projected to be about 1.5 percent lower in 2018 than the estimated baseline at the time of adoption of the G20’s “2-in-5” objective. Potential growth is hard to estimate, but several recent analyses, including by the World Bank, all point to a larger decline in potential output growth in both advanced and emerging economies than previously estimated. The latest estimates from the IMF’s April 2015 WEO show potential growth in advanced economies averaging 1.6 percent in 2015-20, compared to 2¼ percent in the 2001-07 pre-crisis period. For emerging economies, potential growth is estimated at 5.2 percent in 2015-20, compared to about 6 ¾ percent in 2001-07. Against this picture, the G20’s “2-in-5” objective appears modest.    

Need for a stronger, balanced policy mix

Recognizing the need to do more to lift growth, the G20 agenda this year includes a process for strengthening the growth strategies prepared last year. In this context, a debate has developed as to what mix of additional measures are needed. Some have focused on insufficient demand and stressed the need for additional macroeconomic measures to boost demand, calling for making a greater use of fiscal policy to lift demand while continuing with accommodating monetary policies. According to this view, the current G20 policy mix is unbalanced in favor of supply-side structural reforms, some of which can have a contractionary impact on aggregate demand in the short run. Others have put the emphasis on strengthening structural reforms, noting that recent analyses showing a significant decline in potential growth call for stepped-up efforts to address the underlying structural bottlenecks to the growth of investment, employment, and productivity. They have argued that structural reforms can be so sequenced as to support rather than hurt demand. They have also cautioned that, with high public indebtedness, fiscal space is limited in most major G20 economies.

This is an interesting and lively debate. However, this is not a debate where only one side can be right. While specific policy imperatives differ across countries, overall, the agenda to boost growth needs to incorporate elements advocated by both sides of the debate. Rather than see the agenda as macro versus structural, it is better viewed as macro-structural, as both macroeconomic and structural policies are needed. Moreover, these policies can be mutually supportive. Removal of structural bottlenecks would enhance the growth impact of macroeconomic policies. And a context of more buoyant growth in demand would facilitate the implementation of certain difficult but necessary structural reforms.

Boosting investment is a key element of the agenda to lift growth, and it is also one that illustrates well the interplay of macroeconomic and structural factors. Weak investment has been an important factor holding back economic recovery and also undermining potential future growth. Globally, investment today is estimated to be about 20 percent lower than what it would have been in a normal cyclical recovery. So where fiscal space exists, countries could implement additional fiscal stimulus programs, and a good way to do that would be to boost public investment, especially in infrastructure—in the process also taking advantage of the current low borrowing costs. Fiscal multipliers tend to be larger for investment spending, notably on infrastructure, with the impact conditioned importantly on how well the investment is designed and implemented. The dependence of the growth impact of a fiscal stimulus on the composition and effectiveness of spending links the macrofiscal agenda with the structural agenda. High-quality infrastructure investments can create their own fiscal space, if the growth effects are large and the government’s revenue collection capacity is high.  

But boosting public investment alone will not be enough; private investment must rise as well. Pump-priming demand and activity through fiscal stimulus, where the room exists, will help spur private investment, but actions are also needed to improve the business environment through product and factor market reforms. In the area of infrastructure investment, for example, private sector response will depend on the regulatory and institutional environment for private investment and public-private partnerships, including the extent to which policy fosters competition in key network industries. One reason for weak investment despite the ultra-low interest rates in many economies is the post-crisis legacy of high debt and the deleveraging process. So further progress on financial sector reform to support an appropriately paced and orderly deleveraging process will be important. More broadly, the revival of private investment will depend on rebuilding confidence and in turn on private sector perceptions of the overall soundness and effectiveness of macroeconomic and structural policy responses to address key sources of risk and uncertainty, at the global and national levels.

A similar interplay of macroeconomic and structural factors characterizes the agenda to boost labor force participation and employment and productivity growth, which along with investment drive potential growth. The current high rates of unemployment in many countries, the potential of significant negative post-crisis hysteresis effects on employment, and demographic transition underscore the priority of actions to boost labor force participation and employment. The agenda spans both actions to lift demand and structural reforms to improve the functioning of labor markets and education and training systems. Structural reforms have an especially important role to play in reversing the declining trend in total factor productivity growth—in both advanced and emerging economies—and spurring innovation.

In sum, the weak outlook for global growth calls for formulating and implementing a stronger and balanced set of macroeconomic and structural policies to lift growth. The current review and adjustment of G20 growth strategies prepared last year provides an important opportunity to do so.


Zia Qureshi

Director of Strategy and Operations

Join the Conversation

June 23, 2015

Growth is a subject I like but do not understand well. Below are some of my thoughts which may appear misplaced. If so, please ignore them:
Why this fascination with growth. Who has ever been able to accurately predict growth. And which country has ever embarked on a growth path that has delivered growth. One recent example is the world's still born love affair with the concept of BRIC countries. Two of the four BRIC countries are in recession and one in a slowdown. Only one gives cause for optimism.
The problem with a discussion on growth are twofold:
1. It is impossible to predict growth: In a globalized world where the variables are too many and mostly not under a country's control, how can one factor in the future actions of multiple governments, corporations and individuals. Any attempt to predict human behavior is likely to fail.
2. Growth is not a solution to the world's problems (and neither is GDP a comprehensive measure of human achievement). Growth usually means more asset creation and more consumption. However much we produce, a human being is likely to consume the same amount of food, need largely the same number of clothes and not need more than one house and one car. If growth means consuming more processed and refined food, wearing finer fabric and living in gold plated cars and houses, then surely growth is a path to mutual destruction.
Growth usually fattens the rich first before showing some mercy to the poor – more often than not, growth at a national level does not correlate with a better life for the poor. The rich and poor gap consistently increases. In fact growth today is a proxy for the greed of large corporations and despotic governments where the voice of the poor is not very relevant.
Institutions and analysts, in their eagerness and optimism, paint a rosy picture and thus effectively mislead people. They overlook the weaknesses in the governance environment, the political economy considerations and the voices of the rebels; and base their estimates on rational behavior, which seldom materializes. If this were not so, why would growth estimates be revised within 3-6 months of being made in the first place. If estimates cannot be stable for more than 3-6 months, what useful purpose can they achieve. More often than not, growth projections these days show a sobering picture for the current year and a rebound the very next year. On what basis are the rebounds projected other than on optimism. Are there specific actions which will lift European or Latin American growth in 2016. How are investors expected to use these growth projections which defy rationality or at a minimum lack an explanation.
On what basis does the G20 aim to lift its GDP by 2% or more in five years. On the basis of new policy actions? What are new policy actions? Are these fiscal, economic or public policies. What could be new about such policies. Are these 20 nations synchronized enough to set a common goal. If the Eurozone cannot predict whether it will survive or not, and the cause for splintering seems purely economic, then how does a group of 20 which has very different history and future aspirations, not to mention geo-political considerations, act in harmony.
One of the G20 actions mentioned is ‘using macroeconomic policy to boost demand’. I can only eat three meals a day. And only so much in each meal. I cannot envisage any macroeconomic policy which will boost my appetite. Or make me wear two shirts simultaneously. If we are talking about boosting credit availability to encourage binge buying of assets, then we are going back to the crisis of 2008. Not away from it. The other action mentioned is structural reforms. We only have to look to the recent examples of Greece and Jamaica to realise that structural reforms depress demand, not boost it. I agree that reforms can be sequenced to boost demand, but that happens in the long run, longer than most policy makers care to base their actions on.
Coming to weak investment, this does not happen due to lack of capital or lack of risk taking ability. Weak investment usually follows a phase of excessive investment wherein investors have lost money, bad debts clog most financial institution balance sheets and excessive capacity and inventory need to be shed. There is no getting around the fact that bloated economies need to be deflated before you can start inflating the balloon again. Hard decisions need to be taken. Write offs need to be done. Or you risk becoming a Japan which just cannot figure out how to grow. And after the bubbles have been burst, and demand and investment reappears, caution needs to be exercised to not create bubbles again. Availability of low cost finance should not be a catalyst for new investment. New unmet demand should be the catalyst. Low cost finance should only be a facilitator.
In summary, growth inducing policy efforts do not always deliver. As long as we have good governance and less greed, the world will right itself. Maybe I am naïve.

Maithreyi Krishnaraj
June 24, 2015

I support the earlier commentator's views regarding pushing growth as the main agenda. We have already reached limits to growth through depletion of earth's resources. Given population size today
we have to re think the true goals of development