Much of the attention at the Cannes summit this week will be focused on addressing the crisis in the eurozone. But as president Zoellick emphasized in his press teleconference yesterday, the summit should aim to go beyond the immediate crisis-response actions to build some foundations for future growth. A focus on growth is the central theme of a report the Bank released yesterday as an input to the discussions in Cannes. The report conveys the following main messages:
- The global economy has entered a dangerous phase that threatens to stall economic recovery in advanced economies. Weaker growth in these economies and financial turmoil also threaten growth in developing countries that has been an engine driving the global economy. These developments call for a renewed G20 focus on growth. Actions to address immediate risks to financial stability must be complemented by actions to strengthen the foundations for global growth.
- What is needed, fundamentally, is a strategy for growth—and job creation. Large and persistent imbalances—a major focus of G20 discussions for much of this year—must be addressed. But rebalancing must be framed as part of a broader G20 strategy to ensure strong and sustainable growth in the global economy. The strategy must fully engage developing countries that are an increasingly important source of global demand, accounting for two-thirds of global growth in GDP and imports in the last five years. In an increasingly multipolar global economy, rebalancing, growth, and development are more and more interconnected.
- A pro-growth approach to rebalancing will have two key elements: a strong focus on structural reforms that remove barriers to growth and address the underlying drivers of unsustainable fiscal and external imbalances; and leveraging of developing country growth in supporting strong and more balanced global growth.
- In advanced economies, structural reforms must now move center stage. With macroeconomic policy space narrowing, structural reforms (tax and entitlement policies, labor market, competition, investment) provide the main policy instrument to boost growth, while also helping to reduce fiscal and external imbalances. Fiscal policy needs to strike an appropriate balance between medium-term consolidation and short-term support for growth.
- In emerging economies, continued progress on structural reforms will be key to sustaining their growth momentum. Economies with large and persistent external imbalances need to step up reforms (of product and factor markets, social safety nets, exchange rate policies) to rebalance demand.
- Strong growth in developing countries benefits global growth and rebalancing at the same time as it advances development and poverty reduction. Boosting investment in developing countries, such as in infrastructure, can produce win-win global outcomes.
- Successful rebalancing would allow more of the surplus global savings to support investment in developing countries. While about three-quarters of developing countries are net importers of capital, in the aggregate emerging and developing economies have been net exporters of capital to advanced economies over the past decade—a cumulative current account surplus of $3.8 trillion ("capital flowing uphill"). Simulations show that a combination of fiscal consolidation in advanced economies and matching increases in infrastructure investment in developing countries could raise GDP in developing countries by about 25 percent and global GDP by 7 percent over a ten-year period and also significantly reduce global imbalances.
- Multilateral development institutions can play a key role in this redirection of global savings to support stronger and more balanced global growth, both by directly providing financing and by leveraging capital from private and other sources (e.g., sovereign wealth funds) in innovative ways.