A two-speed world

Whether V or W, not yet time for laissez-faire, says IMF

Two years after the onset of the Great Recession, and a year into an as yet tentative recovery in the trans-Atlantic economies, the International Monetary Fund (IMF) believes governments in both developed and developing economies must remain active and focused on ensuring the sustainability of the recovery underway. The IMF’s World Economic Outlook 2010 forecasts 4.8 per cent world economic growth in 2010, followed by a marginally lower 4.2 per cent in 2011. The IMF rejects the prospect of a sharper global slowdown. V it will be, not W. But, this optimism is pinned on heroic performance by the so-called “emerging economies” — especially China, Brazil and India. India is expected to grow by a whopping 9.7 per cent this fiscal. Is this legitimate optimism, a statistical accounting issue, plain bravado or making up for past sins?! Having erred on the side of caution in the past, is the IMF erring on the side of exuberance? Critics may regard IMF’s growth projections as optimistic, especially since it does point to the persistent downside of the global economic slowdown and the consequent stimulus packages — high unemployment, weak private sector animal spirits, high fiscal deficits, resurgence of beggar-my-neighbour trade and currency policies and the like. Clearly, the IMF expects a two-speed world in which advanced economies will remain sluggish and emerging economies will keep growth going.

There is nothing wrong in the global economy moving at two or even three speeds. Multiple business cycles are better than a single one. However, if the two-speed world economy has to not just sustain higher global growth but also ensure global stability, especially the stability of financial markets and trade flows, it is necessary for high-growth economies to be more open to trade. That is a message to China and India. The IMF has identified two other challenges for most economies — to get private sector “animal spirits” up even as governments wind down fiscal stimuli and to get the domestic economy buying more even as mercantilist trade policies are shut down. The IMF expects China and India to do more for global growth and draws attention to the fact that reviving growth in developed economies is vital for sustaining growth in the developing world. Though developed and emerging economies are growing at different speeds, the bottom line is, according the IMF, both need each other to be able to stand up and run, and governments in both the economies can do more to help. Not yet time for laissez faire!