IMF/World Bank: build infrastructure to fight malaise

WASHINGTON DC, USA – The terms are hardly riveting: “new mediocre,” “secular stagnation,” “structural reform”, and “lowflation.” 

But underpinning the economic geek-speak at the International Monetary Fund-World Bank annual meetings were deep worries that the global economy is slipping backward.

The meetings this week were fraught with concerns that the world still has not achieved escape velocity from the economic crisis, and for people around the world that means, in real language, flat incomes and few new jobs.

The IMF has repeatedly cut its growth forecasts since the beginning of the year, now putting 2014 expansion at a tepid 3.3%, hopefully rising to 3.8% next year.

The optimism has slowly been eroded by, firstly, the eurozone’s backsliding toward a possible new recession, but also by Japan’s still-unrewarded stimulus efforts, China’s slowdown, and the inability of the United States, the bright light among advanced countries, to accelerate into a higher gear of growth.

Slow demand from advanced economies has taken a toll on small developing countries that had been doing well, as prices for commodities from ore to oil to grains sink. 

And while the IMF stressed that the challenges and their solutions are often country-specific, it said together they all face “the very real risk of a prolonged period of sub-par growth.”

Especially for the eurozone, economists speak of secular stagnation, where demand is not growing enough to meet capacity and new investment stalls, businesses seeing little potential for their market to grow. 

IMF Managing Director Christine Lagarde labeled it “the new mediocre,” but spelled out what it means—”paltry job creation” for the 200 million unemployed around the world.

“It is taking a very long time for the global economy to climb out of the hole dug by the Great Recession,” she said.

The World Bank and IMF took pains to emphasize that a number of countries, like much of Asia, were doing well.

But they couched that with fresh warnings about new financial risks from “shadow banks” and excess cheap cash washing around in overinflated asset markets. 

And they warned of the spillover from the Iraq-Syria and Ukraine conflicts, and the newest danger, the deadly Ebola outbreak.

The IMF warned that the disease, which has killed more than 4,000, could wreck the economies of West Africa if not soon controlled.

World Bank President Jim Yong Kim summoned a top-level meeting, including UN chief Ban Ki-moon, to highlight to drive home the message of the need for more and faster aid to contain it.

“We must do all we can to stop Ebola, and we must act now because delay exponentially raises the human and economic cost of stopping the epidemic,” he said.

Financial markets took the cut growth forecasts and risk warnings to heart. Global markets fell close to three percent during the week, led by Europe.

Infrastructure as remedy 

The strong message to all governments was to make their own specific efforts to fuel economic growth.

One antidote pressed during the week was more reform, especially in countries mired in fiscal difficulties, to allow markets to work better and businesses to create jobs more easily.

That continues to be the message for the eurozone, insisted upon by core economic power Germany, even as it itself faces slowing consumption and production.

The new mantra was job-generating investment in infrastructure, where the need was put at more than $1 trillion a year around the world.

“In order to fight poverty, you need to build infrastructure,” said the World Bank’s Kim.

“Infrastructure and investment in infrastructure can be a good way to support growth in the short term, by putting people to work, by launching major construction efforts,” Lagarde said.

The World Bank launched a new Global Infrastructure Facility aimed at bringing public and private money together to support projects in low- and middle-income countries.

But the remedies all had their doubters. Some said the focus on structural reforms was not enough to pull the eurozone out of its malaise, and that governments should be able to spend more freely.

On the other hand, Germany’s Finance Minister Wolfgang Schaeuble argued that infrastructure spending is no panacea, and that it would be “foolish” to put at risk the gains made in stabilizing public finances.  – Rappler.com