Free Press Journal

Time for US to heed the IMF


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Rising inequality and stagnating living standards both in advanced and what are called D&E (developing and emerging) economies have been a cause for concern in recent times in the light of the lost decade of the global financial crisis, slowing growth and subdued productivity. Some of these economic ills have been at the root of widespread public discontent and electoral upheavals like the vote for ‘Brexit’ and the election of Donald Trump as the 45th President of the United States. Now, as these verdicts exact their price in policies that close doors, stifle trade and increase cross border barriers, what we face is a geo-political climate that will hurt growth and reduce rather than enhance productivity at the global level.

Consider the recent Trump administration order which makes it US policy to “buy American and hire American” and declaims “reforms to help ensure that H-1B visas are awarded to the most-skilled or highest-paid petition beneficiaries”. The order came on April 18, soon after the International Monetary Fund (IMF) put out an important note that explained why this is precisely the approach that will not work.

The IMF note (“Gone with the Headwinds: Global Productivity”, April 2017), was issued more in the context of global concerns on declining productivity, a subject less discussed when compared to GDP growth, which is seen as a panacea for all modern-day ills. As the IMF has pointed out, productivity plays a key role in driving living standards. This is particularly true over the long term, and especially so of total factor productivity, or TFP, which is a measure of an economy’s overall efficiency in the use of its capital and labour. Loosely speaking, TFP is nothing but the increase of output without an increase of inputs used in production. As such, it signals how efficiently and intensely the inputs are utilised in production.

Greater efficiency helps create more of existing goods, but also frees up resources that can be devoted to producing other, new goods and services, thus replacing jobs and creating new ones. As Ms. Christine Lagarde, Managing Director of the IMF put it: if TFP had followed its pre- (global financial) crisis trend, overall GDP in advanced economies would be about five per cent higher today. This would be equivalent to adding another Japan to the global economy. Thus, she notes, “productivity is critical to fostering growth… It is the most important source of higher income and rising living standards over the long term. It allows us to substantially grow the economic pie, creating larger pieces for everyone.”

But after decades of healthy gains in efficiency, productivity growth fell sharply in the aftermath of the global financial crisis and has remained subdued since then, most strikingly in advanced economies, but also in D&E economies. This decline has been associated with sub-par global economic growth.

The wild-cat ideas of ‘Trumponomics’ will not help address these concerns, particularly since an aging population in advanced economies and a slowdown in global trade are today seen as two important headwinds holding back productivity.

As the IMF note on global productivity has pointed out, between 1990 and 2010, immigrants contributed about half of total working age population growth in many advanced economies, and may continue to play an important role in counteracting declining labour forces in advanced economies in the coming years. Just a one percentage point increase in the share of migrants in the adult population is found to raise labour productivity in the host economy by up to three per cent in the long term through both higher human capital and improved TFP.

What is more, the IMF noted, these effects do not come solely from high-skilled migrants, who bring diverse skills and innovation to their new home countries. Low-skilled migrants appear to contribute as well, reflecting their skill complementarity with higher-skilled natives. Moreover, the long-term benefits of migration appear to be broadly shared. The average per capita incomes of both the top 10 and of the bottom 90 per cent of earners increase as a result of immigration, according to the IMF. Similarly, advancing an open global trade system will benefit productivity, which is vitally linked to pushing GDP growth.

So curbing immigration and placing undue restrictions on global trade cannot be solutions at a time when not only growth is slow but productivity also shows no signs of moving up. What is more, policy-related economic uncertainty is adding to the pressures, particularly uncertainty emanating from key systemic economies such as the euro area or Japan, and more recently the United States. As Raghuram Rajan put it, “There is lot of policy uncertainty right now because of the work the US administration is going to do and how much it can achieve.” Or to quote the IMF: Higher uncertainty induces firms to “wait and see”, slowing the expansion of more productive firms at the expense of less productive ones, and leading firms to cut investment and shift to shorter-term, lower-risk/lower-return projects.

The message is clear: as we wait for the next round of innovation, like artificial intelligence or robotics to kick in and drive productivity growth, policy makers must advance structural reforms, and nurture open trade and migration policies, which have delivered sizeable productivity gains in the past decades.

Clearly, it is time for the US to study and work on the very prescriptions that it has for long offered to others. But it should also be the mandate of the IMF to put across its point of view more forcefully, particularly at a time when policy action appears to be at cross purposes with well accepted ideas and sound economics.

Jagdish Rattanani is Editor, SPJIMR. R K Pattnaik is Professor, SPJIMR
Syndicate: The Billion Press