What is the good news about the World Economic Outlook (October 2018) that the International Monetary Fund (IMF) had released this past week? The good news is that it has lowered the forecast for global economic growth from 3.9% to 3.7% this year and the next. Why is it good news? Unsustainable economic growth in the years leading up to 2008 was one of the causes of the crisis. It was sustained by fickle and debt-based capital flows into the developing world. That is one of the reasons why developing countries had not been able to shake off the effects of the crisis until now. Indeed, India and China are no longer the same economies they were before 2008. They will continue to suffer from its after-effects for quite some time to come. They are yet to figure out and admit that their growth was simply too fast for their own good.
Exceptionally low interest rates had helped maintain the appearance of economic growth post-2008. The IMF now warns of financial vulnerabilities for emerging economies. Its regional outlook for Asia-Pacific mentions rising household and corporate debt in Singapore and Korea. In its classically understated fashion, it warns of medium-term risks for China because the latter had once again encouraged bank credit to flow freely in order to shore up economic growth. The role of the fund in fostering such vulnerabilities was substantial.
The IMF was egging on developed countries to continue their ultra-accommodative monetary policies even as signs of financial excesses were building up in asset markets. Now, central bank officials in the US, Europe and elsewhere are growing nervous, rather belatedly, about the build-up of bubbles in asset markets and incipient signs of rising inflation. Even previously dovish central bankers are beginning to sound cautious and aggressive. It’s not surprising that equity investors around the world are finally waking up to the risks. In other words, the great festival sale in stock markets has just begun.
This has prompted US President Donald Trump to criticise the Federal Reserve for its gradual withdrawal of monetary accommodation. This columnist has been appreciative of Donald Trump’s attempt to call China out on its unfair trade and investment practices. In its annual Article IV assessment of the Chinese economy published in August this year, the fund had used the Index of Trade and Investment Restrictiveness compiled by the Organisation for Economic Cooperation and Development to show how far removed China’s practices are from the average, not to speak of the deviation from the ‘best in class’. Trump has turned the screws on China steadily and has disappointed his critics by not buckling.
However, by calling the policies of the Federal Reserve “crazy", he has set himself up as a tempting and irresistible target for many to return the compliment to him.
Blaming the Federal Reserve’s tightening for the well-deserved and well-justified correction in the stock market is not that dissimilar to the ill-tempered calls for intervention by the government and the Reserve Bank of India from many commentators and media outlets in India to stem the correction in Indian stocks and the weakness in the Indian rupee.
They have taken their cues from their counterparts in the West who want governments and central banks to adopt a laissez faire attitude towards the stock market when it is rising and be interventionist when the market corrects. What binds Trump and these folks is that both of them fail to appreciate the inevitability of the developments in their markets.
Recent US stock market valuation has been the most expensive in history on some measures. If not for the Federal Reserve’s monetary policy, something else would have triggered the correction. What is not sustainable will have to end one day. American stock price valuations were not clearly sustainable.
The same goes for India. The debate over whether the rupee’s recent weakness is good or bad for the country misses the point. It is neither good nor bad. It is inevitable. India’s dependence on foreign capital flows and its higher inflation rate (despite the recent low outturn) make the medium-term case for a weaker rupee. Advocates and proponents of a strong rupee should note that the Federal Reserve could make the dollar stronger in the early 1980s with sky-high interest rates, but at the cost of inducing a recession.
India cannot replicate that. Other strong currencies around the world earned their spurs over a long time and the ingredients included not just low and stable inflation but also economic, financial and political stability and soundness. India needs an adult-like conversation on the economy. However, it lacks a quorum.
In 2012, a chart in The Economist showed that the global economy had packed so much economic growth in the decade up to 2010 (we now know how) that a prolonged period of mean reversion was not only overdue but also desirable. Only a prolonged period of low and stagnant economic growth—unfortunately with all its costs—will get us back to the table to discuss our goals and methods for the world economy and society. The World Economic Outlook (October 2018) growth downgrade marks a rather tentative beginning of a return to such a discussion. The world needs another Bretton Woods like conference, not just on exchange rate regimes but on economic growth regimes.
V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk.