Lagarde warns of ‘economic malpractice’

Posted on September 28, 2016

IMF head Christine Lagarde©Reuters

IMF head Christine Lagarde

The world economy risks succumbing to “economic malpractice” and a new tide of protectionism when policymakers should be focusing on reinvigorating trade, the head of the International Monetary Fund has warned. 

In a thinly veiled rebuke of populist politicians who have called for new trade barriers, such as US presidential candidate Donald Trump, Christine Lagarde warned that the economic risks facing the world were being exacerbated by politics and a growing backlash against globalisation. 

    “Restricting trade is a clear case of economic malpractice,” Ms Lagarde told an audience in Chicago on Wednesday. “Restricting trade and limiting economic openness is sure to worsen the growth outlook for the world and especially its weakest citizens . . . We must reverse the trend toward protectionism and restore a climate that supports a rebound in trade.” She did not mention Mr Trump by name. 

    There is a growing effort by both business groups and the intellectual defenders of globalisation to push back against what they see as a mounting threat from populists such as Mr Trump and France’s Marine Le Pen, based in large part on fears that something akin to June’s Brexit vote in the UK might be repeated. The theme is likely to dominate next week when finance ministers and central bank governors descend on Washington for the annual meetings of the IMF and World Bank. Economists believe creeping protectionism has contributed to a slowdown in global trade.

    The World Trade Organisation on Tuesday said it expected global trade volumes to grow just 1.7 per cent this year, the slowest growth since the collapse and recovery immediately after the 2008 financial crisis. It also said that it expected this year to mark the first in 15 that global trade had grown more slowly than global GDP after growing for years at twice the rate of the broader economy. 

    Ms Lagarde said governments needed to do more to make growth inclusive and take care of those workers hurt by globalisation, citing the need for the US to raise its minimum wage and programmes in Scandinavian countries where displaced workers are given active job counselling. 

    “These are not silver bullets — none actually exist — but if we want to keep globalisation alive for the next generation, there is no alternative to ensuring that it works to the benefit of all,” she said. 

    Restricting trade is a clear case of economic malpractice

    – Christine Lagarde, head of the International Monetary Fund

    But in the end much of the problem also comes down to the world economy’s current low-growth rut and Ms Lagarde repeated a call for governments to do more to boost growth via investment in public infrastructure and other measures. Those governments with fiscal space — such as Canada, Germany and South Korea — needed to more aggressively deploy government spending, she said. 

    She also called for greater co-ordination among governments, expressing what has become a growing frustration at the IMF with a lack of concrete action coming out of international forums like the G20. 

    “No doubt, the current situation is different from the 2008 crisis, which required a prompt, massive, and co-ordinated fiscal response,” she said. “But as our ‘new mediocre’ is less acute, it is also more divisive and subtle than a full-blown crisis, and it could prove just as toxic as the recovery has so far proven elusive.” 

    In response policymakers needed to deploy “a more sophisticated and co-ordinated approach” than they had so far, she said, and focus on doing everything they could to boost growth. “If all countries act decisively to stimulate their own growth, the positive spillovers reinforce each other. And as everyone is working to expand growth, everyone benefits from the efforts of others, to a much greater effect overall.” 

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