April 15, 2019 / 11:04 AM / 5 months ago

Breakingviews - Zero-sum thinking is rising risk to global growth

IMF Managing Director Christine Lagarde speaks at the Spring Meetings of the World Bank Group and IMF in Washington, U.S., April 11, 2019. REUTERS/James Lawler Duggan

WASHINGTON, D.C. (Reuters Breakingviews) - Bubbles can be comforting from the inside. Especially the one inhabited by finance officials attending International Monetary Fund meetings, like last week’s shindig in Washington, D.C. But their cosy world is being disrupted by the rise of zero-sum thinking – the idea that for every winner there must be a loser.

U.S. President Donald Trump is the most obvious example of a break with decades during which most developed-world leaders viewed globalisation as beneficial for almost everyone, a win-win approach. And his trade threats against China and the European Union were repeatedly identified at the IMF gathering as the biggest immediate drag on global growth prospects. Trump’s government is, however, hardly the only one that’s putting national interests first.

Some European countries want national or regional champions: take Germany’s desire for a merger between Deutsche Bank and Commerzbank or the Franco-German push for Siemens and Alstom to merge their rail assets, a deal that was scuppered earlier this year by the European Commission. China, meanwhile, has ambitious plans for its high-tech sector to rival that of United States or Germany by 2025 and is throwing its weight behind local companies capable of furthering this goal. One country’s backing for a national leader in a sector is, however, apt to prompt other countries to respond in kind, hoping to protect domestic businesses and jobs.

That leads to throwing up barriers, rather than the dismantling that helps economies pool capital and to some extent labour. Closer global trade and economic ties have helped alleviate poverty in poorer parts of the world and reduced inequality between countries. But even the IMF, the arch proponent of globalisation, admits there have been losers, often among the middle classes in advanced economies. And while America’s current trade tactics are generally decried, there are plenty of other countries that also want China to change its ways when it comes to state subsidies or the appropriation of intellectual property. Their view is that an economy worth more than $13 trillion cannot continue taking the liberties that it did when it joined the World Trade Organization in 2001 and its GDP was just over $1 trillion.

Granted, there was plenty of support at the IMF meetings for global policy cooperation. But there was far less consensus on what such policies would look like, either at global or regional level. As a result, French Finance Minister Bruno Le Maire sat telling journalists in one part of the IMF headquarters why European countries with budget surpluses should spend more on investment while his Dutch counterpart Wopke Hoekstra, whose country is running just such a surplus, shortly afterwards explained to an audience in another room why he will be keeping a pretty tight grip on the purse strings. Germany, the main target of the Gallic call for more spending, reckoned its fiscal policy was already pretty expansionary. And none of these countries can compel the Italian government – the euro zone country about which many IMF delegates were most worried – to follow the budget advice of the European Commission.

While such divergences are not new, they mattered less when growth was stronger, when fiscal and monetary policymakers in large economies had more room to cushion shocks, and when governments were more inclined to work constructively with each other. Public debt in advanced countries rose from around 70 percent in 2007 to above 100 percent of GDP in 2011 and has since stayed above that level, according to the IMF’s Fiscal Monitor. Meanwhile, policy interest rates in some of these countries are close to or below zero. Central bankers like Japan’s Haruhiko Kuroda insisted in Washington – as they do at home – that they were not out of ammunition. But if there’s a significant downturn they will have to resort to less conventional tools, such as asset purchases, which affect economies in more roundabout ways.

Such policy decisions by the richest countries have knock-on effects on the rest of the world. These spillovers were easy enough to ignore when emerging economies accounted for a smaller proportion of global GDP. But, as Bank of England chief Mark Carney pointed out during a panel discussion on capital flows, advanced economies account for only 60 percent of world GDP these days, rather than 80 percent in 2004, the last time the U.S. Federal Reserve started raising rates until the recent period of modest tightening. That can mean more powerful feedback loops when, say, the U.S. economy is affected by the consequences of other countries’ responses to its policies.

This arguably ought to strengthen the economic case for countries to pay more attention to the wider consequences of their national actions, and to collaborate more. But many of today’s politicians expect others to pay heed to the greater good while they themselves pursue their own interests – especially when growth is flagging. In game theory, that is usually the path to lose-lose outcomes.


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