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Slaughter & Rees Report - Not Fade Away

October 14, 2013 --

Yesterday marked the end of the three-day Annual Meetings of the World Bank Group and the International Monetary Fund. Held in Washington, D.C., these meetings provided, if nothing else, some much-needed economic stimulus to offset the ongoing partial shutdown of the U.S. government.

To us, the most notable aspect of this round of the Bank-Fund annual meetings was not its GDP multiplier. Rather, it was the sobering downward revision to the IMF’s forecasts for economic growth in its biannual publication World Economic Outlook. In many parts of the world—especially in emerging markets—the IMF now foresees slower growth for 2013 overall and into 2014. For the world overall, the IMF now expects 2013 and 2014 GDP growth to be just 2.9 percent and 3.6 percent, respectively—0.3 percentage points and 0.2 percentage points lower than IMF forecasts in July. This was the sixth time in a row the IMF has lowered its WEO forecast for global growth.

Some of this global revision was driven by advanced countries. In particular, U.S. GDP growth is now forecast to be lower in 2013 and 2014—just 1.6 percent and 2.6 percent, respectively. But the largest downward revisions were for many key emerging markets. The IMF now expects China, India, and Mexico to grow in 2013 by just 7.6 percent, 3.8 percent, and 1.2 percent—forecasts lowered by 0.2 percentage points, 1.8 percentage points, and 1.7 percentage points, respectively.

What lies behind all this slower growth? One force has been financial turmoil in many emerging markets that is at least partly linked to expectations of tighter (or less loose) monetary policy by the U.S. Federal Reserve (a topic about which we earlier wrote here). The biggest drag, however, is stalled policy liberalization. In too many emerging markets, policy makers are shying away from the reality that countries tend to grow faster when government gets out of the business of running business. Companies—young and old, domestic and global—tend not to expand their investments and hiring when confronted by government meddling in markets. Thus does growth slow.

The risks of such meddling were on display last week when the global retailer Wal-Mart announced it is abandoning its efforts to build a retail presence in India. For years the Indian government has prevented global best-practice retailers like Carrefour, Tesco, and Wal-Mart from establishing and expanding wholly-owned affiliates in India. Global retailers have worked within these restrictive policies because of the allure of 1.2 billion people yearning for a more-productive, higher-quality retail experience. For Wal-Mart, one of the last straws was a new regulation that any foreign retailer source at least 30 percent of its products locally. Who wins here? Not Wal-Mart, which loses the potential of new revenues and innovation in a dynamic emerging market. And not India, which loses a potential spur to economy-wide economic growth—and, in particular, a spur to much-needed agricultural reform (because modern retailing often supports farmers by reducing income losses due to spoilage and theft).

The first hit for the Rolling Stones in the United States was their 1964 cover of Buddy Holly’s “Not Fade Away.” They sang about love not fading away. That is always a fine sentiment. But what the world needs now is policy leadership that will not cause growth to fade away.

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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