This is part of a series, “Economists Exchange”, featuring conversations between top FT commentators and leading economists about recovery from the economic impact of coronavirus
The IMF is a creature of crisis. It was founded to stabilise global capital flows in the postwar economy. Whenever people have been tempted to write it off as having its best days behind it, a new crisis has come along to bring it back to centre stage as the world’s only permanent financial firefighter.
So there could be no better time for a conversation with Gita Gopinath, the fund’s chief economist. The global economy is in the grip of at least three interlocking crises. The coronavirus pandemic, with its enormous economic fallout, is of course the acute present emergency. But it comes on top of a creeping malaise of slowing growth, rising inequality and popular economic resentment that has fuelled explosive politics in many countries. Looking into the future, the crisis of devastating climate change, and the havoc it can wreak on our economic systems, looms large.
The FT’s leading economics commentators will be holding monthly conversations with the world’s top economists about the changes wrought by the coronavirus pandemic on the world economy. The conversations will be in-depth, solutions-focused dissections of what the face of recovery will look like in the weeks, months and years to come.
In this interview, the FT’s European economics commentator Martin Sandbu speaks to Ms Gopinath, who leads the fund’s brains trust in its efforts to rethink economic policy in the face of these challenges.
In October, the fund turned much conventional wisdom about economic policy on its head. As Ms Gopinath explains below, there is a role for smart state spending and regulation both in the pandemic and in the long-term challenge of climate change.
The fund has come a long way from the “Washington consensus” of state withdrawal and deregulation it promoted in the 1980s and 90s. The new recommendations come through in her view on the US economy, where the fund advises a large fiscal stimulus today, and policies to reduce inequality in the long-term.
Gita Gopinath, IMF chief economist: ‘Every increase in debt does not sow the seeds of destruction. It’s not as if one should abandon concerns about increasing debt, I would be very, very careful about that’ © Jason Alden/Bloomberg
Ms Gopinath and her predecessors have led the fund on a journey where it has been remarkably willing to change its mind on things it treated as gospel not so long ago, suggesting an intellectual open-mindedness to be appreciated even if one does not share the fund’s current views.
Martin Sandbu: I’d like to start with the op-ed you wrote for us recently. You say we are in a global liquidity trap, meaning that central banks are limited in their ability to stimulate demand, so we need to talk about fiscal policy. Are we at risk of getting the policy response wrong in this pandemic?
Gita Gopinath: Firstly, I do think that both monetary and fiscal policy have responded appropriately and aggressively to this pandemic-driven crisis. The actions taken by monetary policy, in terms of monetary easing, asset purchases, liquidity infusions, have all been essential to preventing a financial catastrophe and excessive bankruptcies.
If the crisis gets worse, the problems are going to be more about solvency than liquidity, something that monetary policy is just not that well placed to handle. And we need to enter a world where we have more jobs, a world where we make the investments needed for sustainable, inclusive growth.
And, given the fact that there will be a very large amount of savings looking for adequate investment for some time to come, government fiscal policy can play a very important role.
But it has to be done right, which means it has to be investment in high-quality projects. If you get it right then you are able to create a large number of jobs.
MS: Is there an element here of not wanting to repeat the mistakes from the aftermath of the global financial crisis?
GG: There is consensus that fiscal stimulation was withdrawn too quickly right after the financial crisis. And that is a mistake that we want to avoid happening again, which is why, in our October World Economic Outlook, we made the point that it is important not to prematurely withdraw policy support.
MS: I found this year’s IMF/World Bank annual meetings really provided a blockbuster of research-founded policy views that represent a sea change in thinking. You emphasise the need for public investment, argue there doesn’t have to be a trade-off between health and wealth, and, on climate change, that there also does not have to be too much of a trade-off.
All of that seems to be far from the Washington consensus from the 80s and 90s and up until the global financial crisis. At the top of the world economic policy establishment, the state is back in favour. Is that a fair characterisation? How has this change in thinking come about?
GG: An important lesson that was learnt after the financial crisis is that fiscal policy plays an essential role in recovery. And every increase in debt does not sow the seeds of destruction. It’s not as if one should abandon concerns about increasing debt, I would be very, very careful about that.
The point is that there are good forms of public investment that can create jobs, enhance economic activity while also being fiscally prudent, in the sense of helping to bring down debt to gross domestic product levels. And that can be essential in a time like this, when interest rates are very low for a long period, and there is a high level of uncertainty which can hold back private sector investment.
To work well, it is very important for countries to have medium-term fiscal frameworks to ensure that debt remains sustainable. And these have to be credible frameworks.
MS: Can you be a little bit more concrete, then? What sorts of specific things you would like governments to do, to spend more on?
GG: As of now, the immediate need remains health spending and ensuring there is sufficient scale of production of any solution to end the pandemic, be it vaccines, treatments or better testing.
I would say there are some countries that have the fiscal space to invest in climate mitigation. This should be done using a three-pronged approach. One is a push on green public investment; you combine that with a gradually increasing scale of carbon pricing. And, third, compensation to the lower income households to ensure that this is not regressive.
That combination over the next decade can both boost output and strengthen the recovery from the Covid crisis, but also help arrest the increase in temperatures that the world would otherwise face. In the second half of the century, output will be significantly higher than in the absence of this kind of investment because you’re going to get rid of those catastrophic risks from climate change.
MS: It almost sounds like a free lunch, doesn’t it? Is it as good as that?
GG: What I want to emphasise is that you have to do it right. There are many forms in which governments can intervene to bring down carbon emissions, and some work better than others.
We have to be humble, there is uncertainty around how quickly people will shift to alternative forms of energy but in our view, it can give a boost in output that is needed now. There will be a transitional cost, but that cost is quite low. And, importantly, in the long-run, it is a big positive for the planet and for livelihoods.
MS: We’ve all been riveted by the US election. I’d like to hear your view on what the biggest challenges for the American economy, at the moment, are.
GG: We see the need for another round of fiscal stimulus. That’s on hold, and has been for several months, but we do see that as being essential. Calculations we have run show that if the US were to do a two trillion dollar package along the lines of the Cares Act, that could raise US GDP next year by over three per cent, which would bring the US back to its full employment level much more quickly.
We believe that the US has space to do it — this is something that we’ve said is the need of the hour. Secondly, I would point out that while the US is a strong, prosperous economy, at the same time, in terms of inequality, it has not done so well. It is one of the big economies that has seen a large increase in inequality.
And that has to be a priority, too. In terms of where do we think the rise in inequality has come from, I would say that to an important extent, automation has played a very important role.
MS: Not so much from globalisation?
GG: People feel differently about the extent of the contribution of globalisation to the increase in inequality. There is some evidence of it. But there’s a lot more agreement on automation than there is on globalisation, actually. Of course, there have been changes in terms of policies and institutions, we’ve seen a decline in tax progressivity over time, we’ve seen declines in collective bargaining.
In terms of access to opportunities, in terms of education and healthcare, progress has stalled on those fronts. It is an area I worry about because if you look at what this particular pandemic is doing, it is hastening our automation. That’s then going to aggravate the problem of inequality, which means that policies have to be tailored to address the fact that there will be many displaced workers.
We’ve talked about labour market policies which help reskill workers, which help relocate workers to regions where there are more jobs available.
MS: Regional inequality is a really hard nut to crack. So I wonder, is increasing regional disparity something we have the tools to fix?
GG: We’ve seen a rise in regional inequality in advanced economies since the 1980s and while it used to be the case that poorer regions would catch up with the richer parts, that is no longer happening.
We know that growing up in some cities helps you overcome the disadvantages of your parents, in terms of income and so on. But in others, it doesn’t. What that means, firstly, is that the quality of education and healthcare, for instance, has to be far more uniform across regions. That’s very important.
The second thing is that the regions that have fallen behind tend to be ones that rely more on agriculture and industry. The ones that have grown are the ones that rely more on technology and services. Ideally, you also want to encourage workers to move to wherever the opportunity is.
We have to think about being in a world of life-long learning to ensure that people simply just don’t regress because technology keeps changing. But we know that mobility is not that easy.
So that’s why place-based policies are important — trying to encourage investment through subsidies, or tax credits, the agglomeration in certain places there have fallen behind, to make sure there is good public infrastructure.
But, indeed, it is a challenging problem to address.
MS: But, again, the answers are in the domain of using state policy more smartly, and maybe putting more resources in. It does feel like there has been a big shift in the past 15 years in how economists like yourself and the fund, and the community of economic policymakers, are thinking about this.
GG: I think there’s been a much stronger recognition of the fact that adjustment doesn’t really happen that easily. It was strongly felt that if you have sufficiently flexible labour markets and product markets, labour and capital will move freely to wherever you have the highest wages or the highest returns. But the truth is that doesn’t happen very easily, especially when you’re talking about labour mobility.
That was also an issue with trade, for instance.
I think we’ve understood the limits to the ease with which you can have people and workers moving from one region to another in search of the best possible opportunities.
MS: I can’t help but feel that this is a different IMF than the one my friends demonstrated against when I was a student. I read your op-ed as calling for almost a London G20-style moment where countries really come together and go for a big fiscal push.
GG: It doesn’t have to be an explicit co-ordinated effort. If countries obviously want to come together, and the ones who want to make this kind of investment decide to co-ordinate, then that would be welcome. I want to emphasise that the timing will vary depending upon how the pandemic is evolving and where each country sits in terms of the cycle of the crisis.
MS: So when is the right time to go for the big investment push?
GG: Once we are durably past this pandemic hump, which I would think would happen in 2021, especially for several advanced economies, that would be the time to make the push.
MS: We’ve just heard news that there’s potentially a successful vaccine on its way. Surely there’s going to be a temptation to go back to the status quo ante. Is your advice about a big investment push to change the structure of the economy at risk?
GG: I do think the countries themselves see the need for public investment, especially in climate. The EU Recovery Fund is also about encouraging that kind of public investment.
We have to remember that we didn’t enter this crisis with strong growth around the world. Growth was subdued. We were actually worried about how to bring growth back up. And so we still have to take care of that problem; that we don’t have enough productivity growth, we don’t have enough demand. Those issues remain, which is why the argument for public investment will remain, especially with interest rates expected to stay low for a while.
MS: We talked a bit about co-ordinating in the short-run, but I also want to hear where you think globalisation is headed, both economically and politically, in the medium-term. We’ve had a rise in antagonism and economic policy being used in strategic, political ways. Is that antagonism here to stay because the big blocs — the US, EU and China — have interests that have become somewhat incompatible?
GG: A lot is going to depend upon how this crisis ends. If it turns out that in the next half a year or so, or in 2021, the pandemic is well under control and the jobs have come back and people are returning to productive employment, I believe there will be the political environment to make sure that there is not a shift to protectionism.
Now, further increases in globalisation won’t happen organically. Countries [will have to] agree on what appropriate WTO reforms are needed to ensure that everybody feels like these are fair rules of trade. The WTO has been extremely valuable for growing trade, but at the same time there are issues that need to be fixed.
[Let me] emphasise one other thing. While we all recognise that there are benefits to flexible exchange rates and the impact this has on exports, there are limits to the argument that emerging markets can maintain monetary autonomy as long as they have flexible exchange rates.
We see in this crisis, and we will see it going forward, that emerging market central bankers around the world, and their monetary policy autonomy, are affected by financial market conditions, and flexible exchange rates alone will not insulate them.
MS: I’d like to hear what you see the IMF’s role as being in the next couple of years. On the changes in economic thinking we’ve talked about, it seems to be that the IMF has led on some of those.
GG: Yes, I agree that we’re leading in these important shifts and that is a role that we take very seriously. We have to make sure that we are giving our member countries the best possible advice, while looking at the world as a whole (now with 190 members) and recognising the spillovers across countries, and what the actions of one country does to another.
This crisis has shown that there is still obviously a huge need for a lender of last resort, which is what the IMF is. We’ve provided financing of different forms to 81 countries in this crisis — 75 of them have been in the form of emergency financing which doesn’t have conditionalities that typically come with IMF programmes.
We’ve shown how we can tailor our financing and tailor our advice to the crisis. And I think that’s what you picked up, Martin, from the annual meetings, in terms of our messages on fiscal policy, or messages on climate, inequality, and so on.
This is the edited transcript of an interview between economist Gita Gopinath and the FT’s European economics commentator Martin Sandbu