The rapid increase in debt, the rise of protectionism, and more

> Posted by Elisabeth Rhyne, Managing Director, CFI

There was a curious refrain at the joint Institute of International Finance (IIF) / G20 conference in Buenos Aires: “The global economy is in the best shape in years, but I’m worried.”

This meeting brings together some of the leading financial sector policymakers with counterparts among private banks and financial institutions to talk about the action agenda for this year’s G20. Maybe it’s asking too much for the macroeconomists who advise global banks and policy setters ever to be anything other than worried – they are paid to worry. But I think it’s more than that. The overwhelming message is we (the world) are at a good moment economically, but any number of events could knock us (the world) off our cloud. Among them:

  • The rapid increase in debt – over 50 trillion in recent years, according to IIF chief, Tim Adams. This includes both public and private sector debt. Case in point: the U.S. debt to GDP ratio, which is set to rise dramatically with the recent tax cut. (Though perhaps the rise in debt is not as worrying as in past years, since interest rates are low, so the debt service will not be as hard to swallow.) One big problem is the refusal of some major powers who remain nameless (China) to be transparent about the amount of credit they are issuing, making creditworthiness of countries and some major institutions difficult to gauge.
  • Lack of growth in foreign direct investment (FDI) around the world. With economic recovery, FDI usually picks up, but this has not happened as expected. FDI is a driver of both growth and globalization, which points to another concern:
  • The rise of protectionism. It’s not just the U.S. putting tariffs on aluminum and steel, there were hundreds of protectionist measures put in place around the world this year. The chances of a trade war are making global investors very skittish, and they see many downstream consequences. But the dissolution of NAFTA isn’t one of the main concerns: “You can’t unscramble an egg,” says one pundit, referring to the economic interconnections between Mexico and the U.S. that have developed under NAFTA.
  • Geopolitical instability, a nice way to say the rise of populism (although less in Latin America). Changing politics creates policy uncertainty. Populism is closely connected to protectionism and “de-globalization”. And it’s closely connected to another concern:
  • Increasing inequality. According to Tim Adams, 85 percent of the increase in incomes in the world last year went to the top 1 percent of the world’s population. Which feeds political discontent.
  • The need for China and the U.S. to be good global players. The U.S. Undersecretary of the Treasury, David Malpass, speaking for the Trump Administration, revealed its preoccupation with China which fails, according to Malpass, to play fair. It’s not just the recent power consolidation of Mr. Xi, but the lack of transparency in global credit markets and the lopsided private agreements with regard to technology in which China takes in all the new developments from those she does business with and reveals none of her own.
  • At the same time, the Latin Americans are worried that the U.S. will deviate from the straight and narrow path. Historically, rising interest rates in the U.S. have triggered economic crises in Latin America, and it’s clear that interest rates will be rising over the year in the U.S.

For those of us who work on financial inclusion, it’s good to step back and consider the broader context in which financial inclusion is taking place. But with all these macroeconomic and global trends to worry about, there seems to be little time for those leading governments and major financial institutions to focus on core societal issues. Many speakers at this event call for attention to and investment in: infrastructure (a G20 priority this year), environment, education, poverty and – finally – inclusion. However, it’s not evident how these essential needs will be pursued, nor is there much discussion devoted to those questions. Keeping the current macro risks at bay requires so much focus and discipline, including fiscal prudence, that the space to work on these longer term social issues may continue to be in scarce supply.

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