Safety from economic shocks
In its latest forecast for the global economy, the World Bank isn鈥檛 really worried about the economy itself. Real growth is expected to be 3.2 percent this year, states a bank report issued Tuesday. Both rich and poor nations are 鈥渇inally turning the corner five years after the global financial crisis.鈥�
Rather, the World Bank鈥檚 economists point to a mentality of 鈥渃omplacency鈥� and 鈥渟tasis鈥� in certain countries toward repeating policy mistakes of the past. Unable to deal with or even see structural flaws such as high debt or excessive credit, these countries leave themselves likely to be ignored by global investors for misunderstanding basic economics. To err in ignoring inflation, for example 鈥� as India has done 鈥� is to risk capital flight.
To make its point, the bank cites countries in the midst of fixing fundamentals, such as Mexico. They are expected to enjoy stronger growth over the next couple years. And by making adjustments in line with settled economic rules, these nations are making themselves safer from potential financial shocks from other countries.
鈥淚t is important to avoid policy stasis so that the green shoots don鈥檛 turn into brown stubble,鈥� said Kaushik Basu, the bank鈥檚 chief economist.
The current upbeat global economy is certainly attractive for taking on the 鈥渄aunting political challenges鈥� of improving macroeconomic stability. 鈥淣ow is the time to act,鈥� said Andrew Burns, the main author of the World Bank report. The wealthiest areas 鈥� the United States, Japan, and the eurozone 鈥� are in their first coordinated expansion since the global crisis of 2008-09. (Of the three, the US is furthest along in its reforms.) World trade has nearly doubled in the past two years. Developing countries have largely shed the 鈥渦nsustainable turbo-charge pre-crisis growth.鈥�
鈥淲e鈥檙e moving into a new phase where developing countries are growing at a rate much closer to their underlying sustainable rate of growth,鈥� said Mr. Burns.
Countries that do necessary reforms, especially in shoring up finances, will be far less vulnerable to one possible shock that worries the World Bank: a too-fast withdrawal of stimulus money by the US Federal Reserve. If the American central bank misjudges the pace of lowering its purchases of bonds, countries that have ignored necessary reforms may see interest rates shoot up, the bank predicts.
Many nations learn fast if they ignore basic economics. Others suffer along until they do. To bring greater harmony into the global economy, the World Bank recommends all nations return to fundamentals, shedding a temptation for complacency.
