El-Erian Suggests a Reduced Form Equation to IMF and World Bank Officials

Overall, the construct of the Washington gathering is much better suited to discuss a few big macro issues that are deemed of importance to the majority of IMF member countries, or at least to the subgroup that drives the agenda. This approach can be highly consequential, as it was in 1982, 1998 and 2008, when the annual meetings provided a catalyst for effective responses to financial crises that could have derailed the global economy.

There may be a way, however, to make the 2014 meeting less challenging and more productive: by employing a technique that econometricians have found useful called “the reduced form equation.”

The objective is to identify a handful of factors that, while not explaining the entire problem, speak to a critical mass to make the outcome relevant and actionable. Such an approach would address five themes that substantially aggravate the “host of local ailments”:

First, the failure by policy makers to deliver a proper cyclical pickup in growth. This is due to unbalanced macroeconomic policies within and across major economies, as well as to residual debt overhangs that hold back new investments.

Second, insufficient investments in longer-term drivers of growth such as infrastructure, labor market changes and pro-growth tax and spending reforms.

Third, the failure of established national institutions, particularly in the public sector but also some in the private sector, to adjust quickly enough to how a growing segment of the population is using the Internet, social media and mobility to empower a host of individual activities.

Fourth, the need for the multilateral bodies, particularly the IMF and World Bank, to better reflect the realities of today rather than those of 70 years ago. Giving more countries realistic representation and voice is crucial to engendering the institutional legitimacy needed for effective coordination of global policy.

Finally, inadequate political appreciation of what is at stake if the world inadvertently continues on the path of what Lawrence Summers has labeled the “secular stagnation” — that is, an even longer period of inadequate economic growth.

via Bloomberg

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