How to put the global economy on a sustainable growth path

OECD Economic and Development Review Committee

Is policy sowing the seeds of the next crisis? There is a danger that it is. Imbalances in particular must be tackled.

What was the underlying cause of the economic and financial crisis that began in the summer of 2007? I believe that it was an explosion of private sector credit, driven by excessively easy monetary policies and declining credit standards. This led, in turn, to various “imbalances”, including inexplicably high asset prices, sharp increases in the risk exposure of financial institutions, unprecedented spending excesses in many countries (consumption and private debt in the US and investment in China), global trade imbalances, and a marked shift of factors of production into sectors like construction likely to suffer from excess capacity going forward.

These imbalances were the root cause of the economic and financial crisis that we are all too familiar with. But the crisis has not yet succeeded in reducing these imbalances to manageable levels. This implies a clear danger. Policies designed to stabilise the global economy and restore growth, while temporarily effective, could potentially make the imbalances problem worse. The global economy would then still be on an unsustainable growth path, with future crises likely. Such an outcome could and should be avoided.

In spite of the very unusual nature of the current crisis, it is indeed striking that policymakers have generally responded in traditional, if much exaggerated, ways. Monetary policy was eased dramatically, and then supplemented by credit and quantitative easing. Automatic fiscal stabilisers were allowed free rein, which meant more welfare spending despite less tax revenue. Furthermore, these measures were often supplemented by discretionary fiscal expansion. Massive government support was also provided to the financial system and to special work programmes designed to keep workers in their old jobs.

Unfortunately, each of these policies could also have undesirable medium-term effects. Very easy monetary conditions could lead either to another round of debt accumulation and asset price bubbles, or even overt inflation, with emerging market economies seeming the most vulnerable at this juncture. Moreover, they    keep alive indebted “zombie” companies and “zombie” banks, which a recession should normally weed out, threatening the survival of otherwise healthy competitors.Fiscal stimulus adds to government debt and could lead to a dangerous increase in sovereign risk premiums, while the interactions between higher debt service, higher debt and still further increases in risk premiums could culminate in either default or sharply higher inflation. As for government support for the financial system, public authorities at the height of the crisis loudly asserted that a system in which some institutions seemed too big to fail was in need of fundamental reform.Yet their support has, in fact, resulted in banks that are even bigger, more complex and systemically dangerous than they were before. As for schemes to keep workers in their old jobs, this could easily impede needed adjustment from unprofitable to profitable endeavors.

Recognising that policies have mediumterm effects as well as immediate ones leads to two conclusions. First, “exit” policies need to be considered sooner than those who focus only on immediate effects might think appropriate. Second, stimulative policies should be relied upon most heavily where they are not already encumbered by dangerous imbalances of one sort or another. This implies a particularly important role for creditors in the process of global rebalancing.

On the one hand, there would seem to be little room to increase consumer spending and residential investment in countries like the US or the UK. Household debt levels are already unusually high and many consumers are already retrenching.In China, with fixed investment heavily reliant on bank credit and now almost 50% of GDP, further stimulus of this sort would seem increasingly likely to result in unprofitable endeavors, rising credit losses and even greater global trade imbalances. As for government contributions to demand, virtually all OECD economies have government debt levels that are worryingly  high, with massive demographic challenges still to come. And, finally, many countries seem to want to rely on exports to stimulate demand, but their principal markets are in countries burdened with both internal    and external debt problems, and, at best, moderate demand. In any event, for the global economy as a whole, exports cannot be the answer.

On the other hand, not all global spending categories are debt constrained. In many emerging market economies, consumption levels are low and household debt still minimal. Since many of these countries, in particular China, are running trade surpluses, there is no external debt constraint either. Similar observations apply with respect to some OECD economies, not least Germany and Japan. There would also seem to be room for more private sector investment, particularly in countries like the US and Germany where corporate investment levels have been low for many years, and where balance-sheet conditions are favourable. Changing demographics and concern for climate change offer new business opportunities supporting advanced technology and construction, as well as associated services. Moreover, many countries with large trade deficits need more investment to increase the production of tradable goods and services.

 Governments could play a big role in encouraging investment. A “pro-business” political environment would be very helpful for private sector investment everywhere, in contrast to the “anti-business” policies that contributed materially to the severity of the Great Depression in the US. Further, were governments to allow many important prices to move to more “natural” levels, the need for the economy to adjust would stimulate many new investments. Subsidies for fossil fuels should be removed, as should subsidies to encourage manufacturing in countries with large external surpluses. Countries with large trade surpluses should also allow their exchange rates to rise, since this would encourage both more consumption at home via imports and spur more investment elsewhere.

Finally, governments could do more to encourage public sector investment. In many emerging markets, infrastructure remains inadequate, while in many advanced market economies that    infrastructure has suffered terribly from neglect in recent years. Supposing that the headwinds arising from the “imbalances” are likely to be long lasting, there should be no fear that this kind of spending will come on line only when the need for stimulus is long past. And since it provides an asset to go with the associated increase in government liabilities, such spending should also be much more acceptable to financial markets.

A key question is how debts that constrain current and prospective spending might be reduced. Only two complementary possibilities suggest themselves, assuming that recourse to inflation is rejected as being both too costly and too likely to get seriously out of hand.

The first possibility is to raise potential growth by removing many of the current barriers that inhibit such growth. The OECD has focused for years on such issues, and no further analysis is needed here (see references). Nevertheless, it is worth noting that crises can present windows of political opportunity for structural changes that would normally be fiercely resisted by vested interests.

The second possibility is enhanced recourse to bankruptcy and debt workouts. While distasteful to many, it can be to the mutual advantage of creditors and debtors, and done in such a way as to minimise moral hazard and the risks of encouraging further crises. Debt alleviation frees up productive resources for other uses, and it reduces the debt–and also the uncertainty about debt servicing–that inhibits spending. Evidently, if carried far enough, confronting frankly the debt problem of borrowers requires the restructuring and possible bankruptcy (or    nationalisation) of lenders as well. While challenging, such a process would seem better than the alternative of refusing to face up to reality: if the money is already gone, the only relevant question is how the losses are to be distributed. Many, including    myself, would contend that this type of policy error was the real cause of stagnation in Japan through much of the 1990s and even beyond.

How can the global economy be put on a sustainable growth path? First, recognise that, in some cases, simple demand stimulus can do harm as well as good. Second, focus on those kinds of demand and those forms of stimulus that do not make existing imbalances even more unsustainable. Finally, take steps to reduce the burden of debt to more manageable levels, particularly by pursuing structural reforms to increase potential growth.    Evidently, none of this will be quick or easy. But, as Groucho Marx once said about getting older, “It sure beats the alternative”

OECD (2010), Economic Policy Reforms 2010: Going    for Growth, Paris.   

OECD (2009), “Economy: Thoughts on the crisis”, special  section in OECD Observer No 270/271, December 2008- January 2009.   

©OECD Observer No 279 May 2010

Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly

Online edition
Previous editions

Don't miss

  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • OECD Secretary-General Angel Gurría discusses the uncertainty in politics around the world, lack of proper skills for future jobs, global growth and US-Mexico relations.
  • Green Talks on 3D printing: 3D printing may be growing rapidly and innovations abound, but what does this mean for the environment? Click on the picture to join Shardul Agrawala of the OECD Environment Directorate on 27 February at 13:00 CET to discuss the potential benefits and drawbacks of widespread 3D printing.
  • How should pension systems account for gender differences and deliver equitable pensions for women and men? Do differences in financial literacy between men and women impact their long-term well-being? These are some of the questions to be debated at an OECD-hosted conference taking place on International Women’s Day, 8 March 2017.
  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • OECD Environment Director Simon Upton presented a talk at Imperial College London on 21 April 2016. With the world awash in surplus oil and prices languishing around US$40 per barrel, how can governments step up efforts to transform the world’s energy systems in line with the Paris Agreement?
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Once migrants reach Europe, countries face integration challenge: OECD's Thomas Liebig speaks to NPR's Audie Cornish.

  • The carbon clock is ticking: OECD’s Gurría on CNBC

  • If we want to reach zero net emissions by the end of the century, we must align our policies for a low-carbon economy, put a price on carbon everywhere, spend less subsidising fossil fuels and invest more in clean energy. OECD at #COP21 – OECD statement for #COP21
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017