AT their spring meetings, multilaterals now talk of the arrival of ‘springtime’ in a global economy after an unusually long recession, but they stop short of declaring it a victory.

While acknowledging the bigger role of developing economies in rising global economic growth, they also, at the same time, raise a word of caution for emerging and developing markets: to be vigilant against fiscal imbalances, rising financing and commodity costs as advanced economies move out of fiscal consolidation.

The global economy “is turning the corner but recovery is too weak and slow,” said Christine Lagarde, the managing director of the IMF, as she estimated 3.6pc growth for the global economy in 2014 and 3.9pc in 2015, up from 3.1pc in 2013. In her view, strong actions are needed for a stronger, sustainable and more inclusive growth.

She said the IMF would now focus on policy issues related to shifting growth drivers, spillovers and spillbacks from monetary normalisation, and on macroeconomic and financial stability implications of global financial regulatory reform.

It would also work on prompt implementation of the long-delayed 2010 quota and governance reforms by January 2015 for the Fund’s continued legitimacy, financial strength and effectiveness.

“The environment faced by emerging economies has turned more challenging”, according to the IMF’s fiscal monitor.

In some economies, financial vulnerabilities and changes in market sentiment will likely compound the fiscal challenges. For example, economies with higher non-resident holdings may see sharper increases in interest rates, as liquidity conditions in advanced economies tighten.

Meanwhile, the World Bank group president Jim Yong Kim warned that income inequality could dampen the impact of growth on reducing poverty.

“To end extreme poverty, the vast numbers of the poorest — those earning less than $1.25 a day — will have to decrease by 50 million people each year until 2030. This means that one million people each week will have to lift themselves out of poverty for the next 16 years,” he said.

Nicolas Mombrial of Oxfam, however, was critical that even though multilaterals had admitted the dangers of ‘skyrocketing inequality,’ they were not showing any concrete signs of dealing with the problem.

“It is surprising that the IMF is not proposing a clear plan for dealing with inequality. There is no trade off between growth and inequality. There will be no inclusive growth if economic inequality remains out of control,” he said.

The IMF called upon emerging and developing countries to be watchful of their fiscal positions, and to move quickly on reforms to control wage and pension bills, debt levels and costs.

Although the average debt level of emerging market economies is relatively low, important pockets of vulnerability remain.

“A few high-deficit countries [Jordon, Morocco and Pakistan] strengthened their primary fiscal positions in 2013, largely by cutting expenditures,” said the Fund, and warned against across-the-board expenditure cuts, particularly those related to development and social sector support.

Fiscal vulnerabilities have built up at the sub-national level in several large emerging economies as well, notably in China, Brazil, Mexico and Pakistan.

The IMF’s recipe for wage and pension bills is quite relevant for Pakistan, which has been delaying overdue civil service reforms amid rising wage and pension bills over time.

“Public wage bill reforms should target structural changes that strengthen the link between pay and productivity, improve hiring processes and ultimately raise efficiency in the provision of public services,” said the IMF.

It added that these reforms should also be coordinated with reforms in other areas, especially in the labour intensive health and education sectors, to ensure that socio-economic objectives are aligned.

The IMF highlighted that further increases in the wage bill should be commensurate with the provision of services and growth of the fiscal space. It suggested increasing the retirement age as one solution for rising pension bills, in the view of improved life expectancy rates almost everywhere in the world.

A proposal for increasing retirement age has not been able to see implementation, even though many retiring influential bureaucrats are re-hired almost every year.

It was argued that an across-the-board reduction in expenditure may seem expedient, but should be avoided because it was neither efficient nor welfare-enhancing, and can affect the economy’s long-term growth potential, in addition to hurting low-income population groups.

“Fiscal adjustments are more durable when attained through reforms that reflect well-thought-out strategy choices that protect programmes with high marginal social benefit.”

Reforms for public sector wages and employment can generate substantial savings and bolster long-term growth, particularly where public sector wages are higher than those prevailing in the private sector — adjusted for differences in human capital — or the size of public employment is disproportionate to services provided to the economy.

At the same time, however, an important challenge should also be kept in mind while reforming the wage bill, that it should attract the necessary staff to ensure that public services are provided in an efficient manner.

“Increasing the link between pay increases and employee or team performance and periodically reassessing employment levels in line with the functions of the government should ensure retention of skills while improving efficiency,” the IMF argued.

It said emerging market economies with large debt and deficits like Pakistan, which are most vulnerable to market volatility, should start reining in their deficits now.

The writer is currently in Washington

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