'Global economic growth to hit 4% next year'

International Monetary Fund (IMF), Managing Director, Christine Lagarde delivered a speech on 'Innovtion, technology and the 21st Century global economy' at the Stanford University, America last week.

Excerpts of her speech:

"As I am just returning from Sydney's G-20 meeting, I would like to share with you our views on the global economic situation. "While unemployment is too high, public and private debt are too high, and global growth is too low relative to potential, we certainly see some economic momentum in the works - global economic growth of 33/4 percent this year, rising to 4 percent next year.

"This latest pickup of growth is largely due to positive developments among the advanced countries - certainly in the US, but also in Japan and the Euro area.

"Ironically, the emerging markets that kept the global economy afloat during the crisis (together with the developing economies, accounting for three-quarters of global economic growth in recent years) are weakening, with their economic cycles turning and growth slowing. For some of them, a rising tide came with more choppy waves - strong growth opened up vulnerabilities that came into focus as growth began to slow.

"At the same time, because the economic situation was improving in the US, the US Federal Reserve started the process of dialing back its unconventional monetary policy. This mix created the conditions for some capital to flow out of a number of emerging markets, thus generating market volatility and currency variations.

Reforms

"In these circumstances, we on our part have cautioned (i) that monetary policy should remain accommodative in many advanced economies; (ii) that countries should continue to bring their houses in order by taking appropriate policy action, adopting credible policy frameworks, and implementing structural reforms; and (iii) that communication among policy makers should improve.

"As I just returned from a meeting of the G20 in Sydney, let me tell you where we ended up. As you know, the G20 - the group of the 20 largest economies in the world - has been instrumental in fighting the global financial crisis, and it remains a key forum for discussing global economic and financial issues.

"For example, the G20 members have agreed to complete core financial reforms set out in response to the crisis by the end of 2014, making the financial sector safer and less likely to cause crises.

"G20 governments and central banks have also agreed to clearly and consistently communicate their policy actions, and to continue cooperating on monitoring spillovers to other countries.

Economic growth

"The discussions also rightly focused on a country-specific and a collective effort to restore medium-term economic growth that, if fully implemented, could raise the level of GDP by an extra two percent over the next five years, which would create significant additional jobs.

"So I left Australia with a sense that, despite many risks that could undermine the recovery, policy makers are broadly on the right track. And yet, we also need to discuss what kind of growth this 'right track' leads to. Will it be solid, sustainable, and balanced - -or will it be fragile, erratic, and unbalanced?

"To answer this question, we need to look at the patterns of economic activity in the years ahead, and especially the role of technology and innovation in driving us forward.

"As Isaac Asimov - a master of science fiction literature - once said, "No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.

"This is what I want to address today, in the form of three questions: First, what does this new technological era mean for the economy, especially for jobs? Second, how does it relate to one of the scourges of our age - rising inequality? Third, what about some solutions, including education and what I refer to as the 'new multilateralism'?

"Let me begin with the interlinkages between technology and the economy. Innovation is pushing ahead at warp speed. You know this. You live it. You even drive it. We are certainly living through one of the most exciting periods in human history. We can feel the air hum with virtual activity and reality transform before our very eyes. The pace of change is so fast that even the technology of five years ago seems prehistoric.

"Those of you who are students probably do not even remember a time when phones were not smart, when cameras contained film, when texts meant school books, and when wireless referred to an old-fashioned radio.

"This advance is centered on the rise of a global digital network - the 'hyperconnected world' - combined with the rise of genuine machine intelligence. If the previous revolutions were about using machines for brawn, this is about using machines for brains. And since technology is powering a giant leap in global interconnectivity, these are 'connected' brains.

Super computers

"Today's smart phones are more powerful than yesterday's supercomputers. We see cars driving themselves, printers making complicated three-dimensional parts, and robots doing the most complex tasks.

"'Science fiction' is rapidly becoming 'science fact'. Indeed, we may just be getting started when it comes to the power and reach of machine intelligence.

"What does this all mean for our lives and livelihoods, for our common economic future? It is easy enough to conjure up a bright future of dramatically higher living standards, as routine tasks are outsourced to uncomplaining machines. Indeed, as early as 1930, John Maynard Keynes was thinking about a future of leisure and abundance centered on a fifteen-hour work week.

"Yet it is also all-too-easy to imagine a future that is more grim, more in line with the dystopian picture favoured by so many science fiction writers.

"Certainly, we can see some worrying trends. For a start, the effects of new machine technology are not showing up in productivity statistics - at least not yet - and productivity is by far the most important driver of long-term economic growth.

Matter of time

"Some say that productivity from this kind of advanced technology is devilishly hard to measure. Others say that it is merely a matter of time before it shows up in the data. But we certainly need to keep an eye on this.

"One of the biggest worries, however, is how this technological innovation affects jobs. Put simply: will machines leave workers behind?

"Despite his optimistic vision, Keynes worried about the transitional problem of what he called 'technological unemployment' - what happens when we economise on labour faster than we can find new uses for labour.

"This is always a risk during times of rapid change. In the past, it was agricultural workers and then industrial workers in jeopardy. Today, even seasoned professionals can find themselves cast adrift on an unfamiliar ocean.

"In terms of job creation, this means that we might need to sprint faster in the years ahead - maybe a lot faster. But this will be even harder to do, because we have much more ground make up.

"Think about it. Had the crisis not occurred, there might have been 62 million more jobs in the world today, according to the International Labor Organization.

'Lost' generation

As it is, there are over 200 million people looking for work across the globe. To add to our worries: 75 million of these are young people, eager to take that first firm foothold in the ladder of success. We cannot allow them to become a 'lost' generation.

"So clearly, jobs must be a pre-eminent priority in the years ahead. Can it provide decent livelihoods for all people?

"This feeds into a broader concern. Technological advance creates a small cohort of big winners, leaving everybody else behind. Which brings me to my second topic today - the problem of rising inequality. Income inequality is on the rise across the world - starkly so.

"According to Oxfam, almost half the world's wealth is owned by one percent of the population and, stunningly, the bottom half of the world's population owns the same as the richest 85 people in the world. Since 1980, the richest one percent increased their share of income in 24 out of 26 countries for which we have data.

"Here in the US, the share of income taken home by the top one percent more than doubled since the 1980s, returning to where it was on the eve of the Great Depression. Since 2009, the richest one percent captured 95 percent of all income gains, while the bottom 90 percent got poorer.

"While this is happening, the International Labour Organization tells us that labour's share of income has fallen over the past two decades in 26 out of 30 advanced economies - even though labour productivity has risen. What is causing such a convulsion in the distribution of income?

"There is no single factor here, although it seems clear that technology is one of the major factors - it can create huge rewards for the extraordinary visionaries at the top, and huge anxieties for the ordinary workers at the bottom.