The Unassuming Economist

There are conflicting claims about whether emissions growth and GDP growth have decoupled. My presentation today shows that some of this debate is due to a failure to distinguish cycles from trends: there is an Environmental Okun’s Law (a cyclical relationship between emissions and GDP) which often obscures the Environmental Kuznets Curve (the trend relationship between emissions and GDP).

My ongoing work casts relationships between emissions and economic growth in much simpler terms than is typically done in the climate change literature. My co-authors and I use the trend and cycle decomposition that is familiar to most economists, particularly macroeconomists. We then show that the cyclical relationship between emissions and real GDP—akin to an Okun’s Law, in the terminology of macroeconomists—obscures the trend relationship—the Kuznets Curve that is the focus of many papers in the climate change literature. Once the cyclical relationship is stripped away, the trends do show some evidence of decoupling in the richer nations, particularly in Europe.

We then apply the framework to take into account the effects of international trade. That is, we distinguish between production-based and consumption-based emissions. This makes a big difference to the results. Specifically, the evidence for decoupling among the top emitting countries gets much weaker, including for many countries in Europe.

In recent years, the IMF has put on its plate several issues that appear to go beyond its ‘bread and butter’ focus on fiscal and monetary policies. These issues include: employment & migration; gender; inequality; corruption; financial inclusion; climate change. Why has the institution done so? The answer is simple: they have become critical to the IMF’s mission. These issues directly affect economic performance and stability in many countries, and thus fall under the IMF’s mandate.

Is there a unifying framework for all these new issues? There is and it can be summarized in two words: Inclusive Growth. Both words are important. We do want growth. Understanding the sources of productivity and long-run growth, and which structural policies will deliver them, thus remains an important part of the IMF’s agenda. So when we talk about inclusive growth, we are not advocating as role models either the former Soviet Union or present day North Korea—those are examples of ‘inclusive misery,’ not inclusive growth.

We want growth but we also want to make sure:

•   that people have jobs – this is the basis for people to feel included in society and to have a sense of dignity. (IMF Management set up a “Jobs & Growth” working group to emphasize the importance of this work.)
•   that women and men have equal opportunities to participate in the economy—hence our focus on gender;
•   that the poor and the middle class share in the prosperity of a country—hence the work on inequality and shared prosperity;
•   that, as happens for instance when countries discover natural resources, wealth is not captured by a few—this is why we worry about corruption and governance
•   that there is financial inclusion—which makes a difference in investment, food security and health outcomes;
•   that growth is shared just not among this generation but with future generations— hence our work on building resilience to climate change and natural disasters.

In short, a common thread through all our initiatives is that they seek to promote inclusion. What we are after is strong growth but one that is broadly shared, where major segments of society feel they have had an opportunity to make a better life for themselves.

James Mackintosh in the Wall Street Journal says “economics is hopeless at predicting big turning points in the economy, precisely the moments you most want advance warning. Studies by Prakash Loungani, chief of development economics in the International Monetary Fund’s research department, and collaborators have shown the failure to forecast recessions. Not one of the 62 recessions in 2008 and 2009 worldwide was predicted by the average collected by Consensus Economics by September of the year before. For the U.S., the economy’s only ever been forecast to shrink after a recession has already begun. “I’m a bit puzzled as to why so much attention is given to the point estimates for forecasts,” Mr Loungani says.”

“Investors might be tempted to consign economics to the joke book and get on with their lives. That would be a mistake. Economics can be useful, but only when used correctly to assess different scenarios. Specific forecasts for the economy must come with probabilities and clear assumptions–and the assumptions need to be critically examined by users of the forecasts, not hidden in the models or the appendix.”

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