The Major Economic Policy challenges and the way forward

While a number of risks and uncertainties remain, what stands out in the current economic environment is the alignment of the economic cycle among major economies, stability in financial market conditions and the absence of negative shocks such as commodity price dislocations.

As conditions for more widespread global economic stability solidify, the need to focus policy actions on economic crisis consequences and short-term macroeconomic stabilization has eased. Coupled with improving investment conditions, this creates greater scope to reorient policy towards longer-term issues, such as strengthening the environmental quality of economic growth, making it more inclusive, and tackling institutional deficiencies that hinder development.

the environmental quality of economic growth
the environmental quality of economic growth

Reorienting policy to address these challenges and maximizing co-benefits between development objectives can generate stronger investment, higher job creation and more sustainable medium-term economic growth. Current investment in areas such as education, expanding access to healthcare, building resilience to climate change, improving the quality of institutions, and building financial and digital inclusion, will support economic growth and job creation in the short-term. It will also accelerate progress towards social and environmental goals and raise the longer-term potential for sustainable growth.

Policymakers should use the current macroeconomic backdrop to focus on four concrete areas. First, the long-standing need for economic diversification in countries that remain heavily dependent on a few basic commodities cannot be overstated. The heavy economic costs related to recent commodity price realignments proves the point.

Stemming and redressing the rise in inequality is also crucial for ensuring balanced and sustainable growth going forward. This requires a combination of short-term policies to raise living standards among the most deprived, and longer-term policies that address inequalities in opportunity, such as investment in early childhood development, broadening access to healthcare and education, and investment in rural roads and electrification. A third crucial area is realigning the global financial architecture with the 2030 Agenda for Sustainable Development and the Addis Ababa Action Agenda. This requires creating a new framework for sustainable finance and shifting gradually from the current focus on short-term profit towards a target of long-term value creation, in a socially and environmentally responsible manner.

Macroprudential policies, well coordinated with monetary, fiscal and foreign exchange policies, can support these goals by promoting financial stability and containing the build-up of financial risks.

Finally, weak governance and political instability remain fundamental obstacles to achieving the 2030 Agenda for Sustainable Development. At the same time, stronger global economic growth can do little on its own to help those afflicted by conflict situations, where there is little scope for meaningful progress towards sustainable development. Policy priorities must include redoubling efforts to support conflict prevention and resolution and tackling the institutional deficiencies underpinning many of these obstacles.

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