Page 13 - STRATEGY Magazine
P. 13

The so-called “butterfly ef- fect,” which figuratively posits that the fluttering of a butterfly’s wings can
impact a tornado several weeks lat- er, has been recognized since at least the early 19th century. But while its real-world applications in weather, chaos theory, and quantum mechanics are hotly debated, the metaphor holds true for global economics. Countless research studies have shown that the (often internal) actions of one nation can have a significant effect on other nations. In other words, countries’ economies are not independent of one another.
SPILLING OVER
When one state’s economic decision or undertaking influences the econom- ic well-being of another state, this is known as an economic spillover. These spillovers, which most often occur through channels such as trade, fi- nancial linkage, policy coordination, or policy shocks, can have positive or negative effects.
As a hypothetical example, imagine that Brazil chooses to drastically re- duce tariffs on all imports from South American countries. This would help increase the exports of neighboring nations, meaning that both Colom- bia and Peru would be able to ship much-desired oil and petroleum prod- ucts to Brazil at lower costs. Converse- ly, this same initiative would likely decrease exports from Mexico, whose oil would suddenly become more ex- pensive for companies in Brazil (its fifth-largest trading partner). Bra- zil’s tariff reduction could even have both positive and negative effects on a country like the United States, where oil exports to Brazil would become costlier, but other U.S. goods might be more in demand if the overall econo- my in South America were to expand as a result of the tariff cut.
THREE PRONGS
Obviously, the best outcome for world economies as a whole is to maximize the positive spillover effects while minimizing the negative ones. To that
GLOBAL ECONOMY BY GDP
  SOURCES: World Development Indicators Database, World Bank, 1 February 2017 | Courtesy of: visualcapitalist.com
end, the International Monetary Fund (IMF) and World Bank have been fo- cusing on this goal in their recent biannual meetings. Speaking before the April 2017 meeting, IMF Manag- ing Director Christine Lagarde noted increases in expectations for global economic growth, but cautioned, “We need to make sure that this momen- tum is sustained and that we continue to up that growth and more.”
Lagarde outlined what she called a three-pronged approach that nations should take in order to maintain and bolster the positive economic momen- tum: using their fiscal, monetary, and structural economic policies. Lagarde cited such goals as reinvigorating productivity through innovation and trade, continuing to focus on fiscal and structural reforms, and sculpting economic growth so that it is stronger, more inclusive, and more cooperative.
TENUOUS ECONOMIC GROWTH
To be sure, there is a modest founda- tion of growth on which to build. Ac- cording to the IMF, total world output grew in 2016 by 3.1 percent and is forecast to increase by 3.5 percent this year. The United States is predicted to see a 2.3 percent increase in output in
European nations have passed laws requiring banks to boost domestic investment. As a result of this policy, emerging markets may miss out on
$1 trillion in investments over the next two decades.
 strategybg.com 11



















































































   11   12   13   14   15