Central Banks, Politics, And Growth

January 2019 | VOL. 33  NO. 1

If the forecasters are right—that 2019 will see a global slowdown, with quantitative easing fading fast into memory—then monetary policy is even more important than before. So much so that in many countries the independence of central banks is lately being openly questioned by presidents, prime ministers and parliaments. The tension in countries where the central bank is independent, such as the US or India, is not new. But it is rising; because elected officials fear that the slowdown will be worsened if the cost of money keeps growing. Low interest rates are considered by many the best stimulus for the economy, at least in the short term, and politicians want to make sure that slowing growth—or worse, a recession—does not coincide with their next election campaign.

Central bankers, however, look beyond the electoral cycle.  They do not merely react to market turmoil and volatility, but try to prevent a recession even when the sun is shining. In the US, the Federal Reserve kept to its plans and raised interest rates last month, notwithstanding criticism from President Trump, but then pulled back on both its GDP estimates and planned rate hikes for 2019.

This month’s cover story is our contribution on the debate about income inequality. Its effect on politics both in advanced and developing economies—from Brexit to Bolsonaro to street protests—are not entirely new. Our analysis goes a little further to consider a possible correlation between inequality and growth: When the former increases, the latter slows, and vice versa. The expected economic slowdown makes this discussion very timely. The debate is not just political in its nature, but economic as well. Not just because taxpayers are consumers, and lower income translates usually into less consumption, but because growth is increasingly fueled by jobs that require training and higher education often not available to all.

Andrea Fiano | Editor
afiano@gfmag.com