As 2014 draws to a close, policymakers around the world are faced with three fundamental choices: to strive for economic growth or accept stagnation; to work to improve stability or risk succumbing to fragility; and to cooperate or go it alone. The stakes could not be higher; 2015 promises to be a make-or-break year for the global community.
For starters, growth and jobs are needed to support prosperity and social cohesion in the wake of the Great Recession that began in 2008. The recovery remains weak and uneven. Global growth is projected at just 3.3 per cent in 2014 and 3.8 per cent in 2015. Some important economies are still fighting deflation. More than 200 million people are unemployed. The global economy risks getting stuck in a "new mediocre" - a prolonged period of slow growth and feeble job creation.
To break free from stagnation, we need renewed policy momentum. If the measures agreed by the leaders assembled at the G-20 in November are implemented, they will lift world gross domestic product by more than 2 per cent by 2018 - the equivalent of adding US$2 trillion (S$2.65 trillion) in global income. Furthermore, by 2025, if the laudable goal of closing the gender gap by 25 per cent is achieved, 100 million women could have jobs that they didn't have before. Global leaders have asked the International Monetary Fund (IMF) to monitor the implementation of these growth strategies. We will do so, country by country, reform by reform.
Besides structural reforms, building new momentum will require pulling all possible levers that can support global demand. Accommodative monetary policy will remain essential for as long as growth remains anaemic - though we must pay careful attention to potential spillovers. Fiscal policy should be focused on promoting growth and creating jobs, while maintaining medium-term credibility. And labour market policies should continue to emphasise training, affordable childcare, and workplace flexibility.
As we ponder the second choice, between stability and fragility, we must consider how we can make our increasingly interconnected world a safer place. National economies are so interconnected that shifts in market sentiment tend to cascade globally. It is therefore critical that we complete the agenda on financial sector reform.
To be sure, there has been progress, especially on banking regulation and on addressing too- big-to-fail financial institutions. But countries must now implement the reforms and improve the quality of supervision. We also need better rules for non-banks, stricter monitoring of shadow banks, and improved safeguards and more transparency in the derivatives markets. Progress on closing data gaps in the financial sector is urgently needed as well, so that regulators can properly assess risks to financial stability.
Most important, the culture of the financial sector needs to change. The principal purpose of finance is to provide services to the other parts of the economy, which it cannot do unless it enjoys the confidence of those who depend on those services - that is, all of us. Restoring trust should start with an all-out effort to promote and enforce ethical behaviour throughout the industry.
The third choice, whether to cooperate or go it alone, is the most critical. No economy is an island; indeed, the global economy is more integrated than ever before. Fifty years ago, emerging markets and developing economies accounted for about a quarter of world GDP. Today, they generate half of global income, a share that will continue to rise.
But sovereign states are no longer the only actors on the scene. A global network of new stakeholders has emerged, including NGOs and citizen activists. This new reality demands a new response. We will need to update, adapt, and deepen our methods of working together.
This can be done by building on effective institutions of cooperation that already exist. Institutions like the IMF should be made even more representative in the light of the dynamic shifts taking place in the global economy. The new networks of influence should be embraced and given space in the 21st-century architecture of global governance. This is what I have called the "new multilateralism". I believe it is the only way to address the challenges that the global community faces.
The year 2014 was a tough one. The recovery was slow, a series of dangerous geopolitical risks emerged, and the world was confronted with a devastating Ebola outbreak. Next year may be another tough one, but it could also be a good one - a truly multilateral year.
New momentum on global trade could help unlock investment worldwide, and I am hopeful about the new Sustainable Development Goals (which will succeed the Millennium Development Goals in 2015), and about the prospects for a comprehensive climate change agreement at the end of next year.
Against this backdrop, the adoption of the IMF reforms by the United States Congress would send a long-overdue signal to rapidly growing emerging economies that the world counts on their voices, and their resources, to find global solutions to global problems.
Growth, trade, development, and climate change: 2015 will be a rendezvous of important multilateral initiatives. We cannot afford to see them fail. Let us make the right choices.
Christine Lagarde is managing director of the International Monetary Fund.