10th Annual Stavros Niarchos Foundation Lecture (Transcript), “Global Recovery and Global Cooperation: The Challenges Ahead”, Peterson Institute for International Economics, John Lipsky - Acting Managing Director, International Monetary Fund

May 19, 2011

Peterson Institute for International Economics
John Lipsky - Acting Managing Director, International Monetary Fund
Washington, D.C.
May 19, 2011

First of all, it’s a very great honor to be able to participate in the Niarchos Lecture Series. It’s very humbling to hear the very illustrious names that have gone before me, and of course, it goes without saying that I deeply regret the circumstances that brought me here today instead of Dominique Strauss-Kahn. However, first, as Fred Bergsten has said, the Fund is a deep, talented, and resilient institution. Dominique Strauss-Kahn in his years as managing director provided tremendous leadership, but it was leading an extremely competent and dedicated team that I now have the honor to lead until a new managing director is chosen. And I am completely confident that the institution will be able to fulfill all its obligations, responsibilities, and roles fully in such time as transpires until a new managing director is named. Parenthetically, I’m the third first managing director of the IMF. All three of us have spent some time as acting managing director. This seems to come with the territory.

But let me add one other note while I’m here. Also, to honor Fred and the Peterson Institute and the seminal work that Fred and his colleagues have done to keep international economic policy issues front and center in this capital and this country and around the world. It’s certainly leading one of the leading institutions anywhere. It’s wonderful that it’s here and I’m honored for this reason as well to be here.

Now, I have a presentation on global recovery and global cooperation. I hope you’re able to see the slides. If not, there’s going to be a bit of a problem but hopefully you’ll be -- this will still work.

I’m going to be talking about global recovery and global cooperation. As Fred said, this has been a particular area of concern of mine at the IMF and it strikes me that even among this distinguished and informed audience it’s probably worthwhile making sure you understand the details of what is going on in the effort of policy cooperation in an effort to boost the global economic recovery. That’s going to be the topic of my prepared remarks this evening. Subsequently, we’re going to have question and answer and I simply want to signal that I’ll be very happy to address any issue that you wish me to at that time.

So let’s start. Well, I think in this institution it’s obvious, and perhaps everybody knows, the world has become more interconnected and more complex. It sounds like a platitude but let’s look at some maps and just get an idea of how these developments of interconnection also add complexity and also led to where we are today. Let’s start with a geographic map of the world. It needs no introduction.

Now let’s transform it and see what happens if we redraw it not on the basis of geography but of GDP. Take a look. It may be just a little bit surprising. Based on market values we see the U.S. very large. We see Europe very large. We see Japan very large. And some of the fastest growing economies are still not so large. They’re very important in terms of growth, but this is a snapshot of global GDP.

Now let’s transform this into trade. Different. Europe, and especially parts of Europe, very large. Japan, very large. Frankly, places like Australia and Canada that have a fairly large place in our mindset despite rather small populations, relatively large here. Other places, much smaller. Much smaller. A very different picture than if we looked at GDP.

Now, let’s look at finance. And yet another reality. The U.S., very large. Europe, very large. Asia, well, quite small actually. Latin America, quite small actually. Africa, hardly there actually. It’s a different view of the world. So imagine how the interrelations of these different layers add complexity and is one of the reasons that led to policy failures and eventually policy success.

What do I mean by that? What were the failures? The failures that created the crisis of 2008 and 2009. We could characterize them in many ways and I’m sure they’ve been discussed here endlessly in this very room. But certainly they include failures of command and control systems in the private sector, as well as in the public sector. And one way to characterize the failures was the failures to grasp macrofinancial linkages. The financial interconnections that were not seen clearly to begin with—and their relations to economic activity that were not seen clearly—produced a thunderclap in the global economy in 2008 and produced a deep recession. That was the policy failure. And by policy here as I said, emphasize I meant broadly. Public and private.

What about the success? Well the successes were twofold. The success was the elemental development of increasing globalization and increasing interconnectedness, which in fact has produced, over time, the strongest period of global growth in world history. In the past decade, it delivered growth that produced dramatic reductions in poverty and that continue to produce dramatic improvements in the well-being of hundreds of millions, if not billions, of people. And drawing on the lessons of the Commission on Growth and Development led by Michael Spence that showed that all cases of an escape from poverty, in developing countries and emerging economies, involved a period of strong and sustained growth in every case. And in every case, every period of strong and sustained growth was a result of economies that opened to the world at large. There’s no counterexample.

That’s one broad success. But the other more specific success of the crisis was in contrast to the Great Depression in which countries acted in their own self-interest. There was a coming together of this globalized world to act in unison to resist the downturn. And as a result, the downturn lasted only three quarters. From the third quarter of 2008, to the second quarter of 2009, and by the second quarter of 2009 global growth was positive again. Quite an astonishing result considering the challenges.

So we got out of the deep hole we started to fall into and now, however, we face a set of new policy challenges of how to reestablish strong, sustained, and balanced growth. So let’s take a look at the specific nature of the challenges.

Here’s a very simple graph. It shows you GDP growth rates 2005 through 2012 using the IMF’s World Economic Outlook Forecast. We’re all familiar with this. Green on top, the emerging world. Blue on the bottom, the advanced economies. Red, average global growth. We’re familiar with that but let’s take a less familiar look and let’s say what if we just got rid of that ugly part in the middle and if we could just forget about 2008 and 2009. That’s what the record would look like and you’d say pretty good. That looks pretty good. What’s the problem?

The problem is that’s what actually happened. So we fell into this hole. But now we’re growing back at the rate we were before. But in the advanced economies, don’t we have to grow faster to make up for the hole that we fell into? But it’s not happening.

What’s the result? We all know. Unemployment in the advanced economies. Higher than we’ve seen. Higher than we’d like. And not just overall unemployment rates. There’s an aspect that perhaps doesn’t get enough attention and that is youth unemployment. In a stagnant economy, new entrants to the job market are finding very limited success. We’ve all heard and paid attention to the notion that high rates of youth unemployment in the MENA region led to great social tension. Well, it’s not so dramatic here in a way in absolute terms but in relative terms it’s not something that we would want to sustain and try to live with.

But that’s not all. Another challenge that we face is one, partly a creation of the crisis but partly a creation of a combination of demographics and the kind of promises that our governments have made to our citizens in advanced economies. Here is a portrayal of the amount of fiscal adjustment that will need to be made under the presumption that over the next 20 years adjustment is made to stabilize and return debt levels to where they were pre-crisis. The simple point is that virtually every advanced economy faces a need for substantial adjustment in fiscal policies. And I’m sure if Pete Peterson had arrived he would be smiling and saying what took everyone so long to figure this out?

But the truth is this has been the kind of problem that we’re able to say yes, we know it’s coming some day. The crisis led to an increase in debt-to-GDP ratios of 25 to 30 percentage points on average in the advanced economies over the last three years, so that problem that was out in the distance is now staring us right in the face.

That’s the advanced economies. The emerging economies we saw are growing much more rapidly. So rapidly, in fact, that even though we all agree, at least we all think we agree that these economies are enjoying much stronger rates of potential growth than in the past, nonetheless, by our calculations many of the key emerging economies are out of room in terms of excess capacity. On the right we can see by our estimates some are even operating above potential.

Those little buttons show you where policy interest rates are in each one of those economies. In virtually every single case, policy rates are negative in real terms. How did they get there? Well, they were put there in 2008-2009 to resist the crisis. The crisis is now over, especially for the emerging economies, but monetary policies remain expansionary.

Not surprisingly, that has produced an effect on credit growth. And you can see on the right that virtually everywhere—except in China, where there’s been a slowdown from an extremely rapid pace—credit growth rates remain elevated and in many cases are accelerating. So in that case you’re certainly not surprised to find that one of the fantastic accomplishments of the emerging economies is now potentially under pressure.

This shows you the average CPI, inflation in the emerging economies from 1995 to the present. A spectacular result. Because if we took this chart back to previous years, previous decades, it wouldn’t necessarily be all the way up at 50 percent but it would be close enough for government work. And the decline to the five to seven percent range is not only one of the dramatic policy achievements in the emerging economies but is one of the reasons why investment in emerging economies is beginning to seem like such an attractive proposition.

I could show you government debt-to-GDP ratios and it would show you a similar story. Deficits in the emerging economies lower than in the advanced economies. Debt-to-GDP ratios in the emerging economies lower than in the advanced economies. No evidence of the types of demographic pressures on fiscal accounts that are pressuring the advanced economies.

But -- and here’s the but -- that’s a terrific record but right now, headline inflation in the emerging economies is rising. If we put a little magnifying glass there you’ll see that after a long period of downturn a brief blip in 2007-2008 in response to the previous run-up in commodity and energy prices, back down, now we’re headed up again. What’s the difference between 2007-2008? It’s just as I showed you already. These economies are close to or out of excess capacity. Their fiscal and monetary policies are expansionary. Credit growth is very rapid and inflation is rising. So it’s not just commodity and energy price inflation.

Let’s take a look at what’s happened to inflation expectations here for a chance for the BRIC economies -- Brazil, Russia, India, China. Here is where inflation expectations were six months ago. And we can say, well, okay. Kind of sort of consistent with recent averages. Here are those same figures today. So we see that expectations are beginning to deteriorate.

So what’s called for? We escaped the downturn. We forged new means of cooperation. We’ve established growth but we face substantial challenges. In both advanced and emerging economies. Clearly it’s a time for new policy cooperation as it’s clear that no single economy is going to be able to restore global balance and growth alone.

So in the balance of my discussion today I’d like to take a look at what is being done specifically in some detail at the IMF and then tell you a little bit about what’s happening in the G-20 and try to put it into a context, a logical context that I hope you will find useful. And then we’ll come back at the end to see how this all might fit together.

So first, at the IMF we’ve made changes in four key areas: (i) in surveillance, which is of course the unique responsibility of the IMF, surveillance over policies of our member countries; (ii) the financing instruments that we have available to support our members’ economies; (iii) the resources that we have available in support of those instruments; and (iv) not trivially, in a world of changing relative economic importance, our governance structures.

So let’s look first at surveillance. What’s happened? A whole series of innovations. I’ll go through them quickly. You may know about them but maybe not. The early warning exercise. That you don’t know too much about other than having heard the name. We faced a problem at the Fund. You’re familiar with our World Economic Outlook, our Global Financial Stability Report, and now hopefully our Fiscal Monitor. They tell you what we think our base case outlook is. And principal risks, risks that are relevant enough that you would take them into account in setting policy today. We didn’t have any systematic way to communicate our sense of tail risks, things that could occur and if they occur would force or would justify a substantial policy reaction. The question is what were those risks? How would you recognize them if they were emerging? What would you do about them if they were? That’s what the early warning exercise is and it’s one we present to the International Monetary and Financial Committee, the governors of the IMF who meet twice a year. So that’s a new means of communicating risks.

Second, FSAPs (Financial Sector Assessment Programs). They used to be voluntary; now they’re mandatory for all of our members with systemically important financial systems. Over the past year we’ve conducted FSAPs for the first time here in the United States and in China. The former managing director, Rodrigo de Rato mused one day that maybe if the FSAP had occurred earlier, maybe things could have been better. But in any case a new method of surveillance.

And now we’re in the midst of our latest surveillance innovation spillover analysis. What is this? You might say, you mean it just occurred to the IMF staff that there might be spillovers between economies? No, it’s not that. Here’s what we’re doing. We’re taking the five systemically important economies in which we conduct annual consultation missions -- the U.S., Japan, the U.K., China, and the Euro area. We are going to each of these and asking their authorities about their views of how they’re affected by the policies of each of the others. We’re going to the economies surrounding them, their partner economies, and asking the same question. We’re putting this together in a coherent spillover report and when we then conduct our annual consultation visits to the five systemic economies, we will be able to say we’ve been talking to your partners and here’s what they think about what you’re doing and how it’s affecting them.

It’s a new element in the consultation process. You will find when we publish the consultation report, they will also contain the spillover reports. Let’s see what insight this brings into the discussions about individual countries’ economic policies.

We’re doing work on macrofinancial linkages. Remember I said failure to recognize the specifics of macrofinancial linkages was one of the contributors to the crisis.

And finally, we’re paying more attention to the quality of growth as we ask ourselves how the distribution of income and unemployment rates may affect macroeconomic stability – which is our traditional focus. We don’t have answers. But we certainly have to be aware of the potential inner linkages.

Now let’s turn to financing instruments. What have we done? Here I can be brief because I suspect you know about them. First, in previous years our stabilization programs had been criticized for being too complex, too many conditions, trying to do too much. We streamlined our programs to make sure that they focus on the core issues relevant to the goals of reestablishing growth and stability.

But perhaps more relevant in this context even is the recognition that the financing instruments available to the IMF in the past had been designed in a different era, in an era of bank financing, in an era in which the focus was on crisis resolution. The crisis has happened. How do we cure it?

Two things had changed. One, the growth of global capital markets and the increasing dominance of cross-border capital flows in the context or in the form of sale and purchase of marketable securities, i.e., a capital markets world, meant that financial crises moved at lightning pace. It meant that if you wanted to do crisis prevention you needed insurance-like instruments that would avoid a sense of asymmetrical risks in which, for example, an institutional investor holding a portfolio of securities of a given country would not think if I wait it out I may get my coupon; but if I’ve got it wrong I’ll lose my principal. When those risks appear, investors tend not to wait around to see the result.

How do you prevent that? You need insurance-like facilities that provide liquidity in large scale when needed so that investors have confidence they won’t face those kinds of asymmetric risks. That’s the IMF’s Flexible Credit Line and the Precautionary Credit Line. They’ve been now used by several countries. They’ve never been drawn on. So far, so good. We’ve also enhanced cooperation with regional financing arrangements to provide new kinds of financing instruments. Specifically, you may not think of it that way but a year ago you would have wondered what is the role of the IMF with regard to Euro area countries? That’s been defined. The Euro area has created new financing arrangements. The EFSM, that pre-existed but now applies to Euro area countries, and the EFSF, the financing facility that issues debt to support stabilization programs. We partnered with them in a very symbiotic way.

And we’re looking forward to deepening our cooperation with the Chang Mai Initiative and its multilateral form. So we don’t view these regional arrangements as competitors; we view them as potential partners.

And finally, we’re thinking about the global safety net. Is it really adequate? For one, as you know, during the crisis, short-term liquidity provision required a series of ad hoc, one-off actions by individual central banks. We have to ask whether perhaps there ought to be a multilateral focus with some kind of well understood rules of the game and availability, perhaps working in partnership with central banks. Perhaps a facility that would be created or activated in a crisis situation, perhaps not. So here, again, we’ve made some important changes.

Next, resources. I can be brief. You all know there was an agreement to double our quotas to about $767 billion. There’s also been an expansion of the New Arrangements to Borrow. That means we can borrow more on relatively short notice from our members if we need more. Probably you may have noticed that we were allowed to sell some of our gold to create a trust fund. In the long term, the interest from the trust fund will help to finance the operations of the Fund. But for now, we don’t need this income, and we are able to devote those resources to providing additional subsidized support for our low income country members.

In total, the IMF’s commitment of funds since the crisis has been about $300 billion. Here you can see some details on our lending over time (on the horizontal axis), while on the vertical axis you see the decline in GDP that has occurred in crisis countries that have received financial support from the IMF. The size of these balloons represents the amount of financing, as a percentage of the country’s IMF quota. The point is that as we’ve gone forward the programs have become larger relative to overall quota. Those golden colored balloons show the use of our new, innovative, Flexible Credit Line. The point here is that as the crisis has moved, we’ve figured out that we need to arrive with substantial resources.

Now, to governance. Here again I suspect you’re all aware that last year our members agreed to shift about six percent of quota share to dynamic emerging market and developing economies and from overrepresented to underrepresented members.

So when the 2010 governance reforms are approved, the quota and voice reforms are approved, the top 10 shareholders of the IMF will be the U.S., Japan, the four largest European economies, and the BRICs. And I would ask: can you think of a replacement of any one of those countries that would add to the legitimacy and representativeness of our largest shareholders? I don’t think it’s obvious. And that means that with this reform we should have established our global legitimacy beyond question.

In the process we protected the quota and voting shares of low-income countries and nontrivially, European members agreed voluntarily to give up two chairs on our 24-member Executive Board, when the 2010 reform becomes operational. The goal for this is by 2012, next year. Nontrivial.

And finally, there is the reform of the International Monetary and Finance Committee, to increase direct ministerial engagement in the decisions of the Fund. And as you may know, the IMFC chairmanship was recently passed to Finance Minister Tharman of Singapore, an extremely able and widely respected leader who I’m sure is going to be able to increase the direct involvement of the IMFC in decision-making at the Fund.

That’s the Fund. Now, let’s talk about the policy cooperation through the G-20. You’re familiar with some of the changes, but you won’t have seen it in the way I’m going to present it. I’m going to use as the presentational device the five G-20 leaders’ summits that have taken place so far, the first, of course, here in Washington in November 2008.

That was the first time the G-20 leaders had ever met. I’ll never forget the opening night reception in the White House. There were 24 or 25 heads of government or heads of state. It occurred to me that probably wasn’t very usual. I asked the staff at the White House when was the last time so many heads of state had been in the White House at the same time -- and they said as far as they could tell, never. And yet there’s a tendency to take this for granted. But it shouldn’t be taken for granted. It’s something novel.

What was agreed in Washington? To create this process, an agreement that they needed a broader policy response, closer macroeconomic cooperation. They needed to strengthen financial markets and regulatory regimes and agreed an action plan and agreed to meet in London in April.

By that time, in April -- although we didn’t know it at the time -- the global economy was starting to level off and progress, but as I’m sure you all remember it seemed a very frightening time in which there were concerns of the prospect of a really serious and deep and extended downturn. What was decided in London? That a global crisis required a global solution. A cooperative solution, not an individual solution. And that we would conduct economic policies cooperatively. The result was the famous agreement on providing a trillion dollars worth of additional support and resources for the IMF. The endorsement for our new lending instruments, support for other international financial institutions, and an agreement on massive policy stimulus, both from the budgetary side and from the monetary side.

Did it have an effect? It certainly did. Can we look back and think that that was unprecedented and successful policy cooperation? I think there’s a reasonable case that the answer is yes. And then we look forward to Pittsburgh in September of 2009. What was done in Pittsburgh? By that time it was clear the global economy was growing. We averted the worst. There was recognition that cooperation had been effective both in direct impact but in perception as well. The challenge in Pittsburgh was how do we sustain that sense of cooperation going forward into the recovery phase? First, leaders agreed that the G-20 would be the premier forum for international cooperation. Also, very importantly, they agreed on something called the Framework for Strong Sustainable and Balanced Growth that was to provide the blueprint for policy cooperation in the recovery.

Then we move forward to Toronto. What happened between Pittsburgh and Toronto? The G-20 did two important things. First, they completed the first stage of their Mutual Assessment Process (or MAP), namely for the first time each of the G-20 members shared their medium-term, three- to five-year economic forecast and laid out the policy program that underpinned those forecasts and then turned to the IMF and asked us to see if we thought those forecasts were consistent and if credible. And we offered our suggestions. And the key question was, if you will, could we do better if we acted cooperatively? Because all of these plans were laid out individually without consideration explicitly of what everyone else was doing.

So the IMF was charged with asking the question was there a better alternative, a cooperative alternative? And we showed the G-20 exactly that. Here the green scenario is what we call the upside scenarios – which reflects full policy cooperation, coordination between advanced and emerging economies. And the point here is profound and simple. Policy cooperation is not based on the notion of would you make a sacrifice for the general good. This cooperation is based on the premise that if we act coherently we can produce an outcome that is better for everybody.

So the critical question is do you believe that analysis or not? Because if you believe that analysis, that represents the incentive for cooperation. It’s not because will you be a good citizen and make a sacrifice, it is will you be a good citizen in your own interest? And if you believe that the upside scenario exists, then the question becomes how do you instrument it? How do you decide what it means in detail? And secondly, how do you know that if you do the right thing your partners will do it as well? Will they fulfill their commitments?

It turns out when we looked at this upside scenario in Toronto, the leaders said we believe it, advised I’m sure by their ministers and staffs. And said let’s go for it. We also laid out what I call the framework policy matrix. What does this mean? Are these just words? And the answer is no. Surplus and deficit economies, advanced and emerging economies, all have broad goals that they need to accomplish in order to reach the upside scenario. Amongst the advanced economies, those in extern surplus need structural reforms. And those in external deficit need fiscal consolidation. Emerging surplus economies need to rebalance demand toward domestic sources. And emerging deficit economies need structural reform. And other demand management measures. And across the board, all countries need financial repair and financial reform.

There’s agreement on these broad principles. There’s no disagreement that this has to be done. It’s simply a matter now. It was a matter of saying now let’s go turn this into specific policy commitments.

So then we move forward to Seoul last fall. And in Seoul, if you have looked at the documentation you will see a 49-page addendum of policy commitments, country by country of the G-20 economies in this MAP effort. Looking forward at Seoul, it was decided that we were going to take the MAP to a new stage of now taking this to specific policy commitments and to examine in detail the commitments of the key countries that contribute to imbalances. And right now we are in the process -- we at the IMF, along with our G-20 partners, are analyzing the policies of seven systematically critical economies in this regard.

So now we’re headed to Cannes, the next G-20 summit in November of this year. What will be the challenge for Cannes? Well, this will be really the first part of what I would call the acid test for policy cooperation under the Mutual Assessment Process. Between now and Cannes, what’s called the framework working group, a deputy minister-level group, is going to take a look, among other things, at IMF analysis of the seven key countries and look in context of their policy commitments and offer their judgment and seek revised commitments towards implementing the policies that have been promised in the interest of achieving the upside scenario. That’s going to produce something called the Cannes Action Plan.

But there’s another aspect that makes this novel, not only the degree of interaction and specificity but also a commitment to what we could call a repeated exercise or repeated game, namely it’s not just the promises but a mechanism in which the G-20 participants will go back and look at the implementation to see whether their partners have done what they were supposed to do, to examine the developments subsequently, and readjust action plans according to developments.

Is this all going to work? I don’t know. Has it been tried before? Well, you can say, yeah, we tried this. We tried that. I don’t think anything quite like this has ever existed. Is it going to solve all problems quickly? No, it’s not intended to. Can it make a difference? Well, let’s give it a try. And I hope an audience like this will recognize both the importance of this initiative but also the need to provide political support, analytical support, intellectual support. If there are no expectations, there’s no cost to failure. For an audience like this, I hope that you will be paying attention and derive certainly your own independent conclusions. You’re all perfectly capable of it. But if you come out the same way I do, I hope that as influential a group as this, you’ll create expectations of success that by their existence create costs of failure.

Now, there’s one piece missing I didn’t discuss -- and that is the process of financial sector reform. I simply want to point out that under the auspices of the G-20, there are three important strains underway. One is the creation of the Financial Stability Board, which was requested by the G-20 leaders in their London Summit.

What’s important here, by adding the G-20 members not already members of the preexisting Financial Stability Forum, we brought a whole other set of important and potentially very important countries to the table to discuss financial sector reform. It was no longer a rich man’s club and even a restricted rich man’s club. Now it’s a global club.

They’ve agreed there are four pillars of financial sector reform. Really, only one has been getting substantial public attention and that’s regulatory reform. In fact, many people when they think of financial reform think they mean regulatory reform. But we concluded that weakness in supervision was every bit as important as weakness in regulation in bringing about the financial crisis.

There’s a relatively little known report -- a group called the Senior Supervisors’ Group, which is essentially supervisors from the G10 countries -- that under the auspices of the New York Fed conducted their own post-mortem on the crisis. Their two reports present a chilling reading because they say that many of the largest international financial institutions had risk management structures that were simply inadequate to the risks they were taking. And in their follow up analysis, that group said that very little has changed.

It brings to mind some very obvious questions. One, what happened to market discipline? Where were boards of directors? What was senior management doing? How could we have had in place risk management structures inadequate to deal with the risks you were taking? After all, the governance discipline within the financial institution was in their own self interest. Did it mean you couldn’t rely on self interest to provide adequate risk control? But then obviously, if it was evident to supervisors after the fact that risk management techniques were inadequate to the risks being taken, shouldn’t that have been evident ex ante as well? So we think what’s needed is a strengthened supervisory function, not just regulatory function. More needs to be done.

What else did we learn? We learned we had inadequate resolution mechanisms for failing institutions. We need mechanisms to do away with “too important to fail”. But here’s the difficult part. We’ve seen how the failure of one frankly medium-sized firm -- Lehman Brothers -- created ripples across the world that have not yet been resolved. And part of the difficulty was because they operated in multiple jurisdictions. How do you resolve important institutions operating in multiple jurisdictions? This is fiendishly complicated and work is just getting underway. This will take a long time to reach international agreement on how to deal with these potential problems. But if you can’t deal with those problems, you haven’t dealt with “too important to fail”.

And finally, an important element where we have made progress is the assessment of the implementation of new standards and that’s the mandatory FSAPs and the peer review process separately. There’s a peer review process within the FSB. That’s where everybody talks to each other about how they’re doing. That’s always good. Sometimes it’s a little hard to tell your partners that you think they’re not doing so well, so that’s why you have independent assessment. That’s the IMF’s FSAP, Financial Sector Assessment Program. It’s an independent expert view to come in and say here’s what an independent view looks like.

Finally, we all know that there’s hope for what is termed macroprudential policies to help increase the stability of the financial system. In a word, as we all know -- again, this is an expert audience -- that the traditional view of financial regulation focus on instruments and institutions and macroprudential needs to think about how the global economy affects the stability of the financial system and vice versa. So this is work that I didn’t want to let go by because this is continually being driven forward through the G-20 process.

Final topic, very briefly: so we have the G-20 and we have the IMF. The G-20 has produced some impressive results and remains a vehicle for providing critical, heads of state level impetus for cooperation and reform. But it has some weaknesses. One is legitimacy. There are 20 members. Actually, a few more than that but we need not quibble. That’s not a global institution and the choice of membership is rather arbitrary. So there’s an issue of legitimacy. And if the group is dealing with difficult issues, inevitably honest folks will have different ideas. They’re not always going to agree. How are you able to forge a decision on what to do that is accepted as compelling by even those who don’t agree with it? Well, there’s no voting rule. The G-20 operates by consensus. So inevitably it limits the ability to make difficult decisions.

The IMF is a global institution of 187 member countries. Everybody’s in. And we have voting rules that, as I said, now have global legitimacy. Relative voting share has been altered to importantly reflect economic weight. An organization like the IMF can reach decisions even when they’re difficult and the participants can view them as fairly arrived at.

So as we look forward we have to think about the issue of convergence between these institutions. Perhaps they will coexist in their current form. They have a different focus, perhaps a different purpose. At the same time we have to think whether over the long run if you look at the G-20 finance ministers and alongside them the IMFC ministers, you will find that a great number of them, the majority of them are in both groups. So this is an ambiguity in global governance even if we decide that this process of cooperation will have been advanced in an important way by the G-20.

So I’ve tried to lay it out for you in some detail. First, what the elemental challenges of the economic situation in broad terms are. How they’ve been addressed. They’re being addressed in a structural way by the IMF. How they’re being addressed in a very potentially innovative way, an important way by the G-20. How these strands of efforts, in fact, are coherent and mutually supportive, and if they succeed will create important questions for global governance as we look to the years ahead.

It’s a challenging moment. I know there are many specific challenging cases that we could talk about and I’d be happy to talk about later. But at the same time it strikes me this is a moment of great promise and great opportunity to move forward the process of global economic and financial policy cooperation. That’s certainly one of the principal goals of the Peterson Institute. And that’s why it’s such a great honor and pleasure to be able to come here today to discuss these issues with you, and to have the great honor of delivering the 10th Annual Niarchos Foundation lecture. Thank you very much.


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