A Time to Repair the Roof

October 5, 2017

Video: Courtesy of Harvard University

As Prepared for Delivery


Larry, thank you for that generous introduction. Dean Elmendorf, Nick, thank you for welcoming me back to Harvard.

More importantly, I want to thank all three of you for inviting me to speak in October… instead of January. Coming to Cambridge in the fall during the change of seasons is a true pleasure.

Walking around this beautiful campus I was thinking about cycles.

Of course, there are seasonal cycles — like the one we are enjoying right now. Then there are economic cycles. A key challenge in economic cycles is trying to gain perspective on what comes next while you are in the midst of it. If we take a step back, what might we see?

Well, we would see that the long-awaited global recovery is taking root. In July, the IMF projected 3.5 percent global growth for 2017 and 3.6 percent for 2018. Next week we will release an updated forecast ahead of our Annual Meetings — and it will likely be even more optimistic.

Measured by GDP, nearly 75 percent of the world is experiencing an upswing; the broadest-based acceleration since the start of the decade. This means more jobs and improving standards of living in many places all over the world.

But the recovery is not complete.

Some countries are growing too slowly, and last year 47 countries experienced negative GDP growth per capita. And far too many people — across all types of economies — are still not feeling the benefits of the recovery.

Persistent low-growth in the decade since the global financial crisis has put a spotlight on the problem of inequality. It has also exposed long-running weaknesses in our ability to adapt to technological change and global integration. As a result, our social fabric is fraying, and many countries are experiencing increased political polarization.

So, here is the question:

Can the world seize the opportunity of the upswing to secure the recovery and create a more inclusive economy that works for all?

Fortunately, I came to the Kennedy School — and have found some inspiration from your namesake. Addressing Congress in 1962, about a year after the United States emerged from a recession, President Kennedy said:

“Pleasant as it may be to bask in the warmth of recovery… the time to repair the roof is when the sun is shining.”

Let us explore that idea.

1. Is the Sun Starting to Break Through?

We can start by checking whether the sun is breaking through.

A cyclical pickup in investment and trade in the advanced economies — especially in Europe and Japan — has led to better-than-expected growth.

US forecasts have been fluid in light of the economy’s actual performance and changing prospects for tax reform, but the likelihood for this year and the next is that growth will be above trend.

Meanwhile Asian emerging markets — led by China and India — have remained strong.

In other emerging and developing economies, the outlook has become a bit brighter, including among commodity exporters in Sub-Saharan Africa and Latin America.

Globally, financial stability is improving, thanks to a more stable banking system and increased market confidence. Financial conditions across economies have given borrowers new opportunities to fund investments and repair balance sheets.

But there are threats on the horizon: from high levels of debt in many countries, to rapid credit expansion in China, to excessive risk-taking in financial markets.

All of this comes against a backdrop of heightened non-economic challenges, from weather-related disasters in the Caribbean, the US, and Asia to heightened geopolitical tensions on the Korean peninsula.

So, yes, we are seeing some sun break through — but it is not a clear sky. There are two ways to approach a moment like this.

The first is to sit back, enjoy the progress, and wait for the next crisis before making big changes.

As a former finance minister, I understand the appeal of this path. Championing change just when things are getting back on track is not easy — especially when the benefits come further down the road and policymakers already feel reform fatigue.

But just because something is politically difficult, does not mean we can shy away from it.

Think of what President Kennedy said during the space race: “ We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard .”

The better path is to approach this moment as an opportunity to make changes that will enable prosperity over the long-term.

Not only is this the right thing to do, now is the right time to do it.

IMF research has shown that reforms are more potent and easier to implement when economies are healthier. [1] Intuitively, this makes sense — it is less complicated to change a tax code when incomes are rising; or to update labor laws when an economy is near full employment.

So we should not let a good recovery go to waste.

We know what can happen if we let the moment pass. Growth will be too weak, and jobs too few. Safety nets will be unable to handle aging populations. Our financial system will be unprepared for future shocks.

We only need to think back to the period before the financial crisis to see the peril of missing an opportunity to guard against risks. In the past, we saw countries undertake reforms, through the ups and downs of economic cycles, while others relaxed during periods of growth. In 10 years, we will be able to look back and see which countries made use of this moment. Or, to put it in Kennedy’s terms: when the sun is shining, we must repair the roof.

How can we get the job done?

2. The Tools We Need to Repair the Roof

We can start with fundamentals.

Inflation is still low and remarkably subdued despite near-full employment in many advanced economies. So monetary policy should continue to support the recovery. At the same time, easy financial conditions can create complacency in markets and a buildup in vulnerabilities, including private sector debt.

So central banks should communicate their plans clearly and execute monetary policy normalization smoothly, as appropriate in each country. This will help avoid market turbulence and a sudden tightening of financial conditions that could derail the recovery. Of course, monetary policy is most effective when complemented with sound fiscal policies that promote long-term, sustainable growth.

Countries with healthier public finances such as Germany and South Korea can use this moment to invest more in their own economies. In places where public debt is too high, governments should use the opportunity of growth to reduce debt relative to GDP and strengthen their resilience.

Containing public debt is also an imperative in many lower income countries, where debt levels have risen markedly in recent years.

Reducing excessive global imbalances — which includes investing more where fiscal positions are healthy and lowering deficits elsewhere — can support growth and avoid financial and exchange rate instability.

At the same time, we know that monetary and fiscal tools can only take us so far. We need the whole toolkit, including structural reforms, to fully repair the roof.

I want to focus on two areas in particular.

First, lifting incomes and creating jobs. Second, investing in people’s futures and fostering inclusive growth.

Lifting Incomes & Creating Jobs

In the largest economies, overall productivity growth — a measure of how efficient we are — has dropped to 0.3 percent, down from a pre-crisis average of about 1 percent. This means that, despite technological advances, wages in many places are only inching up.

Boosting productivity, a factor in lifting wages, requires, among other things, cutting red tape, increasing spending on research and development, and investing in infrastructure.

In some countries, wages are being limited by weak demand, reflected in still too-high unemployment or involuntary part-time employment. So increasing demand can help lead to higher wages. [2]

We also need to look at ways to create new jobs — and this is where labor market reforms come in.

What policies have worked?

  • In Spain, both employers and employees have been given more workplace flexibility.

  • In Mexico, revised rules allow young people to more easily enter the formal job market and gain access to health care and other benefits.

  • In Japan, childcare leave benefits were expanded from 50 percent to 67 percent of salary — as part of larger efforts to get over 1 million women into the workforce.

Empowering women is an economic no-brainer. If women participated in the labor force in the same numbers as men, GDP could increase by as much as 5 percent in the US, 27 percent in India, and 34 percent in Egypt, to name just three examples. [3]

Of course, each country will tailor policies for its needs, but we know that taking advantage of the current momentum can make these types of reforms more affordable and more effective.

Every finance minister and every treasury secretary eventually realizes that all policy changes are made a little easier with growth. And this brings me to my second area of focus — investing in people’s futures.

Investing in People’s Futures and Fostering Inclusive Growth

Over the past three decades economic inequality between countries has declined sharply, led by the rise of emerging markets such as China and India.

However, if we look at inequality within specific countries, especially some advanced economies, we see widening gaps and an increased concentration of wealth among the top earners. [4]

IMF research has shown that excessive inequality hinders growth and hollows out a country’s economic foundation. It erodes trust within society and fuels political tensions.

We know that inequality is often cemented through disparities in schools and access to health care. The good news is that many countries are working to change that narrative.

  • In India, health care access has been expanded with clear benefits for the poorest citizens.

  • In South Korea, bonuses are being offered to encourage teachers to work in underperforming schools.

  • In the US, more is being done to increase the number of women studying science, technology, engineering, and mathematics (STEM).

Thirteen years ago, on this campus, a young man invented a social media platform that would connect the world. But the next Mark Zuckerberg need not come from Harvard. With the right investments in education, she can come from the south side of Chicago, or Sri Lanka, or Senegal.

Giving priority to education also means supporting life-long learning, including retraining programs.

Germany’s apprenticeship program has served as a model for decades — and a recent Canadian initiative showed that on-the-job skills training can be more effective than classroom learning.

This moment also calls on us to prepare for the future of work. The rise of automation could exacerbate inequality — as owners of technology gain efficiency but lower-skilled workers lose jobs.

At the IMF, we are looking at the pros and cons of ideas that may help — from unorthodox concepts like universal basic income to mainstream policies such as more progressive taxation.

In 1981, the average top marginal tax rate in advanced economies was 62 percent. In 2015, it was 35 percent. New IMF research, which will be released next week, suggests that some advanced economies could raise their top tax rates without slowing growth. [5] These are all ideas worth exploring.

They can support our efforts to repair the roof. And yet, there is one more tool we need to make our project a success.

International cooperation.

3. The Benefits of Cooperation

Many of the challenges we face require global solutions. Think about corruption, where the IMF recently committed to do more to help our members. [6] Bribery alone costs more than 1.5 trillion dollars per year, nearly two percent of global GDP. [7] Then there is embezzlement, corporate income tax evasion, money laundering, terrorist financing — all problems with cross-border dimensions.

Or consider financial regulation. The Financial Stability Board and other institutions have made significant progress since the crisis to strengthen the safety of the global financial system, especially through higher levels of bank capital and liquidity.

While some regulations and their implementation would benefit from review, we should ensure the progress we have made is protected. Cooperating on all these challenges can help rebuild trust with skeptical citizens — especially if we prove that cooperation translates into more jobs and a brighter future. Our global economic framework should reflect the changing economy and ensure a level playing-field where everyone has an opportunity for a better life.

Look at trade, for example. Over the last thirty years, trade has raised global growth and lifted hundreds of millions of people out of poverty. But some have been negatively impacted. While protectionist policies are counter-productive, steps can certainly be taken to improve the system, increase transparency, and make trade work for all.

One final example where cooperation is critical: climate change —a threat to every economy and every citizen.

Our estimates suggest that a 1 degree Celsius increase in a country with an average annual temperature of 25 degrees — such as Bangladesh — could reduce per capita GDP by nearly 1.5 percent. [8] But Bangladesh — and similarly-situated countries — cannot meet the challenge by themselves. Only international cooperation can stem the man-made causes of global warming.

So, what is the bottom line? Policymakers should use all tools at their disposal to act now, and take advantage of this period of global growth. And to truly be successful, they should act together. Cooperation remains the best way to create a more prosperous future for every nation.

The IMF can help by serving as a platform for dialogue and a resource for countries seeking to build more resilient economies. Put it another way? The IMF is a critical part of the toolkit.

That is the message I will underscore next week when representatives from our 189 member nations convene for our Annual Meetings.


I started my remarks by mentioning a walk through your campus and how it sparked my thinking. I am certainly not the first French citizen to find a little wisdom in New England. In fact, I think Alexis de Tocqueville would quite enjoy the town hall forum you have created here at Harvard.

He once wrote, “What is not yet done is only what we have not yet attempted to do.” Let us draw inspiration from these words — as well as from the enduring message of President Kennedy — and use this season of transformation to repair the roof while the sun is shining.

Thank you very much.

IMF Communications Department


Phone: +1 202 623-7100Email: MEDIA@IMF.org