France and the IMF
United States and the IMF
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Managing Director of the International Monetary Fund
At the International Symposium of the Banque de France
On Productivity, Competitiveness and Globalisation
Session on Economic Adjustment and Policy Responses
Paris, France, November 4, 2005
As Prepared for Delivery
1. Good afternoon. I would like to thank the Banque de France for inviting me to this important symposium. The subject of this afternoon's first session is economic adjustment and policy responses, and, if I may paraphrase, our speakers are asked to answer the questions, "what form could private sector adjustment of global imbalances take?", and "what role should economic policies play to bring about an orderly rather than damaging adjustment?" I will for the most part leave these questions to our distinguished speakers, but let me give my perspective on them briefly.
2. We know that today's global payments imbalances, and more broadly, the current geographical patterns of growth in the world economy, are unsustainable over the long run. Higher net savings—private and public—are needed in the U.S., and lower net savings are needed elsewhere. If the U.S. current account deficit remained at present levels it would mean ever-growing U.S. external indebtedness, and it is difficult to see this being accepted by private investors or central banks of countries which would need to hold the U.S. assets. But if global growth is to be sustained, not only the U.S. but other countries will need to act.
3. Of course, even without any policy adjustments, changes in private sector behavior could produce a gradual adjustment in imbalances. Specifically, increases in private sector saving in the U.S. and reductions in private saving and increases in investment, especially in emerging Asia, could allow a graceful exit from the current situation.
4. But the unfolding of such a scenario would require a number of things. For example, individuals, businesses and central banks outside the United States may need to be prepared, for quite some time, to hold increasing amounts of U.S. assets without a substantial risk premium. To put it mildly, this looks like a risky proposition.
5. The main risk is that there will be a much more abrupt and disorderly adjustment—a sudden decline in demand for U.S. assets, which produces a substantial decline in the value of those assets, and of the U.S. dollar, and a significant increase in U.S. interest rates. The impact of such an adjustment would be felt not just in the United States, but by exporters in other countries who sell to the U.S., and by emerging-market borrowers who would experience higher interest rates. Such an adjustment would usher in a period of dangerous instability in financial markets and in the global economic environment.
6. This raises another risk, one that is not raised explicitly in the questions for this session, but which I think is implicit, and needs to be considered. That is, the risk that in the absence of a coordinated international response to global imbalances there will be not just uncoordinated and disruptive private sector adjustment but also uncoordinated and disruptive measures taken by governments.
7. The IMF was born out of a painful lesson: the catastrophe of the 1930s in the world economy. The lesson of that dreadful decade was that financial and economic crises, payments imbalances, and exchange rates are international issues, and that attempts by governments to find national rather than international solutions to their economic problems can not only beggar their neighbors but also beggar their own people. And it is no coincidence that economic depression in the inter-war period both fed and was fueled by a resurgence of nationalism. We live today in an internationally integrated, globalized world, but we are not immune from nationalism. You can see it in some of the debates over the European Union constitution. You can hear it in the protectionist rhetoric in the United States Congress. And we can only imagine the pressures on those in China who advocate an internationalist approach to economic policy. Moreover, the insecurity that many people feel about the effects of globalization makes them more vulnerable to nationalist sentiment. This is one of the reasons that I want to focus the work of the IMF on helping our members maximize the benefits and minimize the risks of economic and financial globalization. It also adds urgency to the task of dealing with global imbalances.
8. As to the measures that governments should take, the IMF view, endorsed by our members, is clear. In Europe, governments need to articulate comprehensive, growth-oriented strategies that address unemployment and aging, by reducing the rigidities prevailing in labor, product, and service markets. Emerging Asia needs greater exchange rate flexibility and measures to encourage higher investment in some countries and better investment in others. Those oil-producing countries whose fiscal and macroeconomic frameworks are strong can help reduce global imbalances by increasing productive spending in priority areas. And the United States needs to reduce its fiscal deficit, including—on the basis of almost any realistic appraisal—by taking actions on the revenue side, particularly by broadening the tax base.
9. The main elements of this view are widely shared. They have been endorsed by the G-7, the G-20, the IMFC, by almost every international body. And while many, including today's speakers, give emphasis to some measures over others, and sometimes propose additional steps, there is consensus on the need for collective action. Recently some progress—a little progress—has been made in adopting measures that will reduce imbalances. But much remains to be done.
10. We are fortunate to have with us today some people who have not only made important contributions to thinking on global imbalances, but are also in a position to help translate that thinking into action. Kristin Forbes and Agnes Benassy-Quere are both academics, whose lucid and penetrating analysis has led to their recognition as leaders in the field, by their governments as well as their peers. Ms. Forbes has also served as the youngest ever member of the President's Council of Economic Advisors. Yi Gang, Assistant Governor of the People's Bank of China, has important responsibilities in the area of monetary and exchange rate policies, and has shown himself to be a wise counselor to the Governor. And Otmar Issing, as a Member of the Governing Council of the European Central Bank, has a position which affords him both a view of the global and European economies, and the capacity to act on that view. Mr. Issing is our first speaker, and I will invite him to begin our discussion now.
11. Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT