Meeting the Challenges of 21st Century Globalization: The IMF's Medium-Term StrategySpeech by Rodrigo de Rato
Managing Director of the International Monetary Fund
At the National Museum of Australia
June 14, 2006
As Prepared for Delivery
1. Thank you very much.
2. This is a busy and also an exciting time for the International Monetary Fund. We are in the process of implementing a new Medium-Term Strategy for the Fund, with the aim of adapting the institution to help our members deal with the challenges of 21st century globalization. These include issues like greatly increased capital flows which permit current account payments balances on an unprecedented scale; integrated financial markets that are both more complex and subject to more rapid change and development than in the past, and the emergence of new economic powers. Many Asian countries are already wrestling with these issues, as they work to increase their resilience to large and volatile capital flows, and to integrate financial markets. I believe that the Fund must also adjust to these new realities and must adapt both its work and its governance structure to them.
3. I spoke about our Medium-Term Strategy yesterday at the National Press Club and I am happy to answer any questions you might have on it. In these remarks, I would like to focus on our assessment of the current state of the global and regional economies and on how our surveillance function needs to evolve to reflect changes in the international economic environment.
• The global economy remains strong. The Fund projects that global growth will be close to 5 percent in both 2006 and 2007. We expect some slowing in growth in the United States from the over 5 percent rate of the first quarter, but there has been some pickup in growth in the euro area, and the Japanese recovery remains on track. However, downside risks have increased, as evidenced by increased financial market concerns.
• Asia remains a leader in world growth. We have recently increased our projection for growth in the region to 7 percent, about the same as in 2005. In part, this growth is driven by an increase in demand for the region's exports, but in many countries it also reflects rising domestic demand—a welcome trend.
• In Australia, too, we see the effects of increased demand abroad, in high prices for Australia's commodity exports, and we see rising company profits and a strengthening in private consumption in early 2006. Overall, we expect a pickup in growth in Australia to about 3 percent in 2006.
4. What, then, should one make of the recent financial market volatility and falls in financial asset prices? What we have seen so far is a fairly modest correction of previous increases in asset prices. In the Fund's view, these corrections reflect heightened risk aversion as investors reassess prospects for liquidity, inflation, and growth, rather than a negative judgment about the fundamentals of emerging markets or corporate borrowers.
5. The main trigger for the recent market turbulence was heightened sensitivity to inflation and tightening global liquidity conditions. Long-term inflation expectations have been increasing gradually in recent months, as has core inflation, notably in the United States during the last two months. This will make the balancing act that central banks around the world must undertake more difficult. Changes in interest rates will need to be timed carefully, to head off inflationary pressures while minimizing unintended effects on domestic demand. In Australia, the Reserve Bank has put its cards on the table by a modest tightening in May. I think this was a good move. A modest tightening at a relatively early stage reduces the risk of needing a larger tightening later.
6. One reason why there is increased concern about inflation is, of course, high and volatile oil prices. Rising oil prices have so far only had a moderate impact on inflation and growth, including in Asia, but this may change going forward, especially as concerns about future supply rather than about increases in demand have become the prime movers of prices. There are measures that governments can take to improve the balance of supply and demand: in particular, eliminating obstacles to investment and strengthening conservation efforts. Improved transparency in data, including on inventories, would also allow markets to work better, and thus help to reduce volatility.
7. The recent increase in risk aversion in the markets is a healthy development, taking froth out of markets. It is notable that the sharp falls in emerging equity and currency markets have, for the most part, merely reversed equally sharp rises from the beginning of the year. These corrections should not be taken as a sign that investors consider that fundamentals, particularly in emerging markets, have weakened, especially since one of the most direct measures of emerging market creditworthiness, spreads on sovereign external debt, have risen only quite modestly.
8. I also see in recent market movements some evidence of increased concern about global current account imbalances. Again, I do not want to overstate the case. Recent changes in the markets do not, in my view, represent the beginning of the disorderly adjustment in financial markets that the Fund has warned about. Indeed, the changes in exchange rates that we have seen constitute modest steps in the right direction, and should make adjustment of payments imbalances easier.
9. Rising concern about global imbalances can indeed be a helpful development if it encourages action to address them. This is an area where I believe that the Fund can help. A central element of the Medium-Term Strategy that we are developing includes improvements in our surveillance of the global economy and of individual members' economies. Let me now discuss some of these in more detail.
10. Some of the measures that we are planning are designed to improve the quality of our analysis. For example, in our surveillance of exchange rate policy, we are planning an extension of the analysis that the Fund currently does of multilaterally consistent equilibrium exchange rates in industrial countries to the currencies of the major emerging economies. This is something that needs to be handled with caution, given methodological differences and sensitivities, but it is an important step. I would also like to see a sharper focus on capital and financial markets. This effort will take many forms, including enhanced financial market analysis in the Fund's country reports and assistance with statistics. On the latter, for example, the Fund has recently helped the Chinese authorities produce and release their first international investment position statement, for the years 2004 and 2005, an important step in transparency. Another important element of the Fund's work will be helping members develop strong and well-supervised financial sectors. In Asia, many countries have given particular prominence to developing domestic financial markets and deepening regional financial integration. The Fund needs to be able to support its members in this process, and must continually deepen its understanding of this continually changing field.
11. But good analysis will only take you so far. You also need instruments to promote action. To this end, I have proposed that we supplement our annual consultations with individual members with multilateral consultations, in which issues will be taken up comprehensively and collectively with some members and, where relevant, with entities formed by groups of members. These multilateral consultations will be something new for the Fund and for our members, and they will be an important vehicle for analysis and consensus-building.
12. Our first multilateral consultation will focus on resolving the current global imbalances while maintaining robust global growth. To make progress, the Fund has now asked China, the Euro area, Japan, Saudi Arabia, and the United States to take part in the consultation, and I am happy to report that all have agreed to participate. Some of these countries have large current account deficits or surpluses and together, the participants represent a large share of world output. By cooperative actions they can play a major role in producing an orderly unwinding of global imbalances and go a long way toward sustaining world growth as demand and saving patterns adjust.
13. The Medium-Term Strategy covers other aspects of the Fund's work besides surveillance. Among them is now we can improve the usefulness of IMF lending, especially our support for emerging market economies. As I mentioned yesterday, I have proposed that we develop a new instrument to provide financing that is more predictable and more front loaded to emerging market countries that have strong fundamentals but remain vulnerable to shocks.
15. I also referred to our continuing role in support of low-income countries. I believe that the most effective way that the Fund can help low-income countries achieve their development goals is by focusing on policies and economic institutions that are critical to economic and financial stability and growth and that fall within our core competencies.
16. Finally, the Fund needs to adapt its governance structure to the changing economic weight of different economies. At present, the relative quotas and voting shares of our members do not adequately reflect the rise of economic powers, such as the Asian emerging markets. This undermines the Fund's perceived legitimacy, especially in Asia. This must change if the Fund is to remain effective. I will be making some specific proposals to address this problem in the run-up to our Annual Meetings, which will be held in Singapore in September.
17. As you will gather, we have a lot of work to do over the next few months, and on several issues—multilateral consultations, a new instrument to help avoid and react to crises, and changes in our governance structure—we will need the support of our members, including Australia. In concluding, let me thank the Australian Treasury and Reserve Bank of Australia for the contributions they have made so far. Both in discussions in the Fund and outside, Australia has been a strong supporter of the Medium-Term Strategy. Through its chairmanship of the G20, Australia has also taken a leading role in raising issues of Fund governance and in exploring options for changing Fund quotas. Through its aid and security support to countries such as the Solomon Islands and Timor-Leste, Australia has shown its commitment to economic and social stability. And of course, in terms of economic policies, Australia has led by example, through its flexible exchange rate, inflation-targeting system, prudent fiscal policies, and sustained reform efforts in labor and goods markets. We in the Fund look forward to continued good cooperation with the Australian authorities in the months ahead.
18. With these comments, I now look forward to your questions.
19. Thank you very much.