Adapting to the Changing Global Economy: The IMF's Medium-Term StrategySpeech by Rodrigo de Rato,
Managing Director, International Monetary Fund
At a Working Breakfast
Wellington, New Zealand
June 16, 2006
As Prepared for Delivery
1. Thank you very much. The staff of the International Monetary Fund comes from almost 100 different countries and many Fund staff have traveled to almost as many. But I am told that among them there is general consensus that New Zealand is one of the two most beautiful countries in the world. There is no consensus on the other: peoples' preferences have a lot to do with where they come from. But based on my colleagues' accounts I have been looking forward to this trip, and I am very pleased to be with you today.
2. There is a Chinese proverb: may you live in interesting times. The times certainly look more interesting in the global economy today than they did a few months ago. In terms of economic growth, the global economy continues to do well: we expect global growth to be close to 5 percent in 2006, the third consecutive year for growth to be noticeably above the historical trend. A few months ago, we might have said that this is as good as it gets. But perhaps it was too good to be true. In the financial markets, we have seen a faltering of confidence in recent weeks, as participants become more conscious of downside risks from inflation, from high oil prices, from geopolitical developments, and from longstanding and unaddressed global imbalances.
3. Moments when the economic tides seem to be turning are among the most difficult for policy makers. At such moments, cooperation on international economic policy is particularly important. The International Monetary Fund is the only global institution with a responsibility for fostering monetary cooperation and securing financial stability, and it has a crucial role to play. The Fund is currently implementing a new Medium-Term Strategy, with the aim of adapting the institution to better help our members deal with the challenges that they face, including some of the challenges and risks currently affecting the global economy. So I will begin by talking about current global economic developments, some of the risks that our members face, and how the Fund can help tackle them.
4. As I said, the global economy starts from a position of strength. 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 over 5 percent rate in the first quarter, but there has been some pickup in growth in the euro area, and the recent growth numbers from Japan show that recovery there remains on track. And 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.
5. But there are a number of risks. One is high and volatile oil prices. To combat the risk that they will adversely affect global growth and inflation, the Fund is encouraging sound macroeconomic management and polices that promote a more stable, more transparent and better functioning oil market, as well as a better balance between supply and demand. Actions here would include eliminating obstacles to investment in both production and refining, and strengthening conservation efforts. Improved data, including on inventories, would also allow markets to work better, and thus help to reduce volatility.
6. Another risk is the small but very serious one of an avian flu pandemic. This would, of course, be a major public health problem, and the economic costs would be secondary. Nevertheless, we should work to minimize them. The Fund is working within its areas of expertise: helping our members to prepare business continuity plans, especially for their financial sectors, so that financial systems will continue to function properly in the event of a major public health problem. I understand that the New Zealand authorities have already made such contingency plans. This is very welcome, and is an example I hope other countries are following.
7. The third major risk is global payments imbalances. The most obvious signs of these payments imbalances are a large current account deficit in the United States-to the extent of almost 6½ percent of its GDP in 2006—and large surpluses in the external accounts of certain other countries. These include oil exporting countries, Japan, and some of the major Asian emerging market countries, especially China. Underlying the payments imbalances are imbalances in global consumption and saving, and these differences are not sustainable. American consumers cannot support demand in the rest of the world indefinitely. And other countries will not continue to finance American consumption indefinitely.
8. The risk is that if nothing is done, imbalances will not be reduced gradually, but suddenly, and in a disruptive way. For example, there could be an abrupt fall in the rate of consumption growth in the United States, perhaps triggered by a slowing housing market, leaving countries dependent on exports with inadequate demand. Or a disorderly adjustment might be triggered by developments in financial markets. Recent changes in exchange rates are in the right direction to help aid the adjustment process and, so far, have been orderly. But if investors become suddenly unwilling to hold U.S. financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt depreciation of the U.S. dollar and increases in U.S. interest rates. This could cause global financial market disruptions as well as a downturn.
9. Actions to bring about a gradual reduction in imbalances are needed. To help address this problem, and as a key element of the Medium-Term Strategy I mentioned at the beginning of this speech, I have proposed a new tool for the Fund, multilateral consultations, in which particular issues of global or regional significance will be taken up comprehensively and collectively with systemically important members of the Fund and, where relevant, with entities formed by groups of members. The aim is to provide a vehicle for analysis and consensus-building and a framework that helps our members overcome some of the hurdles to individual action by emphasizing the benefits of joint action for all.
10. Our first multilateral consultation will focus on narrowing global imbalances while maintaining robust global growth. The Fund has asked a number of countries to come together to discuss the issue. I am happy to report that China, the euro area, Japan, Saudi Arabia, and the United States have agreed to participate. Some of these countries have large current account deficits or surpluses; and together the participants represent very a large share of world output.
11. There is already considerable agreement on the broad policies that are needed to reduce global imbalances. Most policy makers around the world agree that what is needed is fiscal adjustment and measures to stimulate private saving in the United States, further exchange rate appreciation and measures to stimulate domestic demand in some countries in emerging Asia, and structural reforms to stimulate demand and improve productivity in the non-tradeables sector in Europe and Japan. The task now is to make action happen in several countries together. Cooperative actions by the participants in the consultation 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. There is a lot of work to be done, and it will take time: global imbalances did not build up overnight, and will not be solved in one shot. But I am confident that we can make some progress on this vital issue.
12. Let me now talk about a few other areas where work is underway under the Medium-Term Strategy to improve the services we can offer to our members.
13. I want to improve the usefulness of IMF lending, especially our support for emerging market economies. At present, not many of our emerging market country members are borrowers from the Fund. This is partly a reflection of good conditions in the global economy and financial markets, and of improved economic management in emerging market countries themselves. But I want to make sure that when financial market conditions worsen, which we know they will eventually, the services we offer to our members are sufficiently useful that they will come to us for support if they need to. For this reason, I have proposed that we develop a new instrument to provide predictable and front loaded financing to emerging market countries that have strong fundamentals but remain vulnerable to shocks. Many emerging market countries have also built up their cushion of foreign exchange reserves in three complementary layers—nationally; through regional arrangements like the Chiang Mai Initiative; and through their access to support from global institutions like the IMF. The Fund has a key role to play in helping these countries optimize the contribution from all three of these reserve mechanisms.
14. Work on low-income countries also remains a critical task for the Fund. 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. For example, one thing the Fund can do is help countries manage their macroeconomic policies in ways that maximize their capacity to absorb aid and debt relief. Another is to make sure that countries that have just benefited from debt relief don't quickly become heavily indebted again.
15. Another important element of the Medium-Term Strategy concerns governance of the Fund, and especially Fund quotas, which largely determine voting shares and also influence the amount countries can borrow. 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.
16. Before concluding, let me say a few words about trade. Increased trade, bolstered by multilateral agreements, has been a cornerstone of growth in the global economy for many years. But time is running out on the next stage of multilateral trade reform, the Doha Round. Failure would be very damaging. I would urge all parties to look beyond narrow defensive interests and demonstrate their willingness to negotiate a substantive agreement in the time that remains. I am also concerned that a number of countries may be turning away from multilateralism toward bilateral and regional trade agreements. These agreements can certainly be useful, especially if they are combined with significant non-discriminatory liberalization and if they contain transparent, simple, and liberal rules of origin. But they can also be a distraction, result in trade diversion, and can be confusing to exporters. For example, what has been called the "Asian noodle bowl" contains many competing and overlapping agreements, whose net effects on global and even regional trade are uncertain. The answer is not necessarily to forego all bilateral agreements, but to ensure that these are well-designed and that they are complemented by the further liberalization of trade with all partners. Countries can also liberalize trade unilaterally. In trade, as in other areas of economic policy, New Zealand has often led the way. The success of New Zealand's dramatic trade policy reforms that began in the mid-1980s, and its success in other areas of economic policy, show what can be achieved.
17. With that, I welcome your questions. Thank you very much.