Meeting the Challenges of 21st Century Globalization: The Medium-Term Strategy of the IMF, Speech by Rodrigo de Rato, Managing Director, IMF
September 8, 2006Speech by Rodrigo de Rato, Managing Director
International Monetary Fund
At Spruce Meadows Roundtable, Calgary, Canada
September 8, 2006
As Prepared for Delivery
1. Good morning. I would like to thank Ron Southern for hosting this occasion, and for his very kind introduction. It's a pleasure to be here. This is an exciting time for the International Monetary Fund. In a little over a week our Governors will gather in Singapore for our Annual Meetings, held together with the World Bank. The Annual Meetings are a chance for our members to take stock of developments in the global economy. This year's meetings are especially important because we are now a year into implementing a new Medium-Term Strategy for the International Monetary Fund, and we will be seeking guidance from ministers on some important issues.
2. The Medium-Term Strategy is motivated by the central insight that the world is changing fast, and that the Fund needs to adapt to help our members deal with the challenges of 21st century globalization. Greatly increased capital flows have contributed to global growth but have also permitted current account payments imbalances on an unprecedented scale. Integrated financial markets have allowed greater risk sharing, but are also more complex and subject to more rapid change and development than in the past. And over the last thirty years, new economic powers have arisen. These developments give rise to great opportunities but also to serious challenges. If the Fund is to remain relevant to its members, both its work and its governance structure must be adapted to these new realities. The Medium-Term Strategy is our plan to meet the challenges posed by globalization. I would like to talk today about some of its most important elements.
3. But let me begin by talking a little about recent developments and prospects in the global economy. The world has now seen several years of strong growth, and in the past year the global economy showed itself resilient to high oil prices, increases in interest rates, and an episode of financial market turbulence. Growth prospects for next year are also good. In the United States, the speed of the expansion is moderating to a more sustainable pace, largely reflecting the slowdown in the housing market and the effect of higher interest rates. But elsewhere in the world, growth prospects are encouraging. Japan appears to have put deflation behind it. China and India continue to be engines of growth, and many other countries, including in sub-Saharan Africa, are enjoying a continuation of the strong growth that we saw last year.
4. But there are also risks to this generally good outlook: inflation risks are a concern as output gaps narrow, high oil prices could adversely affect both inflation and growth, and there has been a major setback in the Doha Round. And of course, the risk of a disorderly adjustment of global economic imbalances have not gone away, and could be exacerbated by the other risks.
5. Central banks know that they need to be vigilant on inflation. For example, although the U.S. Federal Reserve has recently kept interest rates stable for the first time after 2 years, it continues to emphasize that inflation risks remain and has not ruled out further interest rate increases. The Bank of Canada should also monitor developments closely and may need to consider further modest monetary tightening, given strong domestic demand and price pressures from elevated fuel prices.
6. Relative to three years ago, high oil prices are here to stay, at least for a while. I have been impressed by the reactions of governments of oil importing countries, especially those in developing countries and emerging market economies. In countries as diverse as Indonesia and Egypt, governments have shown political courage, and demonstrated economic sense in raising administered prices to reflect higher import costs. I have also been impressed by the reaction of some major oil producers, with some of the major producers which have strong macroeconomic frameworks taking the opportunity to invest in infrastructure, something that helps their own citizens and also contributes to containing global imbalances.
7. I am both disappointed and troubled by developments in the Doha Round. Increased trade, bolstered by multilateral agreements, has been a cornerstone of growth in the global economy for six decades, and is fundamental for continued strong global growth. There is now a need to ensure that the current impasse marks a brief pause, rather than a collapse, in the negotiations, and that negotiators will persevere and try to preserve the gains that have already been made. In order to build political momentum, pro-trade voices must be heard more loudly in the process. It is untenable, for instance, that in rich countries, farm interests that account for less than 4 percent of employment are effectively able to block a deal to open new markets for services and manufactures, which account for over 90 percent of employment.
8. Another significant risk, and one where the Fund has a particularly important role to play, is the risk of a disorderly adjustment of global payments imbalances. The most obvious signs of these payments imbalances are a large deficit in the current account of the balance of payments of the United States—that is, the United States will depend on foreign savings to the extent of about 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. The imbalances between the United States and the rest of the world are not sustainable, and are creating further imbalances, both economic and social. American consumers cannot support demand in the rest of the world indefinitely. And other countries will not continue to finance American consumption indefinitely. Actions to bring about a gradual reduction in imbalances are needed. The risk is that if nothing is done, imbalances will not be reduced gradually, but suddenly, and in a disruptive way.
9. There are at least two ways in which this could happen. First, there could be an abrupt fall in the rate of consumption growth in the United States, triggered by a sharp correction in the housing market. This would impact growth in the United States and leave countries that are dependent on exports to the United States with inadequate demand, thus spreading the downturn. The recently published analytical chapters of our World Economic Outlook contain some interesting research on the potential implications of this. The research discusses the role of arms-length financing mechanisms, involving transactions where the parties do not have a long-term relationship, or sometimes even direct knowledge of each other. It suggests that the increased prevalence of these, and especially the development of the mortgage bond market, greatly increases the ease with which homeowners in the United States can translate asset price gains into increased consumption. The research also indicates that the resilience of such consumption to a pause in asset price increases has not yet been tested.
10. A disorderly adjustment could also be triggered by developments in financial markets. If investors become suddenly unwilling to hold U.S. financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt change, and could cause global financial market disruptions as well as an economic downturn.
11. There is now general agreement on what needs to be done 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. There is also increasing agreement that it would be better for the major economies to act together to address the issue.
12. This leads me to the first of the elements of the Fund's Medium-Term Strategy that I would like to talk about: some changes in the way that we conduct surveillance of the global economy. By surveillance, I mean both monitoring of the global economy and the Fund's discussions—consultations—with individual members on their economies.
13. One change that we are making is the introduction of a new tool, Multilateral Consultations, in which particular issues of global or regional significance are taken up comprehensively and collectively with some members 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.
14. Our first Multilateral Consultation focuses on narrowing global payments imbalances while maintaining robust global growth. Fund staff have already held bilateral discussions with the participants in the consultation—China, the euro area, Japan, Saudi Arabia, and the United States, and over the coming months we will hold roundtable meetings with all of the participants together. I don't want to go into too much detail on these discussions, as the consultation is still at an early stage. It will also take time, both to complete the consultation, and for actions taken to produce effects on global imbalances: these have been built up over a number of years and will not be reduced to sustainable levels quickly. However, I hope that the consultation will produce: (a) a shared analysis of the nature and consequences of global imbalances; (b) a common understanding on policies designed to make things happen in several countries together, and (c) understandings on the role the Fund can play as a forum for implementing the common approach.
15. The Medium-Term Strategy contains other steps to strengthen our surveillance too. For example, we are working to improve the quality of our analysis, including of exchange rates. One aspect of this is that we are in the process of extending to the currencies of the major emerging economies the analysis that the Fund currently does on industrial countries' economies to assess, within a consistent cross-country framework, whether exchange rates are broadly in line with fundamentals. This is something that needs to be handled with caution, given methodological difficulties and sensitivities, but it is an important step, which will strengthen the analysis of competitiveness that we regularly undertake in our work on individual countries.
16. We are also intensifying our efforts to integrate our financial sector work, including on capital and financial markets, in our regular surveillance activities. The increased importance of financial markets for growth and development for all countries is a major feature of the new world of globalization. It is of particular importance for emerging market countries, which have a lot to gain from financial integration but may also become more vulnerable in integrated global markets. To reflect this, in our surveillance of the global economy, we have already begun to devote more attention to the linkages between the financial sector and real economy. Meanwhile, in our surveillance of individual countries' economies, we are enhancing the analysis of financial sector vulnerabilities and ensuring that this is reflected in our macroeconomic analysis and policy advice. The bottom line is that in the past, nasty surprises in the financial sector have had even nastier effects on the real economy. To avoid such surprises, we are devoting increased resources to financial sector surveillance.
17. I have focused particularly on surveillance work today, because it benefits all of our members, and it is at the heart of the Fund's responsibilities. But the Medium-Term Strategy covers many other aspects of the Fund's work besides surveillance. Let me mention briefly some areas where I expect some changes over the coming year.
18. I think we need to improve the usefulness of IMF support for emerging market economies. After very heavy borrowing for a period of years, not many of our emerging market country members are currently borrowing from the Fund. This is partly a reflection of good conditions in financial markets, and of improved economic management in emerging market countries themselves. But I want to make sure that if financial market conditions worsen, 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 liquidity for emerging market countries that have strong fundamentals but remain vulnerable to shocks. The aim would be to provide assurances that substantial financing will be available in time of need, a framework for policy commitment and monitoring, and a signal to markets. Our Executive Board discussed this instrument for the first time last week. I look forward to further discussions on this issue in Singapore. Given members' support, we would work on these issues in the coming period with a view to making concrete progress before the next Spring Meetings.
19. We are also refocusing our work on low-income countries. Over the past year, the Fund has moved quickly to implement the Multilateral Debt Relief Initiative, wiping out the debt owed to us by some 19 poor countries, and other international organizations have followed. I have also proposed in the Medium-Term Strategy that the Fund renew its commitment and improve its effectiveness in helping low-income countries meet the Millennium Development Goals by focusing on what we do best, and on tasks where we can make the greatest contribution. These include helping countries reap the benefits of higher aid and debt relief, and avoid a new buildup of unsustainable debt. A key role that the Fund plays is in promoting macroeconomic stability, which is the prerequisite for sustainable growth. The Fund can also provide support in other policy areas where it has expertise, and that are critical to growth: for example, trade policy and financial sector issues. In all of these areas we also need to work closely with others—the World Bank, donors, and most importantly low-income country governments and civil societies.
20. We are also making some very important changes in the Fund's own governance. The background to this is that the distribution of Fund quotas, which largely determine voting power in the Fund and also influence the amount that members can borrow from the Fund, has changed only gradually over time and has not kept up with changes in the relative position of countries in the global economy. There is a clear need for a rebalancing of quotas to reflect changed economic realities, especially the increased economic weight of major emerging markets. There is also a need to enhance the participation and voice of low-income countries, whose weight in the global economy may be small but for which the Fund plays an important advisory and financing role. I believe that reform of quotas is essential for the IMF to remain an effective and credible participant in global economic discussions.
21. Last week, we took a significant step forward when our Executive Board reached a historic agreement on a package of reforms which will bring about the most significant change in our governance structure in a generation. In Singapore, we will ask our members to approve an increase in the quotas of four under-represented countries: China, Korea, Mexico, and Turkey, and to endorse a broader reform of the quota process over the next two years. This would involve a new formula designed to capture member countries' weight in the global economy in a simpler and more transparent manner, and further quota increases for a broader range of members based on the new formula. We will also ask our members to support proposals to enhance the voice of low-income countries through an increase in the "basic votes" that are allocated to all members regardless of size, and by providing additional resources for the two African chairs.
22. As I said at the outset, this is an exciting time for the Fund, and for me. The current position of the global economy is strong, but there are risks. With good international cooperation we can contain these risks, keep the global economy strong, and broaden the reach of prosperity and progress. The reforms of the Fund that we are working on will play an important part in achieving this, and our meetings in Singapore will be a further significant step in implementing these reforms. We have a long journey ahead of us, but we are well underway.
With that, I now invite your questions. Thank you very much.