The International Monetary System: Reforms to Enhance Stability and GovernanceBy Dominique Strauss-Kahn,
Managing Director of the International Monetary Fund,
International Finance Forum, Beijing
November 16, 2009
As Prepared for Delivery
It is my great pleasure to address such an eminent audience at the annual meeting of the International Finance Forum. Meeting here in Beijing, we are at the forefront of the global economic recovery, with China leading the world out of recession. This performance is in keeping with China’s remarkable achievements over the last generation.
China’s role in the international policy debate has been rising in tandem with its growing economy. As a key member of the G-20, China is helping to elaborate the global policy priorities for the future, and devise solutions to global problems. And at the IMF, China is supporting our efforts to adapt and serve the needs of our member countries even more effectively. I look forward to listening and learning from my exchanges with the Chinese leadership, as well as with business leaders, academics, and the Chinese people during my visit to Beijing.
In my brief remarks today, I will touch on two main topics. First, the principal challenges for the world as it begins to emerge from the global crisis. And second, how to strengthen the international monetary system, including by reforming global governance.
I. Policy Challenges for the Global Economy
The global economy appears to have turned the corner at last. The recovery is uneven and not yet self-sustaining, but many emerging economies—especially in Asia—are turning around strongly. Indeed, in China, we project growth of 8½ percent for 2009 and 9 percent in 2010.
While the global outlook has thankfully improved, we still face considerable policy challenges. The biggest risk is a premature withdrawal of policy stimulus. While it is prudent to plan for so-called “exit strategies,” policy makers should keep supportive measures in place until a recovery is firmly established, and particularly until conditions are in place for unemployment to decline.
In China, the government’s commitment to maintain fiscal stimulus into 2010 will be important for supporting growth. As the government also recognizes, however, the time has come to begin slowing the very rapid pace of loan growth, which raises risks of overinvestment, overcapacity and ultimately bad loans.
With the recovery emerging, a key medium-term policy challenge for the global economy, the first focus of my talk today, is how to achieve a more stable distribution of demand across economies. This is the challenge of what we have come to call global economic rebalancing.
In the run-up to the crisis, global imbalances widened significantly. Because they raised concerns of possible disorderly adjustment, these imbalances have been a source of concern for policy makers. And although global imbalances have declined during the crisis, they remain large and could widen again as the global economy normalizes.
The G-20 recently adopted a Framework for Strong, Sustainable, and Balanced Growth, which sets out a process of mutual assessment of policies and their implications for global growth. This reflects a shared understanding that all nations must do their part if the rebalancing effort is to succeed. And the G-20 has called on the IMF to lend analytical support to the mutual assessment process.
What can the economies at the heart of these imbalances do?
In economies that have run large current account deficits, national saving will need to increase. In many of these economies, including the United States, fiscal consolidation must take priority. And in those that have experienced asset price busts, financial sector repair will be essential for a lasting recovery.
On the other hand, in economies that have run large current account surpluses, domestic demand needs to be stronger. In euro area economies and Japan, competition in product and labor markets should be increased. And in emerging Asia, rebalancing means increasing domestic demand—investment in many countries, and in China, an emphasis on private consumption.
China’s leadership has already articulated a clear vision for how to boost private consumption. Consumer spending is growing faster than the economy as a whole. Moreover, as noted by President Hu last week, China will be taking further steps to boost household spending—and reduce reliance on exports—in the period ahead.
Much is already being done. For example, the bold new initiative to provide quality healthcare for most of the Chinese people. Reform of the rural pension system is also moving forward. But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms.
A stronger currency is part of the package of necessary reforms. Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labor share of income, and provide the right incentives to reorient investment.
At the end of the day, higher Chinese domestic demand, along with higher U.S. saving, will help rebalance world demand and assure a healthier global economy for us all.
II. The International Monetary System: Reforms to Boost Stability and Governance
I turn now to my second topic, namely strengthening the international monetary system.
Over the last year or so, many have asked questions about the viability of the current system—and in particular, questions about the U.S. dollar’s role as the principal reserve currency. Some worry that the United States’ economic and financial problems, and in particular its large fiscal imbalances, present serious risks to the value of the dollar, and hence of a disorderly adjustment in the international system.
There have already been a number of valuable proposals for how to address concerns related to reserve currencies, including from prominent figures here in China. Some call for the creation of a new world reserve currency, possibly based on the Special Drawing Right (or SDR)—the composite currency issued by the IMF. Another possibility is for a multi-reserve currency system to emerge, with the euro, the yen, and the renminbi perhaps serving as co-equal anchors. These are useful ideas that will influence the future discussion of this issue.
My own view is that the current international monetary system, despite its problems, is still working reasonably well. It proved resilient during the recent crisis, and near-term concerns about the dollar can be eased with appropriate policy actions from the U.S. authorities. In fact, I expect the dollar to remain the principal reserve currency for some time.
Having said this, it is important to address the underlying causes of instability in the international monetary system.
Providing global financial insurance
Recent experience has demonstrated, once again, that fast-paced and hard-hitting financial crises can lead to large demands for foreign exchange and external liquidity. In some countries, the need arises from underlying balance of payments problems. In others, it may purely result from global liquidity shortages that have no relation at all to domestic conditions. One response to this is for countries to build up precautionary reserves as a form of self-insurance. But we have to recognize that this carries serious costs—including the missed opportunity to invest in domestic projects with a high social rate of return. For all these reasons, I see a clear need for global financial insurance.
At the global level, I believe that the IMF can serve as an effective and reliable lender of last resort. The international community has indicated a strong commitment to this objective, by tripling our lending resources to $750 billion—including about $172 billion in contributions from our Asian members. This has allowed us to provide critical financing to many countries hit by the crisis.
However, to serve as a truly dependable global lender of last resort, the Fund will need considerably greater resources. In this regard, China’s commitment to purchase up to SDR 32 billion in IMF notes is very helpful. But even after its recent tripling, our resources are still smaller as a share of global GDP—and even smaller as a share of global capital flows—than they were when the Fund was created.
Our members have recognized this constraint. At the IMF Annual Meetings in Istanbul, they asked us to examine the appropriate size and composition of capital we might require to safeguard our ability to meet members’ needs.
We have also been asked to consider ways to improve the way we lend, i.e. to improve our financing instruments to better meet the need for global financial insurance.
Regional reserve pools hold considerable promise in this regard. Here in Asia, the Chiang Mai Initiative provides an important complement to IMF financing. We should think about ways in which these regional resources—as well as those in other regions—could be combined with the IMF’s financial and technical resources to make them more effective.
Finally, we should look more closely at ways to increase global liquidity more generally. Earlier this year, the IMF boosted global liquidity through a $284 billion issuance of additional SDRs. Such allocations could be made more useful in the future, by being targeted to regions or issuing SDRs more flexibly in response to global liquidity tensions.
As you can see, there are many ways of thinking about how to strengthen the international monetary system. I am sure that as we delve further into this issue, our members will provide many excellent ideas for how to make progress in this area.
Global governance reform
Allow me now to touch also on the issue of global governance reform. I consider progress in this area a critical element for strengthening the international monetary system.
The emergence of a new global governance framework has been essential for securing the international cooperation needed to tackle the crisis and secure a sustainable recovery.
In particular, the transformation of the G-20 into a key forum for fostering the international policy dialogue and advancing reform initiatives has been, in my view, a historic development. And thanks to Asia’s strong representation at the G-20, with 6 members—including China, of course—the region has a solid platform from which to make valuable contributions to reshaping the global financial architecture.
What is the IMF doing to improve its own governance?
The IMF can only be effective if we have the confidence—and the trust—of our member countries, and we have taken a number of steps in this direction. Under the quota reforms agreed in 2008, underrepresented countries in Asia stand to gain nearly 3 percentage points in quota share (including 1 percentage point for China alone). And this will raise Asia’s overall IMF quota to about 19 percent. The region is likely to gain even more under the agreement reach in September at the Pittsburgh Leaders Summit to shift 5 percentage points of quota toward dynamic emerging markets and developing countries. This shift should be completed by early 2011.
III. Closing Remarks
The world order is changing. For China and for Asia as a whole, a growing voice on the international stage means tremendous opportunities to contribute to the reshaping of the post-crisis global economy. This is entirely appropriate, given Asia’s economic weight in the world. By the same token, Asia also has a growing responsibility to help find the global solutions needed to secure strong and sustainable growth for the long term.
I am certain that Asia will play a vital part in making the most of this historic opportunity. China, no doubt, will play a leadership role in making the changes needed to embark on a new growth path that secures long-term economic success for all nations.
Thank you for your kind attention.