Speech

Remarks by John Lipsky, First Deputy Managing Director, International Monetary Fund
Delivered at the Korea Economic Institute, Washington, DC
July 27, 2010

As Prepared for Delivery

In the wake of the 2008 global financial crisis, the G-20 assumed a leadership role in addressing financial economic issues. This newly-empowered group helped give political backing to global efforts, many of them centered on the IMF, to arrest the crisis, to secure a durable recovery, and subsequently to deliver strong, sustainable and balanced growth.

We can look back over this short period to some significant accomplishments made possible through the cooperation of G-20 members, working together and with key multilateral institutions such as the IMF. Examples include the massive 2009 coordinated fiscal stimulus, the tripling of Fund resources—including new support for the poorest countries—and the strengthening of the global financial safety net through such innovations as the IMF’s Flexible Credit Line (FCL). These results demonstrated in high relief the potential gains from strong international collaboration.

Of course, some wondered whether G-20 members’ willingness to work together—that was so effective during the crisis—would fade away as the recovery arrived and challenges became more complex. The early evidence is that the cooperative spirit has endured.

Of course, cooperation requires persistence and commitment. In several areas, the seeds have been sown for ongoing dialogue and cooperation, even if countries’ diverse circumstances call for distinct policies in response.

With the accomplishments of the London and Pittsburgh Summits behind us, and with Toronto effectively looking toward Seoul for results across many fronts, the focus is turning to Korea—not just for concrete decisions, but also to demonstrate that the spirit of effective collaboration endures.

Thus, both expectations and risks are high, but so too is the potential for success, and for a lasting legacy to be created.

Korea’s Role

Since becoming G-20 Chair, Korea has taken its responsibilities forward with impressive ambition and professionalism, evidencing a strong commitment to multilateralism and to the Asian region.

This was evident last week in Seoul, when I attended the G-20 Sherpas meeting, as part of the preparations for the November Seoul Leader’s Summit.

Already, these efforts are beginning to pay off. The G-20 has added political momentum to reform efforts currently underway in the IMF and elsewhere. Many complex issues have moved forward, including: coordinating exit policies, strengthening the global financial safety net, implementing the Framework for strong, sustainable and balanced growth, and reforming IMF governance. These and other issues are on the G-20 agenda—and they also will be a key focus for the IMF in the months ahead.

Challenges

The outlook for the global economy presents various challenges for policy makers and will affect the G-20 policy agenda:

Despite recent signs of slowing momentum, the global recovery is expected to continue. Nevertheless, the most likely prospect is for a moderate, multi-speed recovery, with significant downside risks. While financial markets have improved somewhat in recent weeks, ongoing financial market strains have heightened uncertainty. Against this backdrop, the overarching policy challenge is to sustain the recovery while restoring confidence.

Several key policy challenges are evident, some more immediate than others: These include:

• The need for an ambitious and vigorous program of financial system repair and reform. In many advanced economies, progress is underway on bank recapitalization; on bank consolidation, resolution and restructuring; and on regulatory reform. Greater transparency regarding bank liabilities and their exposures to sovereign debt, is a key goal. The recently completed European bank stress tests are receiving particular focus at present, and in general they have made a positive contribution to market sentiment. There is also a pressing need to reduce uncertainty about the broader regulatory environment.

• The need for credible, medium-term fiscal consolidation plans to bolster confidence, while not choking off the recovery. G-20 members have agreed to follow credible and “growth-friendly” medium-term fiscal adjustment plans that could include legislation creating multi-year targets. Reforms to pension entitlements and public health care systems, controlling non-entitlement spending, and strengthening fiscal institutions are critical tasks. Better strategies for public debt management also will be helpful. While most G-20 economies’ current fiscal plans appear to be appropriate, countries facing sovereign funding pressures still will require upfront measures to underpin confidence.

• The need for global demand rebalancing and key structural reforms to support future growth. In economies with excessive external surpluses, the transition toward domestic sources of demand should continue, helped by structural policies to reform social safety nets and improve productivity in the service sector as well as—in a variety of cases—more flexible exchange rates. In economies with excessive external deficits, fiscal consolidation and financial sector reform should help rebalance demand. But successful fiscal adjustment is difficult without strong growth. Structural reforms, particularly in product and labor markets, are needed to raise potential growth.

What does this mean for the G-20?

All roads lead to the MAP. Front and center in the G-20’s economic policy agenda is the Framework for strong, sustainable and balanced growth. Launched in Pittsburgh, the Framework offers the potential for precisely the kind of policy collaboration and cooperation that was central to the G-20’s success last year during the depths of the crisis.

So far, the signs are encouraging: The first stage of the process included constructive engagement from all parties. It was agreed in Toronto that countries will formulate country-level plans to achieve an“upside scenario” for the global economy. Nevertheless, the second stage of the process will be very challenging.

As G-20 Chair, Korea has the daunting challenge of shepherding this process to Seoul, in order to deliver the Comprehensive Action Plan envisaged by Leaders in Toronto. Given the inevitable difficulty of multilateral policy coordination, this will be a demanding task.

In addition to addressing the underlying economic challenges, three more “architectural issues” also are high on the agenda. In particular:

• The international financial system needs to be made more robust. Hence, as noted above, there is a need to accelerate the process of strengthening both regulatory and supervisory elements. Korea is working with officials in key financial centers, the FSB, the IMF and other stakeholders to reach agreement on this agenda.

• The resilience of the international system needs to be improved. A strengthened global financial safety net is an important potential building block. Korea has been working extremely actively within Asia, and with other G-20 capitals—as well as with the Fund—to garner the necessary support of the international community.

• Governance reform at the IMF is another challenge. With an objective set in Pittsburgh, all eyes are turning to Seoul for delivery. But quota reform is only one aspect of the task. A broader reform package is needed to adequately reflect new economic realities. Korea has an important role to play, working with key actors, particularly emerging markets. It won’t be easy, but reaching an agreement would be a huge accomplishment.

Conclusions

The G-20 agenda in the run-up to the Seoul Summit is complex. This reflects both the wide ranging and deep-rooted nature of the challenges, and the window for meaningful and lasting reform that the crisis has created.

In recognition of the drive and commitment of the Korean authorities, I am confident that the Seoul Summit will be able to make significant progress in all these areas, showcasing how the international community in general—and the G-20 specifically—can work together to make the world a more stable, secure and prosperous place for all.