The Evolving Role of the IMF in the Global Economy, Remarks by Min Zhu, Deputy Managing Director, International Monetary Fund, Port Louis, Mauritius
October 17, 2011Remarks by Min Zhu, IMF Deputy Managing Director
Port Louis, Mauritius, October 17, 2011
As prepared for delivery
Good afternoon. It’s a great pleasure to be here today. I would like to talk about the global and regional outlook. I will then talk about regional integration and how the IMF can help countries address the challenges they face, especially here in Africa.
The new challenges
Global economic slowdown
Let me begin with the global economic outlook. Overall, we expect global growth to slow to 4 percent this year and next.But this global number masks some important differences. In the advanced economies—the epicenter of the financial crisis—the recovery is still weak and bumpy, with unacceptably high unemployment. They will only manage an anemic 1½ to 2 percent in 2011-12.
The global economy has entered a dangerous new phase. While the recovery continues, it looks weaker, bumpier, and more uneven. Financial stress has risen substantially. The world is suffering from a collective crisis of confidence, which is holding back consumption, investment, and job creation. This imposes not only economic, but also social costs. And uncertainty has been exacerbated by policy indecision and political dysfunction across the advanced economies.
A key problem is too much debt in the system. Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States. Adverse feedback loops between the real economy and the financial sector are gaining strength. Concerns about public debt sustainability in the euro area have intensified, leading to fears about the health of the area’s banks.
The story is different in the emerging markets and developing countries, with growth projected in the 6 to 6½ percent range. The two-speed recovery that we noted last year is still very much in evidence. If anything, it is getting starker. While the advanced economies face cold headwinds, the emerging markets and developing countries face too much heat.
This is a real bright spot, as countries harvest the fruits of sound economic policies. And while accommodative policies, especially fiscal stimulus, helped to ease the pain of the crisis, we now see signs of overheating and inflationary pressures in some countries.
But these countries are not immune to adverse developments in the core economies.
I see a number of key risks here. First, continued financial market stress could lead to large and abrupt capital outflows as investors flee to safety. Second, weaker global growth would hurt emerging markets through reduced trade flows and lower commodity prices. And third, a global slowdown could expose underlying vulnerabilities from excessive credit growth—vulnerabilities that typically stay below the surface in good times.
So downside risks are substantial. Without policy action to halt this vicious circle, the global economy could face a protracted period or low growth and high unemployment. Even worse, we cannot rule out a downward spiral of uncertainty and risk aversion, dysfunctional financial markets, unsustainable debt dynamics, and a collapse in global demand.
These countries must stand ready to deal with spillovers from the advanced economies. IMF research shows that economic tremors in core countries can easily reverberate across the globe, especially when channeled by the financial sector.
Resolving the crisis requires two key rebalancing acts—a domestic demand switch from the public to the private sector, and a global demand switch from external deficit to external surplus counties. Progress on both fronts has been weak. Private demand has not been strong enough to take the baton from public demand. And domestic demand in key emerging markets has not grown enough, owing to structural distortions and limited exchange rate flexibility.
Policies have gone halfway toward addressing the debt problems in advanced economies and achieving more domestic and inclusive growth in emerging and developing economies. It is time to finish the job. Policymakers must act now, act boldly, and act together. The stakes are high.
The first priority is to deal with balance sheets—sovereigns, banks, and households. On sovereigns, advanced countries need fiscal consolidation as a matter of priority, but, for some, pushing too fast will harm growth and jobs. Credible measures that deliver and anchor savings in the medium term will help create space for supporting growth and jobs in the short run.
Policymakers must also focus squarely on job creation. High unemployment not only depresses demand, but also leads to grave human and social costs. This is especially true when unemployment is long-lasting, and concentrated among the young and the unskilled.
In the emerging markets, including in Asia, the surplus countries must rely more on domestic demand, especially since domestic-led growth is also more inclusive growth. In the deficit countries, including in Latin America, the challenge is to reduce overheating and preserve financial stability.
While the advanced economies have the greatest responsibility to act, all must play their part. In this interconnected world, there can be no decoupling. The ultimate goal is growth—inclusive growth that benefits everybody, and growth that produces sufficient jobs.
African regional outlook
The encouraging recent developments we have been observing in sub-Saharan Africa make a welcome contrast to the disappointing recent performance of the advanced economies. For sub-Saharan Africa, we project output growth this year 5¼ percent, rising to 5¾ percent by 2012.
Beneath these good overall prospects for sub-Saharan Africa, there is however considerable diversity.
• Most low-income countries have been doing well, despite the weak world economy: one third of them are expected to grow by more than 6 percent this year. However, poor households have been hit hard by rising food and fuel prices, and famine is devastating the Horn of Africa.
• Economic developments have been less positive for some middle-income countries. South Africa, in particular, was hit hard by the global crisis. With unemployment remaining stubbornly high, growth will probably be limited to about 3½ percent this year.
• Oil exporters have been enjoying high oil prices, and the non-oil sectors in their economies are projected to grow by 7½ percent this year.
Despite the rebound, the crisis did a lot of damage. The strong momentum in reducing poverty and reaching the Millennium Development Goals has been stymied. South Africa alone lost a million jobs. And now, the resilience of Africa is being tested again by sharp increases in food and fuel prices and the fallouts of the sovereign debt crisis in Europe, spilling over to the European banking system. There are also downside risks to the outlook, including volatility in financial and commodity markets, as well as signs that inflation may be on the rise again.
Looking ahead, the policy challenge in Africa will become trickier, because of what is happening in advanced economies.
If growth continues to falter in the North, the South will eventually be adversely affected. This could happen through the same transmission channels as in the previous crisis, namely lower trade, lower foreign investment, lower remittances, and lower aid flows. In the event of an increased impact from the global slowdown, and subject to financing constraints, policies should focus on maintaining planned priority spending. However, some slower growing, mostly middle-income countries, including South Africa, have yet to see output and employment return to potential levels. Policies there should remain supportive of output progression; and even more so if global growth wanes.
Most low-income countries are currently growing at an increased pace, but their policy reaction has been too slow to shed the accommodative approach adopted during the previous crisis. As a result, inflation is now rising in a number of them. These countries should tighten monetary policy and focus on medium-term objectives in setting fiscal policy. With the projected output growth and rising inflation, it is time to rebuild the buffers that served the region so well during the previous crisis. And since many African countries need to invest in infrastructure and strengthen social safety nets, domestic revenue mobilization must be a priority.
Oil-exporting countries are in a different league. Better terms of trade are providing an opportunity to build up reserves depleted in the aftermath of the previous crisis to cushion price volatility and global slowdown, while at the same time pursuing development goals.
Trade re-orientation and regional integration
Trade re-orientation and regional integration can help increase resilience to the global downturn.
Developing countries now account for about half of sub-Saharan Africa’s exports and almost 60 percent of sub-Saharan Africa’s imports. This re-orientation is mostly driven by the economies of Brazil, China, and India, but also by a substantial increase in trade within sub-Saharan Africa. A similar re-orientation is also taking place in investment flows, with China now accounting for 16 percent of total foreign direct investment to the region; other emerging countries are also making considerable investments in sub-Saharan Africa.
This re-orientation and the associated expansion of trade and financial flows have benefits, including gains from comparative advantage, economies of scale, technology transfers, and the diversification of export markets. As a result, closer engagement with other developing countries, including within sub-Saharan Africa, fosters higher valued-added and employment.
However, Africans do not need to go far to find new opportunities. There are significant untapped resources for expanding trade and financial flows within sub-Saharan Africa itself. Regional integration could raise the economies of scale in the region, thus increasing industrialization, competitiveness, and attractiveness for foreign direct investment.
Against this background, it is encouraging that regional integration initiatives are gaining momentum. A tri-partite agreement among the East Africa Community, the Common Market for Eastern and Southern Africa, and the Southern Africa Development Community on launching negotiations on a free-trade zone was signed recently. This prospective free-trade zone could cover 26 countries with a population of 600 million and a GDP of about US$1 trillion. A lot remains to be done, however, to make this vision a reality. The IMF supports regional integration and harmonization initiatives through policy advice and technical assistance, drawing on its vast international experience. AFRITAC South, which we inaugurated today, will also contribute to these efforts.
The evolving role of the IMF
I believe the IMF has a strong partnership with Africa. We are certainly focused on the distinct challenges of the region. But in our interconnected world, global issues are also African issues. Strengthening our ability to prevent crises matters for everybody. Let me talk a little about the IMF’s agenda.
We are trying to better understand the interconnections that run through the global economy. We are focused more than ever on the vulnerabilities and spillovers that run through our interconnected world. Clearly, this is important for Africa’s economy too, given its dependence on what happens in advanced economies.
We are also trying to improve global monitoring of capital flows. This is becoming an important issue here in Africa, with the growth of frontier markets—like Mauritius—which are finding favor with international investors. These flows bring many benefits to recipient countries, but they also come with risks to macroeconomic and financial stability.
The IMF is seeking to sharpen its awareness of the quality of growth within countries. A poor distribution of income and high unemployment can have implications for macroeconomic stability, sustainable growth, and social stability, as demonstrated by the Arab Spring.
We need to broaden the range of indictors we look at to assess the economic health of a country. But this is not really our area of expertise, so we must collaborate with other institutions. Right now, we are working with the International Labor Organization (ILO) across a number of dimensions, including on the policies behind job-creating growth. Zambia is one of our pilot cases of enhanced social partnership discussions involving the IMF, the ILO, and the International Trade Unions Confederation. We are also working with the ILO in building effective social protection floors in low-income countries—Mozambique is a pilot in this respect.
I think our lending during the crisis drew a line in the sand, helping the countries themselves and reducing contagion—including to African countries. We also changed the way we lend, making our lending programs more flexible, streamlining conditionality, stressing country ownership, and protecting social spending.
Concessional lending to low-income countries jumped sharply during the crisis, and the Fund seeks to increase its concessional lending capacity to provide up to $17 billion during 2009-14. We also cancelled all interest payments through the end of 2011, with permanently higher concessionality thereafter.
We introduced different lending facilities to reflect the diverse needs of our membership better. We adopted a more flexible approach to debt, giving countries with lower debt vulnerabilities and greater capacity to manage public resources enhanced leeway to borrow more from both concessional and non-concessional sources.
Our lending programs allowed governments maintain critical spending. A recent IMF study shows that health and education spending in countries with IMF programs increases faster than in developing countries as a whole.
During the crisis, we also took steps to enhance liquidity provision in times of extreme volatility. We created insurance-like instruments intended for crisis prevention. Looking ahead, we are discussing ways to provide short-term liquidity during times of systemic stress to stop contagion. In this, we think about collaborating with other institutions, such as central banks, systemic risk boards, and regional financing arrangements.
Capacity building is a core part of the IMF’s work. After all, sound policies must be built on sound foundations. Strong institutions are critical for sound macroeconomic management, and ultimately for economic development and inclusive growth.
It is technical assistance and capacity building that brings me to Mauritius today. Just a few hours ago, I had the privilege of opening our latest IMF regional technical assistance center—known as AFRITAC South. This represents an important milestone. This new center is our fourth in Africa, and the total number of countries covered by AFRITACs has reached 38. And we are not finished, as we are planning on one more center in West Africa.
I believe the AFRITAC model is a recipe for success, because of three key advantages. First, it is built on country ownership. Second, the proximity to the action greatly enhances the chances of success. And third, the model provides ample opportunities for cross-fertilization, knowledge transfer, and exchange of best practices.
It is now part of conventional wisdom that cooperation saved the world from calamity during the last crisis. Today, collaboration is more important than ever, given the grave and urgent challenges, as well as the complexity and interdependence of the global economy. And everybody must have a voice at that table, including Africa.
As a multilateral institution founded to support cooperation, the IMF is here to help its members. We all share the same goal—a stronger, more resilient, and more inclusive global economy. Let’s continue to work together during these uncertain economic times.