An Address to the 2011 International Finance Forum by Christine Lagarde, Managing Director, International Monetary Fund
November 9, 2011By Christine Lagarde
Managing Director, International Monetary Fund
Beijing, November 9, 2011
As prepared for delivery
Good morning. It is a great joy and privilege to be here. I would like especially to thank the chairman of the International Finance Forum, Dr. Cheng Siwei, and His Excellency Han Seung-so, former Korean prime minister, for kindly inviting me here today. It is always a pleasure to return to this magnificent country.
I have visited China many times, but this is my first trip as Managing Director of the IMF, a visit from an old friend of China. I am very pleased that China and the Fund have such an excellent relationship. China is one of our most important shareholders. So I look forward to listening to and exchanging views with our Chinese friends—and to discussing how our partnership can grow even stronger in the future.
The rise of Asia in the global economy is really the defining economic success story of modern times. And so today, it is no surprise that Asia is propelling the global recovery.
In all of this, China is very much a leader. Just look at its remarkable achievements over the past three decades—creating 370 million jobs, lifting half a billion people out of poverty, and growing by an average 10 percent a year.
No wonder that when I visit this region, I am filled with hope and optimism about the future.
But I do not visit you today in the best of circumstances. There are dark clouds gathering in the global economy, and Asia will need to watch them carefully.
I am encouraged by the steps that have been taken recently—by the Euro Area leaders a few weeks ago and by the G20 leaders a few days ago. But the risks remain serious.
So let me talk about four things:
First, the state of the global economy.
Second, the policies needed to restore global growth.
Third, how China can do even more to safeguard its own economic future.
And fourth, the importance of shifts taking place in global economic governance, especially as it relates to the role of emerging markets and China
1. Global and regional economic challenges
First, as I have said before, the global economy has entered a dangerous and uncertain phase. Adverse feedback loops between the real economy and the financial sector have become prominent. And unemployment in the advanced economies remains unacceptably high.
If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment.
While so many other areas are still struggling to recover from the global financial crisis, Asia is rebounding. It is a real bright spot—no question about it.
Asia is not immune, however, from developments in the rest of the world. The trade channel is critical, as the region still relies a lot on external demand to propel growth. Emerging Asia is also vulnerable to developments in the financial sector.
In our increasingly interconnected world, no country and no region can go it alone. We are bound together by our economic success—or failure.
2. Policy path
Which brings me to my second issue—the policy path ahead for the world. Since the advanced economies are at the center of the global turmoil, they have a special responsibility to undertake the policies needed to restore confidence and lift growth.
In that respect, as I said, I am encouraged that on October 26, Euro Area leaders agreed on a framework that would restore debt sustainability in Greece; recapitalize European banks; strengthen the firewall against financial contagion; and lay the foundations for robust economic governance in the euro area.
At the Cannes Summit just ended, the G20 countries endorsed this framework and emphasized the need for expeditious implementation. That is now the key.
More broadly, we also need to keep our eyes on the big prize—a strong, sustainable and balanced recovery. What does this mean for the advanced economies in terms of the policy path forward?
It means striking the appropriate balance in fiscal and monetary policies to promote stability and growth. It means pushing ahead with structural policies to boost competitiveness and employment; and strengthening financial regulation to make the financial sector safer and to put it back in the service of the real economy.
Of course, the mix of policies differs from country to country. There is no single path. Each must find the right balance which, when combined with what others are doing, leads to the kind of recovery we want—one that benefits as many people as possible.
And here, let me emphasize another key element of a truly sustainable recovery—the social dimension. We need growth, but we need growth that produces jobs. Without jobs, the great risk that is that a generation of young people becomes unmoored from the productive economy and the bonds of society.
We need growth, but we need growth that is inclusive. As is borne out by recent IMF research, more equal income distribution is good for macroeconomic stability and sustainable growth.
If this is the policy direction for the advanced economies, what is the path for Asia?
Right now, Asia is facing a difficult balancing act. Countries need to prepare for any storm that might reach their shores. But some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions. Therefore, policy must respond nimbly to changing circumstances.
When inflation pressures are high and monetary policy is accommodative, monetary tightening makes sense. But when inflation is under control and exposure to external dangers is high, countries can hold off on monetary tightening. Indeed some countries in the region have already halted monetary tightening or even eased. However, since fiscal deficits and debts are higher than before the crisis, for the vast majority of countries, continued deficit reduction is the right course of action.
But if the global economic environment deteriorates further, it makes sense to quickly change course and deploy a range of measures to cushion economic activity. For example, policymakers can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central bank swap lines. We, at the IMF, are prepared to help in complementing regional financial arrangements in Asia.
The social dimension that I spoke of is also directly relevant in Asia. It is at the forefront of thinking of the leaders in Asia, including in China. Certainly, tremendous progress has been made in poverty reduction. Major efforts have also been made and are continuing to be made in building better social safety nets and investing more in infrastructure, health and education in the region.
This strategy has the twin benefit of creating more inclusive growth for the benefit of the people of Asia and providing stronger domestic engines of growth—which in turn helps the global economy.
3. The role of China
Which brings me to my third point: the role of China. Let me state up-front that I believe that, fundamentally, China is on the right path—a path laid out comprehensively in the 12th five-year plan.
It is on the right path in terms of reducing domestic vulnerabilities—by moderating the pace of credit growth, increasing provisioning and capital, and expanding scope of macroprudential policies. There is still scope for using monetary policy to restrain credit growth.
Fiscal policy is appropriately moving back to balance. But if the growth outlook deteriorates significantly, it could become the first line of defense, given ample fiscal space and capacity to deploy resources quickly.
China is also on the right path in terms of reorienting the economy towards domestic demand. As Laozi said, “a journey of a thousand miles must begin with a single step”. Indeed, China has already made good progress on the road to rebalancing.
The current account surplus has fallen from an all-time high of 10 percent of GDP in 2007 to just over 5 percent last year. While some of this comes from weak global demand, some of it also comes from higher imports—which helps the global economy.
Now is the time to move further from exports and investment toward consumption—including by further boosting household incomes and expanding social safety nets. Reform of the financial system continues to be important and, as we have said before, China also needs a stronger currency in real effective terms.
4. Global economic governance
Global economic governance is my fourth and final point. I have already referred to the spectacular rise of Asia in general, and China in particular, in the global economy.
China is a vital driver of global growth and, along with other key emerging markets, it also helps to lift growth in low-income countries through trade, investment, and financing.
China plays a leading role at the G20—and I was delighted to have the opportunity to meet with President Hu Jintao at the Cannes Summit. China also plays a leading role at the IMF.
For the Fund to be more effective, we recognize that we need to be truly representative of our membership—all 187 countries. In that respect, we have been working hard to reform our governance structure so that emerging market and developing countries have a greater voice in the institution.
One result of these governance reforms is that China is now in our top three shareholders. So China is a very important member of the IMF—which is only fitting, given its very important role in the global economy.
I want to leave with you one final thought—we are all in one boat. One global economy. Our fortunes rise together, and they fall together.
“All men are brothers”, said the Analects.
We have a collective responsibility—to bring about a more stable and more prosperous world, a world in which every person in every country can reach their full potential.
For much of history, China was among the most technologically advanced, the most populous, and the most prosperous of nations. China has once again taken the global central stage and plays a crucial role—today and into the future.