Seizing the Moment – Thinking Beyond the Crisis
By Christine Lagarde
Address at the Brookings Institution
Managing Director, International Monetary Fund
Washington DC, April 12, 2012
|Webcast of the speech|
As prepared for delivery
Good morning. I am delighted to be here. I would like to thank the Brookings Institution—and especially my friends Strobe Talbott and Kemal Derviş—for inviting me to speak here.
The Institution provides an ideal forum to discuss our global economic future and look beyond the immediate imperative of dealing with the crisis.
In fact, both the IMF and Brookings were formed by visionaries from a period of global crisis. Robert Brookings, here, and John Maynard Keynes and Harry Dexter White at the Fund, took the opportunity, even in the midst of crisis, to think deeply about how to shape a better tomorrow.
They seized the day.
As Horace famously wrote in Odes: “Carpe diem.”
Strobe and Kemal too have embraced this spirit. Each in his own way has seized the moment—Strobe with his work following the break up of the Soviet Union, and Kemal—as a courageous minister of economy—with bold reforms, which helped put Turkey in a much better position following its crisis.
We saw this same spirit when G20 leaders came together, during this global financial crisis, with a renewed sense of collaboration. First, here in Washington in late 2008, then again in early 2009 in London. In fact, some have called it the “London moment” when, as you may recall, vigorous coordinated action was taken—including strengthening the capacity of the IMF to help the world respond.
I believe we may be at another such moment.
In recent months, important actions have been taken to confront the problems we face. I am thinking primarily of Europe, but of other parts of the world as well. As a result, we have seen some improvement in the economic climate.
But, let me also underline this point: the risks remain high; the situation fragile.
Yet, we have earned a bit of time to think through and to actively pursue what still needs to be done.
Who knows, perhaps as we look forward to next week’s Spring Meetings of global financial leaders, this can be our “Washington moment”?
What do I mean? We must address three fundamental issues:
- First, the next steps needed to keep the crisis at bay.
- Second, the building blocks needed to achieve more lasting growth and stability to put the crisis behind us.
- Third, how strengthened cooperation—and a strengthened IMF—can help us take advantage of the tectonic shifts taking place in the global economy.
I. Putting the crisis at bay
First, actively pursuing what still has to be done to keep the crisis at bay.
Only a few months ago, we seemed to be staring into the abyss. More recently, some data have indicated that the United States may be beginning to turn the corner. Financial strains in Europe have eased somewhat since December. However, events of the past week remind us that markets remain volatile and that ‘turning the corner’ is never easy. Emerging and developing economies have been, and should continue to be, a relative source of strength.
But, again, we must not let down our guard.
As Nelson Mandela said, “I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb.”
Clearly, the risk that looms largest is that sovereign and financial stresses return with renewed force in Europe.
The steps taken by the Europeans in recent months are a timely reminder of the power of policy resolve and action. Yet there are still risks, hills to be climbed.
Europe must keep up and build on these efforts: continued strong policies at country level; continued support from the European Central Bank; continued efforts to build a healthier banking system; and continued steps toward fiscal integration. The much expected decision of Euro Area Ministers to strengthen the European financial firewall has also been crucial.
These actions will help, slowly but surely, to restore confidence and reduce vulnerabilities.
But we also need a broader approach—and a stronger global firewall—if we are to push back this crisis.
In today’s global economy, with its dazzling array of instant interconnections, a stronger European firewall can only ever be part of the solution. A stronger global firewall will help complete the “circle of protection” for every country.
Here, the IMF can help. But to be as effective as possible, we need to increase our resources.
The Fund needs to be able to stand behind all its members and meet the needs of all those affected by the crisis—those at the epicenter, and those who are bystanders.
We are, of course, continuously reassessing global risks, taking into account developments in the economic climate as well as all policy actions including by Europe. The needs now may not be quite as large as we had estimated earlier this year.
But, let us make no mistake: the risks and the needs are still sizeable, and it would be imprudent to think otherwise.
In this context, I have been encouraged by the expressions of support by many of our member countries to increase our resources. I am hopeful that, during the upcoming Spring Meetings, we will make progress on this issue.
We should seize the moment.
II. Building blocks for future growth & stability to put the crisis behind us
Which brings me to my second main point—the opportunity we have to build a stronger foundation for growth and stability to put the crisis behind us.
The crisis has shaken the foundation of our economic framework. For too long, the benefits of growth have been shared by too few. Growing inequalities and weak financial sectors left the world prone to instability and crises.
In the nine months I have been Managing Director, I’ve travelled across our membership. I have seen the costs of that instability. I have seen the face of unemployment—the hardship, the loss of dignity, the economic loss. It is the same in all countries: advanced, emerging, and low-income.
We saw the painful collusion of social exclusion and high unemployment—especially among young people—in the countries transitioning from the Arab Spring. A generation is at grave risk of being lost in transition.
It is imperative that the reforms underway across their region succeed. It is imperative that all the people of the Middle East have the opportunity for a fairer and more prosperous future. And it is imperative that we help them achieve it.
In particular, appropriate financial support will be critical to prevent the risk of near-term economic instability jeopardizing the future. The costs of inaction—for the region and the world economy—would be many times higher.
In the Middle East and elsewhere, the global economy must help deliver the right type of growth and the jobs that people need. That is not happening on the scale needed right now.
So, even as we grapple with the crisis, we must take this opportunity to rethink the paradigm and harness a new type of growth.
What does that mean in practice?
Some of the best economic minds in the world are struggling with this issue, including here at Brookings. We, too, are working on it at the IMF.
Let me sketch out some of our thinking.
In the short-run, we obviously need more confidence and more demand. The immediate focus of policies must therefore be to support growth where it is still weak.
Let me be clear: in many countries, especially in the advanced economies, fiscal adjustment is essential. But the pace of adjustment matters. And it must be country-specific.
Yes, some countries have no choice but to adjust now, sharply and quickly. But that is not true across-the-board. Other advanced economies can be more gradual in reducing deficits—they can allow automatic stabilizers to operate, letting tax revenues fall and spending rise if their economies weaken. Others still have the flexibility to reconsider the pace of deficit reduction this year, to limit the harm to growth.
But short-term caution should be no excuse to delay efforts to restore sound public finances. Grounding adjustment in credible medium-term plans—as is needed in the U.S. and Japan, for example—will not only help address fiscal concerns, but also reinforce confidence and growth.
Monetary policy can also support growth where inflation remains in check—as is the case at present in virtually all advanced economies. For emerging economies, a bit more caution is required, especially if rising oil prices and extended credit booms begin to test the bounds of inflation.
Low-income economies also need to strike the right balance. Even as they are being hit by reduced aid flows and reduced remittances, they must guard against current risks—especially those radiating out of Europe. Rebuilding their policy buffers is a priority.
These kinds of policies will help to get growth restarted over the short-term. Over the longer-term, we must work toward growth that is more inclusive and more durable.
Clearly, the rebalancing of the global economy—a shift in demand from external deficit to surplus countries—is key and something that the IMF has been advocating for some time. It is even more important now. We are seeing some promising signs—in China, for example, albeit partially. But we know that more needs to be done.
We also know—based on recent IMF research—that a more equitable distribution of income can help promote economic and financial stability, and more lasting growth.
Brazil, for example, reduced inequality significantly from the early 1990s through a focused and efficient set of transfer programs. If other countries were to reduce inequality by as much as Brazil, our analysis shows that periods of uninterrupted high growth could be 50 percent longer than they might otherwise be.
India and China too have made important in-roads into reducing poverty. Yet, with high growth, they have also seen rising inequality. Those inequalities need more attention.
So we need growth. We need equitable growth. We need inclusive growth.
How? There are many important factors but let me emphasize three.
One, we need financial systems that support—not destabilize—the economy. This means repairing financial systems so they can deliver credit, growth and jobs. This means better regulation and supervision, and coordination across countries, to prevent the recurrence of reckless risk-taking. And, it means getting the financial sector to pay its fair share. We dare not be complacent on financial sector reform. The mission has not been accomplished—the mission is still to be accomplished.
Two, we must improve competitiveness and have better functioning labor markets so that we can generate more jobs. The focus should be on getting people back to work. Recent initiatives in Ireland are a good example—including targeted training as well as incentives for workers to take-up job opportunities, and for employers to take-on people who are unemployed.
Nobody should pretend this is easy. Labor market reform is difficult. In many cases, it involves lowering labor costs. But reform is essential for competitiveness and for creating greater job opportunities in the future—especially for younger workers. It needs to be done, but done according to individual country circumstances, and done with care.
Three, as countries undertake the sometimes wrenching reforms that are needed, the social fabric is in danger of being stretched. So they must protect and reinforce appropriate safety nets. This is an important goal in many of the programs that the IMF is supporting. Take Kenya, for example, where the government targeted support to the most vulnerable, increasing the number of households receiving cash transfers from 200 to 33,000 in just four years.
The IMF is working closely with others—including the International Labour Organization—to expand the frontiers of research and analysis on jobs and inclusive growth.
We must seize the moment.
III. Coalesce around global change
This brings me to my final point—the need for us to coalesce around, and take advantage of, the major shifts taking place in the global economy.
My worry is that the lingering risk of instability may pull policymakers inwards. My belief is that, through a collaborative approach, we have a better chance of success.
We have seen the rise and fall and rise of emerging market economies—indeed, we might well say they have emerged.
We have also seen historic progress in reducing poverty in low-income countries. During the past two decades, emerging and developing economies have driven well over 50 percent of global growth. And, in that same time span, more than 600 million people have been lifted out of poverty.
These groups of countries are increasingly important players in our global economy. They must play an increasingly important part in our global governance structures. Certainly, we have seen how their participation has strengthened the G20. With our global membership of 187 member countries, we also see it every day at the IMF. And our 2010 quota and voice reforms will make their participation even stronger.
I have been relentlessly urging—and I am relentlessly urging—all our member countries to complete that reform in a timely manner.
More and more, we are seeing new forms of collaboration coming into play. We are seeing it in Europe in fighting the crisis. We are seeing it in regional arrangements, like the Chiang Mai Initiative and a growing network of swap agreements between central banks in Asia. And we see it in plans by the BRICS—Brazil, Russia, India, China, and South Africa—to establish a development bank, for instance.
Each, in its own way, tips its hat to what can be gained through collaboration.
The IMF recognizes it too. We are at the very intersection of an increasingly global world. And we understand that to stay there and to stay relevant, the IMF must increasingly reflect our membership and serve our members’ needs effectively as they manage economic change.
Again, take the countries of the Arab Spring. We can support them with the IMF’s unique combination of advice, technical assistance, and financial support. We are committed to supporting their home grown programs that meet their needs, built around consensus, and protecting the most vulnerable. We are doing this, importantly, working closely with the governments of the region and with the Deauville Partnership.
The message is clear: collaboration makes us stronger.
By way of example here, I was struck by the recent actions of several countries in Africa. Of those countries that have so far pledged their share of the recent IMF gold sales to the pot of resources that will support our concessional lending, two-thirds are from Africa.
These types of policy choices should inspire us. Let us build on them.
To conclude—the crisis is not over. But thanks to our collective efforts, we have an opportunity to reassess the challenges we face as the crisis evolves. An opportunity to reassess what is required to meet those challenges. An opportunity to push on and take the further actions that are certainly needed to keep the crisis at bay and finally put it behind us.
We must not waste this moment. And our actions should be guided by three principles.
One, act quickly—implement the right policies now, with the knowledge that what we do today also affects tomorrow.
Two, act together—do not underestimate the importance of the collective interest, over self interest.
Three, act with confidence—support of institutions, like the IMF—and our friends at Brookings—will stand with countries undertaking reforms every step of the way.
Alexander Graham Bell once said: “When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”
When opportunity knocks, we should open the door.