Excerpts from a Press Briefing by IMF First Deputy Managing Director, John Lipsky on Multilateral Consultations
May 1, 2007International Monetary Fund
Washington, DC, Wednesday, April 18, 2007
MR. LIPSKY: Everybody has a copy of [the multilateral consultation documents released publicly on April 14, 2007].
So now you see the results, which represents the outcome of the consultations to date. Like the consultations themselves, this represents a new and unprecedented development in the process of international consultation and cooperation in economic and financial activities. What you see before you is the result of discussions among the participants, including not only the largest developed economies, but also China and Saudi Arabia. The participants represent a balanced group of the principal protagonists, if you will, in global economic developments. Although it is a selective group, not a universal group, all of them have an important influence on the course of the global economy.
The multilateral consultation discussions were focused around achieving the dual goals of sustaining global growth while reducing global imbalances. The documents comprise a statement by the participants in which they state that they found that the process itself was useful and that they've found that they could elaborate a set of policy plans that were in the interests of each individual participant and deemed by them to be, as a package, consistent with the strategy laid out by the IMFC -- the International Monetary and Financial Committee -- back in 2004. When implemented as planned, these policy plans will make a significant contribution to achieving the dual goals of the IMFC strategy.
Each of these policy plans represents voluntary descriptions by each of the participants of their own plans. Of course, an effort was made for them to be broadly consistent in terms of format and level of detail. This outcome represents something that is novel and innovative.
There are some who would claim that the global imbalances represent a very significant near-term threat to global economic progress and stability. I want to emphasize that such an alarmist view is not shared by the participants nor by the Fund's staff. The participants consider that reducing global imbalances is of great importance, but it is seen by them as a medium-term challenge. Therefore, the approach reflected in the policy statement is a set of medium-term policies that are designed to achieve the dual goals of sustaining growth while reducing imbalances. These policies represent to the participants an appropriate response to the challenges before us.
For those who might say that there are no dramatic measures - or even immediate changes in policies - contained in the policy plans, it should be recognized that there was consensus that a dramatic response was neither warranted nor appropriate. Rather, a medium-term response was seen to be appropriate.
To adequately judge the outcome of this process, it will be evident only in the medium term whether these policies are implemented as planned, and whether they will have the intended effect of sustaining growth while reducing imbalances.
QUESTION: Although these are medium-term policies, can you say what the participants feel like their co-participants offered anything new or really a restatement of them, sort of a group therapy so that everyone understood what everyone else was doing?
MR. LIPSKY: What's new is the format and focus. These participants met and had frank discussions about each others policies. These consultations marked the first time that these participants participated in such confidential discussions about their policy plans. As they state themselves, they found that process to be very useful, as they stated in the first paragraph of the cover note.
As Duke Ellington said about music, `If it sounds good, it is good.' So test No. 1 of the consultations is if the participants found them useful, that seems to me prima facie evidence that it was useful. In addition, that they were willing to discuss specific policy plans and to make them public strikes me as an advance. If you ask, "Do all of the participants feel that everybody's policies are absolutely perfect?" I would say, I don't think so. But I also think that's the wrong standard. As you can imagine, the tendency in any kind of discussion like this is for each participant to say, "I'm doing fine but everybody else should do some more." What the policy plans from each of these economies represents is what each of the participants feel is appropriate. What's important additionally is that the participants all agreed that if implemented as stated these policies would represent significant progress.
QUESTION: May I just follow-up?
MR. LIPSKY: Sure.
QUESTION: So is part of the usefulness then of this process that it might lower the tone of the rhetoric and the criticism of one country of another's policies because it had to sit down and clear the air, so to speak?
MR. LIPSKY: Potentially. Hopefully, the process has led, as they state [in the cover note], to an improved understanding of the issues and of each other's positions.
QUESTION: So is the format to be retained? Will it work looking ahead?
MR. LIPSKY: You're talking about multilateral consultations?
QUESTION: No, I'm talking about this particular issue of global imbalances and this format, the five participants, if they work together to implement this will they continue meeting?
MR. LIPSKY: What you can see is that in the cover note, and it's probably worth reemphasizing the context, the context being that these are undertakings about or descriptions of medium-term policies rather than a set of policy actions to be implemented next week, or next month. However, as agreed by the participants, the IMF is going to continue to follow developments. That means that in our bilateral consultations these policy descriptions will serve as a benchmark for our discussions. Secondly, we have regular multilateral surveillance that includes the World Economic Outlook and the Global Financial Stability Report. Moreover, there are venues, such as the IMFC or others, in which these conversations could be taken forward. And as you know, the participants state that they agree to meet again when developments warrant.
QUESTION: And also in the communiqué it says it looks forward to further steps by the Fund to promote dialogue and help financial markets and [inaudible] can work to foster economic growth and financial stability including possibly in the context of further multilateral consultations.
MR. LIPSKY: Yes.
QUESTION: So this looks like a subject for the next round of multilateral --
MR. LIPSKY: Potentially, that's right. If you remember back in September in Singapore the IMFC communiqué said that we should be thinking about potential additional or subsequent rounds for the consultations, not this consultation, but different.
MR. LIPSKY: And if you remember, it mentioned energy, trade and financial globalization as potential themes. Now it has been narrowed down by the latest communiqué that we should start preparatory discussions on financial stabilization. There hasn't been a final decision, but we should prepare to see if we think we can define a specific set of questions and participants on this subject.
QUESTION: I was talking to the head of the Russian delegation and he seems to be very happy with the consultation process and the fact that it worked as a process.
MR. LIPSKY: Yes.
QUESTION: Very useful. But at the same time, the Russians asked about this particular subject for the next consultation. Why limit it at all? Are there countries in the world that --
MR. LIPSKY: Limit it in what sense?
QUESTION: Multilateral consultations by definition are not universal consultations by IMF members.
MR. LIPSKY: Correct.
QUESTION: It is a group of countries selected to do this. The Russians say this particular subject seems to be more fitting for a universal discussion in the IMFC or whatever forum you choose other than limiting it to a number of countries.
MR. LIPSKY: Frankly, what I understand is that the IMFC has told us to see if we can define a set of questions that seem appropriate for a multilateral consultation. I hope it's clear, and I'm sure it's clear to your Russian colleagues. Implicit is that the group of participants in a subsequent multilateral consultation could well be different than in the first round.
QUESTION: I understand that. They just say that it's probably not appropriate to even single out any group for this particular subject.
MR. LIPSKY: Again, no decision has been taken [on additional multilateral consultations]. Global imbalances were a topic appropriate for discussion in a broader format. For example, the consultations were the subject of the breakfast among members of the IMFC, which is a global forum for discussion at the ministerial level, on the issue of global imbalances. But that didn't preclude useful discussion among a narrower group of participants.
QUESTION: Back to the imbalances, a year ago the Fund would be saying that they were more worried about imbalances than they are not, still are concerned, but they seem to be less -- the question is, does the Fund agree that it has become a medium strategy for these countries that that is appropriate?
MR. LIPSKY: Yes.
QUESTION: And so there is full agreement on that?
MR. LIPSKY: Well, when you say full, let's see what you mean by full.
QUESTION: Well, does the staff agree that --
MR. LIPSKY: We think the appropriate context is a medium-term context. Put it this way, imbalances need to be addressed, and I think I've described it this way [in previous contacts with the press]. Over the past five years, global growth has been unexpectedly favorable by the standards of consensus views. Who in 2002 would have imagined that the subsequent five years were going to be the five fastest years for global growth in the last three decades? Who would have guessed not only would global growth be unusually favorable, but well balanced by historical standards?
But why has that unusually favorable global growth was accompanied by record payments imbalances? It was because there was dispersion among rates of growth in domestic demand. So viewed this way, the goal of the IMFC strategy is to preserve this well-balanced and solid increase in the overall global expansion while rebalancing domestic demand growth to reduce imbalances and thereby make the expansion more sustainable.
As we note in the cover note, in fact signs have emerged over the past year that the policies being put in place have been consistent with that rebalancing. Policies are moving in the right direction and outcomes are starting to move in the right direction: that encompasses stronger domestic demand growth in Europe, stronger domestic demand growth in Japan, increased flexibility in Asian economies, increased domestic demand and energy investment in the oil-producing countries, for example, in Saudi Arabia, and in the United States, a faster than anticipated decline in the fiscal deficit and measures that should be supportive of higher savings. Things seem to be moving in the right direction.
Of course, imbalances could turn into a short-term problem if there were a loss of confidence that the needed medium-term policies were being put in place. However, the outcome of the multilateral consultations should be a confirmation that the major participants found their policy plans both broadly appropriate and consistent with these global goals. Hopefully, this will help boost confidence that appropriate policies are being put in place.
QUESTION: Looking at the list of the proposals, are lot of these are retread ideas from the past 10 years that the U.S. is going to reform their entitlements, they're going to cut spending, the Europeans are going to reform their labor markets. These are things we've heard for a long time. Are you banking on this happening in the medium future?
MR. LIPSKY: Well, let's put it this way, willingness to state these plans in this format can't have reduced that likelihood can it? It has to have helped, and, frankly, you folks are going to help. Because they have jointly stated in public this is what they're going to do.
QUESTION: So will the Fund be the honest truth teller as everybody is --
MR. LIPSKY: That's part of our job. Yes, that's part of our job.
QUESTION: But are you saying that you can use these as benchmarks for the IMF, the IMF will use it in its bilateral consultations?
MR. LIPSKY: Of course.
QUESTION: I'm wondering since the thing people complain about at least with China is the failure of the currency to appreciate. The WEO itself said that the yuan had depreciated slightly over the course of the last year.
MR. LIPSKY: In real effective terms. Not against the dollar of course.
QUESTION: Well, against the dollar they said it had depreciated a little bit.
MR. LIPSKY: The Chinese authorities have stated reasonably clearly that exchange rate flexibility will gradually increase with attention paid to the value of a basket of currencies.
QUESTION: But yet their foreign currency reserves increased -- one of the fastest rates in the first quarter of this year which means they are intervening more heavily or they're being forced to intervene more heavily to maintain whatever rate of appreciation they've decided on.
MR. LIPSKY: That's correct, factually correct. They have stated here that reduction of external imbalances has become, which it wasn't before, a major objective of economic and social development in 2007. Sounds like a policy goal to me and sounds like something that we will talk to them about in the future. But you notice the order in which they have stated their policies. The issue of first importance is to boost domestic demand growth and that there are lots of ways to do that in addition to a supportive foreign exchange policy. After all, the goal is not to reduce China's exports, but to speed up domestic demand growth. And there are a number of measures in this policy statement that are designed to do that. In the end they may result in a slowdown of export growth, since China's economy is probably growing close to potential or even beyond potential. But the goal is a rebalancing of growth toward domestic demand, and that is absolutely crucial. Foreign exchange policy can be supportive, but it's only supportive. You would not expect exchange rates alone to change the balance of domestic savings and investment, which is by definition what is being sought by the Chinese authorities.
QUESTION: Do you feel that at the end of this, I mean the participants were a little reserved about everything, but since Mr. Paulson is not making that much of progress with bilateral talks, he has come back from China with really nothing, I won't say nothing, with little, that this seems to be the way that the U.S. has accepted it should deal with China.
MR. LIPSKY: By definition the U.S. has accepted participating in the consultations. The U.S. was party to the cover note that says, we found this useful. As for the rest, you'll have to go ask the U.S. authorities in terms of comparison. The important point here is that all the participants agreed this was a useful process. There are obvious reasons for thinking that a multilateral approach to what are multilateral problems and challenges is absolutely appropriate. I should have stated it before, as we've been emphasizing, what's novel here? Look at Paragraph 3 [of the cover note], reducing global imbalances is fundamentally a multilateral challenge and resolving them in a manner compatible with sustained, robust global growth is a shared responsibility. That's what these five participants have stated. Words have implications and that's a new approach.
Let me come back. You had asked about things like the U.S. context and entitlements. You understand the U.S. system. The representatives here were the administration, Treasury and the Fed specifically. In the U.S. system, Congress is involved so the administration and the Fed can't commit the Congress, but they certainly have indicated the administration's policy priorities. I assume that they have stated them sincerely. That they're willing to put this in the public domain in this context suggests they're meant to be taken seriously.
QUESTION: I just had a question. Everybody seems very happy with the way it worked with the [inaudible] but when you read the press release that we agree to meet again when developments warrant, it doesn't sound very committing to me. What is the development? Is it in six months? We're talking about medium-term policies. Or it could be three years? It could be five years? Who has the power to say, listen we have a big problem here in the making, we have to come back to the table and talk about it?
MR. LIPSKY: Ultimately they would all have to agree. Think of it this way. Think back to the context. We all agreed this is a medium-term challenge but that we've got to get going, we have to start moving. Here are the medium-term plans. So certainly this represents the end of a phase. We've diagnosed the problem together, we've come up with a set of proposals together, these proposals seem appropriate to the challenge, they will unfold in the medium-term. The IMF through its regular consultations will follow-up, and we've been told that's what we should do, and we will.
What could generate the need to come together again? Rather than speculate on that, this was left open as a possibility. I'm sure you can think of circumstances in which it might be worthwhile to call for the group to reconvene.
QUESTION: Who would call for the group? You? The IMF? The G-7? It's totally open-ended.
MR. LIPSKY: Remember this is voluntary. This is a voluntary grouping endorsed by the IMFC. So just as you can think of a lot of ways or a lot of circumstances that might generate a desire to reconvene, you can think of a lot of ways that that message could be put forth, but at the end of the day it's a voluntary grouping.
QUESTION: How many meetings did they actually have in this process and at what level?
MR. LIPSKY: We had a process in which we had a series of bilateral meetings.
QUESTION: The IMF with each?
MR. LIPSKY: The IMF with each of the participants, and then we had a series of multilateral meetings. What makes this a little vague in a sense, is that we had some formal face-to-face meetings, but we also had a lot of communication and emailing and discussions. So I think of it more like a process in which we held a series of face-to-face meetings, but that just sort of punctuated, if you will, a process.
QUESTION: And what level?
MR. LIPSKY: The face-to-face meetings?
QUESTION: Yes, or any of them, but the face to face, yes.
MR. LIPSKY: The meetings were largely at the deputy ministerial level.
QUESTION: One last question. You've described the consultation as face to face. Is it going to go on, your other meetings or consultations before the next assembly or is it now kind of left up in the air?
MR. LIPSKY: That part is left open. What is not left open is we're enjoined to follow-up and then we'll see.
QUESTION: I'm interested to see what you come up with in the next --
MR. LIPSKY: So are we, but I hope you can see we -- in the Duke Ellington spirit, we are very gratified that the response of the participants was that this was worthwhile, that they made public this statement of shared responsibility, that they were willing to discuss in quite some detail what they think are the appropriate policies relevant to this issue.
You can't call this trivial or insubstantial. Some people said there's nothing new and I would say, show me where this has happened before that these participants have made this kind of public statement. I don't find it anywhere else. So this is a good start. It's not the final word. The final word will be six months from now, a year from now, two years from now. Will we have a sense that policies are moving in the right direction and that imbalances are moving in the right direction?
Of course, we have made some rough simulations of these policies to see whether they are likely to do what they're intended to do. Our immediate guess is that if they're implemented with all the caveats about simulations of something like this these measures will reduce global imbalances by about 1 to 1-3/4 percent of GDP over the next four years. In other words, they would produce non-trivial progress toward the dual goal of sustaining growth while reducing imbalances.
QUESTION: And how would we compare that to what the figure would be today?
MR. LIPSKY: That would be relative to a baseline of about 6 percent. In other words, the reduction of 1 to 1 ¾ percent of GDP would be relative to what would be happening without these policy measures.
This is a rough order of magnitude, but shows why the participants said this would represent a significant reduction in global imbalances.
QUESTION: Can I just ask one more thing, too? Was there a lot of disagreement or differences of opinion in these discussions or in any other context of the impact that changes in foreign exchange regime flexibility would have on imbalances? Because you said don't overstate it, but I've heard there was another comment this weekend and it was a long week and so I don't remember exactly who said it, was that you can't underestimate the impact that a flexible exchange rate might have.
MR. LIPSKY: Let me make a couple of points. First of all, to make sure it's clear, all the participants thought the IMFC's strategy was appropriate. In other words, the IMFC strategy implies that there has got to be a shift in the relative sources of growth. Surplus countries need to move towards greater reliance on domestic demand, deficit countries or areas need to move in the opposite direction.
I think there is agreement that implementing this strategy requires a broad set of policies. Look at what everybody says needs to be done and exchange rates are included, but they're not at the heart of the policy plans. As the World Economic Outlook summary says, exchange rate changes can be supportive of broader policy changes.