Ensuring Global Economic Stability

A Commentary by Rodrigo de Rato
Managing Director
International Monetary Fund
Published in Börsen-Zeitung
September 12, 2006

We live in an era of unprecedented global growth. The world economy will grow by roughly five percent this year, marking the third year in a row above the historical trend. Moreover, more countries are benefiting from this expansion, with strong growth most visible in the United States, the emerging economies of Asia—especially China—as well as Japan and the Euro area.

But as rosy as this picture may appear, risks to global prosperity are never far away, and recently those risks have been on the rise. Over the last few months alone, higher oil prices have elicited considerable nervousness in financial markets, and the current crisis in the Middle East is understandably prompting even greater concerns. The markets also have shown their worries about inflation.

Those are the immediate preoccupations, but underlying them is a deeper concern about rapidly expanding global imbalances. Those imbalances are most evident in the extremely large U.S. current account deficit and the correspondingly large surplus in the external accounts of other countries. The U.S. is currently running a current account deficit equal to 6.5 percent of GDP, and is spending considerably more than it saves. In fact, the U.S. is absorbing roughly 70 percent of world external savings. Meanwhile, current account surpluses have been growing rapidly in the oil exporting nations, Japan, China and the rest of emerging Asia. In some countries, those surpluses have produced a large buildup of foreign currency reserves, while U.S. external indebtedness has continued to grow.

As the financial institution charged with ensuring the stability of the global economy, the International Monetary Fund follows these trends closely, and has been working increasingly with its members to define the policy response to the problem. Global imbalances will be an important element on the agenda of the Fund's Annual Meetings in Singapore later this week.

The debate about global imbalances should not be viewed lightly, because a disorderly unraveling of the problem could spark an undesirable global recession. At the same time, an orderly rebalancing of global demand is difficult, and nobody should expect quick fixes. Attention should be given to policy adjustments in all regions. Countries running current account deficits should begin to reduce their reliance on global savings, while those with surpluses should depend less on external demand. Various countries also need to follow through with structural reforms that would improve their business environments and increase resilience to future shifts in global demand.

The Fund is helping its members to develop these policy responses primarily through its new medium-term strategy. Along with others, it has identified steps needed to reduce global imbalances. It is a strong advocate of fiscal adjustment and measures to stimulate private saving in the U.S., and policies to stimulate domestic demand and let market forces have a greater influence on the allocation of resources in emerging Asia. It also urges structural reforms to stimulate demand and improve productivity in Europe and Japan. To become more effective, the IMF is now moving beyond analysis to a more systematic and persuasive approach toward the policy advice it provides to its members. Traditionally, the Fund holds annual consultations with most members, focusing on their exchange rates; fiscal and monetary policies; developments in their balance of payments and external debt; and the regional and international implications of their policies.

These bilateral policy discussions are now being complemented by multilateral consultations, which allow the Fund to take up issues comprehensively and collectively with systemically important members and, where relevant, with bodies like the European Union. Our first multilateral consultation is focusing on narrowing global imbalances while maintaining robust global growth. The IMF has asked China, the Euro area, Japan, Saudi Arabia, and the U.S. to take part, and all are participating. The consultation is at a relatively early stage, and it will take time: global imbalances did not build up overnight and the problem will not be solved from one day to the next.

Beyond addressing the Fund's approach to consultations with member countries, we are also looking at improvements in lending programs, especially our support for emerging market economies. We are looking into a possible new financing instrument that would help to prevent crises in emerging market countries in case they face external shocks. Such a program would be aimed at providing predictable funding to countries that have strong economic fundamentals.

Our continuing role in support of low-income countries is also important. The most effective way that we can help these countries achieve their development goals is by focusing on policies and economic institutions that are critical to economic and financial stability and growth.

Clearly, we have a full plate over the next few months. Success in our efforts will go a long way to ensuring that our members reap the rewards of globalization, and are adequately equipped to deal with its challenges, including global imbalances.



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