Consultation to Reduce Global Imbalance

Commentary by Rodrigo de Rato, Managing Director, IMF Published in Le Monde (translated from French)
May 15, 2007

The United States, the Euro zone, Japan, China, and Saudi Arabia have embarked on a round of discussions aimed at coordinating their economic policies.

Favorable periods—and the current period is favorable for the world economy—are rarely a good time to carve out initiatives to solve major problems. For that reason, I am very pleased by the April 29 announcement of a group of leading economies, acknowledging their shared responsibility to reduce global imbalances gradually and maintain the current level of world economic growth.

A year ago, China, the Euro zone, Japan, Saudi Arabia, and the United States began discussing these initiatives among themselves and with the International Monetary Fund (IMF). Hiding behind the rather clinical term "multilateral consultations" are discussions unique in their genre which are proving useful for tackling issues of global importance.

These five economies are linked to global imbalances in different ways, either because they are carrying a substantial current account deficit or surplus, or because they account for a very large percentage of world output. These countries agree that reducing global imbalances is in everyone's interest, while also stressing that this is a multilateral challenge and a responsibility shared by all.

In the past year, and partly as a result of policies implemented previously in these countries, the imbalances in the global economy showed signs of stabilizing and even improving. Nevertheless, these countries need to make it clear that the aim of their policies is to ensure a gradual and steady correction of imbalances, together with sustained economic growth. Otherwise, the world economy will remain under the threat of new protectionist measures and economic or political developments that could lead to a disorderly resolution of these imbalances, to the detriment of growth.

These five countries or regions spelled out their economic strategies during the Fund's biannual meeting. This was the first joint presentation of its kind. As Gordon Brown, Chairman of the IMF's International Monetary and Finance Committee pointed out, these policies are wholly in keeping with the medium-term approach long advocated by the IMF member countries.

China therefore plans to make the reduction of external imbalances a key national objective in 2007. Beijing aims to reinvigorate domestic demand and has undertaken to move gradually to a more flexible exchange rate.

The Euro zone countries, for their part, have reaffirmed their intention to implement a series of structural reforms in numerous areas, particularly production, the labor market, and the financial markets.

Japan plans to expedite its labor market reform, boost competition, and strengthen the fiscal sector in order to win the confidence of the public.

Saudi Arabia hopes to increase substantially its investment in infrastructure and social projects, and to build its capacities in the oil sector.

Finally, the United States is taking steps to balance its budget, jump start saving, and encourage energy efficiency. Washington also wants to strengthen the competitiveness of the U.S. financial markets to preserve their attractiveness to foreign investors.

Just as world imbalances did not spring up overnight, they will not disappear overnight. The objective of the multilateral consultations is not to solve global imbalances in a single stroke, but rather to cement an agreement on a medium-term approach aimed at reducing those imbalances gradually.

The policies outlined by the participants, once implemented, will serve as a first step in that direction. The publication of their economic aims is further proof of their commitment and provides a useful roadmap for gauging progress, thus inspiring confidence in their full and wholehearted participation in the resolution of these imbalances. For its part, the IMF, in the context of its mandate to provide analyses and strategic advice, will closely monitor the implementation of these policies. These countries have clearly indicated that their economic initiatives will continue to conform to the strategy adopted by the IMF member countries.

The five participating countries, the other IMF member countries, and the Fund itself all agree that these consultations have been constructive. A clear sign of their success is that a second round of multilateral consultations is under consideration. It will focus on the impact of globalization and financial innovation on growth and stability. As in the first round of discussions, this consultation will involve a group of economies particularly concerned by this issue.

Rodrigo de Rato is the Managing Director of the International Monetary Fund (IMF).



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