Lagarde: A second fundamental transition is taking place in the global financial sector (IMF photo)
LAGARDE SPEECH
Two transitions—economic and financial
Lagarde highlighted two new transitions: one in the pattern of economic growth, and another toward a different kind of financial sector.
“The transitions I am talking about today are different,” Lagarde told the audience. “They will likely play out over the rest of the decade, if not longer. And they will require not only active national policy management, but also active international policy collaboration."
“These new global transitions need a new global agenda,” she said.
“With the right policies, these transitions can be managed,” Lagarde pointed out. “But of course, they can be derailed by the wrong policies.”
Economic transition—advanced economies
Lagarde noted that although the global outlook remained subdued, there were “signs of hope” from advanced economies—the United States, the Euro Area, and Japan.
The Managing Director stressed the important role played by monetary policy. Any pending normalization of monetary policy in the United States needs to be managed carefully, Lagarde cautioned, noting that the U.S. has a special responsibility “to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate clearly; and to conduct a dialogue with others.”
Monetary policy has bought some time and space, she said. The key is to use the time wisely and take advantage of this space, highlighting the need for all advanced economies to move on a broad policy front, but with different emphases. This means financial effort in the Euro Area, restoring banks to health; fiscal effort in the United States and Japan, making debt more sustainable; and structural effort in the Euro Area and Japan, where policies to boost supply can pay off in terms of growth and jobs.
In the midst of U.S. fiscal challenges, Lagarde said, the ongoing political uncertainty over the budget and the debt ceiling does not help. “The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy,” she warned. “So it is ‘mission-critical’ that this be resolved as soon as possible.”
Economic transition—emerging markets and low-income countries
While the emerging markets drove the recovery for the past five years, growth momentum is slowing and the external environment is becoming more challenging—partly due to the anticipated exit from easy monetary policies in the United States.
The immediate priority for emerging markets is to ride out the turbulence as smoothly as possible, Lagarde said, spelling out some of the needed policy responses to prevent these economies getting stuck in low gear—including currency depreciation, liquidity provision, and structural reforms.
Low-income countries, too, are in the process of profound transition, Lagarde said. Their transition, however, is not without risks. “The low-income countries sit between the advanced country rock and the emerging market hard place,” Lagarde noted.
Lagarde also called for the international community to help the Arab transition countries keep up the drumbeat for economic reform.
The financial sector transition
Lagarde pointed to a second fundamental transition—one taking place in the global financial sector. This transition, however, remains a case of “mission not yet accomplished,” she said.
While there has been some progress—for example, in improving capital and liquidity standards, and identifying systemically-important financial institutions—the sector still needs to shift from the “old model”, where the sector “took on outsized risk in pursuit of outsized rewards, causing outsized ruin.”
Building something new is not easy, Lagarde said, acknowledging the complexity, but also the delay and divergence across countries. She urged faster progress on outstanding areas, including derivatives and shadow banking.
In managing well these two major transitions—economic and financial—international collaboration is the only way forward, Lagarde concluded. “Mutual help is the best form of self help.” That, in turn, means that the IMF will need to be more helpful than ever before, Lagarde noted.
