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    IMFC Chair Tharman: eventual normalization of monetary policy in advanced economies is a net positive for emerging markets (IMF photo)

    IMFC Chair Tharman: eventual normalization of monetary policy in advanced economies is a net positive for emerging markets (IMF photo)

    INTERVIEW WITH IMFC CHAIR THARMAN

    The Path Forward: A Talk with Tharman Shanmugaratnam

    IMF Survey

    October 13, 2013

    • Positive and constructive discussions; solve problem through cooperation
    • Advanced and emerging economies face similar policy challenges
    • Refocus on medium-term fiscal plans; structural reforms

    As the IMF-World Bank Meetings wrap up in Washington D.C., policymakers leave with a sense that global problems can be solved not just by national policy management, but also through cooperation and dialogue internationally.

    In an interview, Tharman Shanmugaratnam—Deputy Prime Minister of Singapore and Chair of the IMF’s policy steering committee, the IMFC—lays out a policy path for all countries for higher growth, incomes, and jobs. He also sees the eventual normalization of monetary policy in advanced economies as a net positive for emerging markets.

    IMF Survey: The IMF’s policy steering body met today amid a subdued and uneven growth outlook. Can you give us a sense of the discussions?

    Tharman: If you look at the discussions over the last few days, both at our restricted closed-door sessions, as well as the formal plenary, I would say the mood has been consistently positive and constructive. By that I don’t mean that people were trying to talk away the problems, but that everyone acknowledged that there are problems that can be solved, and there were some things that we could do to cooperate with each other so that we arrive at global solutions to some global problems. So it was a mood of collegiality, much more so than we have seen in a while.

    IMF Survey: We heard a lot on the emerging markets at these meetings, with many transitioning to a slower growth pattern. What message should emerging markets be taking away?

    Tharman: I think the emerging markets are, first, taking some cyclical knocks. They were growing extremely rapidly in the last few years, some above potential. There is a reversion back to potential. For some of them it is also a matter of moving to a new structural setting, not just taking a cyclical knock, because the demographics are changing.

    China is the most important example of this. The labor force is slowing down. They are reaching a new phase of development, and they are resetting the path of growth. Now, that is a positive. It looks like lower growth rates but it is actually a positive because it is about sustaining growth and not overheating the economy and then facing a major correction further down the road.

    Several other economies are in the same situation. They are resetting their structural path of growth, moving onto a new footing. For instance, by productivity increases, skill improvements, and innovation. So by and large, changes in growth rates in emerging economies, if you strip out the cyclical aspects which are transitory, are basically about moving onto new phases of growth as they move up the value curve and income curve.

    IMF Survey: You now have the much anticipated exit from U.S. unconventional monetary policies. How should emerging markets prepare for that eventuality?

    Tharman: I found it very encouraging that virtually all my colleagues on the IMFC from the emerging markets saw the eventual normalization of interest rates as a net positive because it means the global economy is recovering. The U.S. and the advanced economies are recovering, and on that basis they will see a normalization of interest rates.

    Next is the challenge of transition. From now until the point at which interest rates stop normalizing, we have to prepare ourselves. First, that means that all countries—not just emerging markets—need to get their macroeconomic houses in order. Second, it means that during this transition phase, it is more important than ever that we get momentum into our structural reforms. The last thing we should do is leave the structural reforms to the time when it is critical. Start doing it now when we are still in peacetime. Explain to our populations why they are necessary, and explain that this is really a path to higher incomes and better jobs in the future.

    IMF Survey: Low-income countries have proved to be resilient. How can they sustain that?

    Tharman: The low-income countries are a very large group of IMF members. Here, some things have changed. Commodity prices may not be the same in the future as they have been in the past, particularly on the mineral side, and it is partly a consequence of the fact that China’s economy is changing and the global economy is changing. Diversifying away from commodities is still a key development task. This is an area in which the Fund is working closely with these countries, together with the World Bank and other agencies. And these countries will come out of it well. Again, there is a sense of realism—and optimism coming out of realism—that I find very encouraging amongst our low-income country members.

    IMF Survey: What do you see as the main policy priorities going forward?

    Tharman: If you look at media reports and some of the discussions in the blogosphere, you often get the impression that there are very different solutions for the advanced economies and the emerging economies respectively, and that they are talking at cross purposes or pointing fingers at each other.

    Our meetings were very different. If there is one simple takeaway from these meetings, it is that the advanced economies and emerging market economies, although at different stages of development, have very similar policy challenges.

    First, getting our macroeconomic houses in order, and in particular, getting credibility in medium-term fiscal consolidation. We don’t have it yet in the United States. We are getting it in some European economies, and we have it in several emerging economies already. So medium-term fiscal consolidation is critical for those that have large debts.

    Second, structural reforms. There is remarkable similarity between the advanced economies and the emerging economies. Deregulation is a major priority in Abenomics. It is also a major priority for countries like Germany, a relatively successful European economy. The same issues are a priority in the emerging market economies. Opening up economies to competition for both foreign investors as well as more domestic competition, and greater deregulation in the services sector in particular, is needed across the world.

    Third, labor markets. Europe is not the only continent with a rigid labor market problem. Several emerging economies have the same problems and making sure that we always keep the labor market open to the young, women, and minorities is critical. So the policy lessons coming out of the advanced economies are being borrowed by the emerging economies but also getting some reverse lessons.