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IMFC’s Shanmugaratnam: Rapid growth of corporate leverage is another risk to keep a very close watch on (photo: IMF)

IMFC’s Shanmugaratnam: Rapid growth of corporate leverage is another risk to keep a very close watch on (photo: IMF)

INTERVIEW WITH IMFC CHAIR THARMAN

To Build Resilience in Growth, Focus Must Turn to Structural Reforms

IMF Survey

April 14, 2014

  • Mix of policies has to change with focus on growth and jobs
  • Need to find a practical way forward on quota reforms
  • Key to addressing inequality is “redistribution of productivity”

At the IMF-World Bank Spring Meetings in Washington D.C., policymakers’ concerns shifted from crisis recovery to achieving durable and high-quality growth.

In an interview, Tharman Shanmugaratnam—Deputy Prime Minister of Singapore and Chair of the IMF’s International Monetary and Financial Committee (IMFC)—says that the focus must now turn to structural reforms to “build resilience in growth and jobs”. He also highlights that steps to address income inequality should focus on raising skills and productive potential across the workforce.

IMF Survey: As Chairman of the IMF's policysetting body, can you give us a sense of the key themes from the meetings today?-setting body, can you give us a sense of the key themes from the meetings today?

Tharman: The overarching theme is that we are in a new phase of the recovery. It’s most clear in the U.S., but Europe is past the worst although there's still some downside risk. Globally we are now four to five years out of the crisis. It requires a new balance in policymaking, focused on the medium term, and building resilience in growth and jobs.

The second important theme in our discussions had to do with financial stability. I'm not talking here about the legacy of the last crisis, which is still with us, such as the impaired bank balance sheets in Europe and elsewhere; but about new risks. With the recovery, we also see new risks. Yields are compressed in a whole range of risk assets. Some people think that is a positive because it is cheaper to borrow now, but we have to ask whether it is because risk has gone down or risk is being mispriced. Eventually rates will correct, and we get new instabilities.

Another risk is the rapid growth of corporate leverage, as several of my colleagues pointed out, both in the developing countries as well as in some of the advanced countries—not in Europe as much. Leverage has gone up, much more than investment has. These are new risks that we've got to keep a very close watch on.

And for emerging market economies, there's continuing risk of volatility in capital flows. It's not, in my opinion, a short-term phenomenon, it's not episodic. It's going to be with us for a while.

IMF Survey: We seem to have moved away from talking about recovery to talking about strengthening growth and, in fact, high-quality, durable growth. How can we achieve that?

Tharman: The mix of policies has to change. The basic macroeconomic measures to keep demand afloat remain important. But increasingly, our focus has to be on structural reforms because our aim should be to build not just quarter-to-quarter, year-to-year growth, but self-sustaining resilience in growth. And that can only come from structural reforms.

The world is operating at below potential output—everywhere in the advanced world, in the U.S., the U.K., Europe and Japan; many emerging countries too are still below potential output levels. There is by definition a shortage of demand. But the question is, how do we bridge that shortage for demand? If we rely solely on demand management, macroeconomic policy stimulus basically, it won’t do the trick.

The key at this stage of the recovery is to build long-term confidence into our economies. And that long-term confidence is going to come much less from macroeconomic policy than from better education, stronger institutions, a better and more predictable investment environment, matters that give long-term investors confidence in our economies. That's why the supply side featured a lot more in our discussions this time.

Demand-oriented policies still play a role, but it's the supply side that brings confidence at this stage of the recovery, confidence that can last.

IMF Survey: The IMFC expressed deep disappointment in the delay in passing the 2010 quota reform. How do we move forward?

Tharman: Well, we're not in an ideal situation. We never wanted to be here, but we have to find a practical way forward. First, full focus on the United States. They’ve got to ratify the reforms, and I believe they will. It's in their interest, and I believe they will eventually do the responsible thing. But more fundamentally these reforms, including the 14th Review of Quotas, are part of the evolution of a critical international institution.

The IMF is about multilateralism. It's about global solutions to global problems. If the IMF doesn't reform, if it doesn't get the resources it needs—permanent resources, not just temporary borrowings—then what we are going to see is a rise of regionalism, and bilateralism. We are going to see a more fragmented world. And that's not a world that will be safer. It's not a world that will be better for anyone, including the United States.

IMF Survey: We've heard a lot during these Meetings on income inequality. Any reflections on the priorities to address this issue?

Tharman: Well, it's an issue that's increasingly occupying our minds. The IMF is not just about macroeconomic and financial matters. It's ultimately about the well being of people. And when we talk about well being, we are talking about inclusivity, about people across a whole spread of occupations and sectors of our society doing better in their lives.

Poverty, itself, quite apart from inequality, is still a major challenge. When we talk about self-sustaining growth, it is the quality of growth that matters. It's not just a GDP growth number; it is about the quality of growth that can uplift lives across the whole spectrum of people in a society.

But how do we do it? How do we tackle a challenge that's not just a result of this crisis, but a whole new phase in the global economy where technology is doing some things that jobs used to do and where globalization itself, particularly for countries that are more advanced or middle income, is taking away jobs because they're redistributed elsewhere?

I think the key to it is what my Mexican colleague mentioned, which they call the redistribution of productivity. It's about raising skills and the productive potential of everyone, not just those in the most modern and advanced sectors, not just the professionals or the knowledge-based workers; but raising skills and productive potential of everyone so they can earn a better wage and earn their own success. That's the most sustainable way of improving inequality.

It means biasing our policies towards the broad base of people in our society, and thinking of this not just from the point of view of traditional redistribution, but in terms of their productive potential, their ability to contribute. It's a challenging task. There's no one model that works superbly in the world today. We've got to listen to each other and learn from each other.



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