Speech: The Case for a Global Policy Upgrade by Managing Director Christine Lagarde
IMF News, January 12, 2016
Source details
- Canonical URL
- Speech: The Case for a Global Policy Upgrade by Managing Director Christine Lagarde
Other formats
Bibliographic details
- Authors: Christine Lagarde
- Published: January 12, 2016
Introduction
- Tribute to Christian Noyer and recognition of his roles: head of the Paris Club, Directeur du Trésor, Vice President of the ECB, Governor of the Banque de France, and Chairman of the BIS.
- Emphasis on the need to "see all sides" of global economic issues and adapt mindsets and policies as the geography of the world economy changes.
- Speech delivered at the Farewell Symposium for Christian Noyer, Banque de France, Paris, January 12, 2016. (As prepared for delivery.)
1. The Role of Emerging and Developing Countries in the Global Economy
- Emerging and developing countries are home to 85 percent of the world’s population.
- Today, emerging and developing economies account for almost 60 percent of global GDP, up from just under half only a decade ago.
- These economies contributed more than 80 percent of global growth since the crisis.
- China: noted as an economic superpower and recent member of the SDR currency basket.
- Current challenges:
- Growth rates are down; cyclical and structural forces have undermined the traditional growth paradigm.
- On current forecasts, the emerging world will converge to advanced economy income levels at less than two-thirds the pace predicted a decade ago.
- China’s multi-year rebalancing toward slower, more sustainable growth generates short-run spillovers through trade, lower demand for commodities, and financial channels.
- Oil and metals prices have fallen by around two-thirds from their most recent peak and are likely to stay low for a sustained period.
- Many commodity-exporting emerging and developing economies are under severe stress; some currencies have experienced very large depreciations (examples cited: Latin America, Nigeria, Cameroon).
- Policy implications:
- Individual countries must tackle vulnerabilities and policy constraints.
- In advanced economies, monetary policy needs support from fiscal policy and structural reforms to support aggregate demand and raise growth potential.
- Emerging economies need to redirect their economies toward new sources of growth.
2. Monetary Policy in Motion
- Euro Area and Japan: weak growth and low inflation justify continued monetary accommodation.
- United States: firming activity laid the ground for monetary normalization by the Federal Reserve; lift-off went smoothly, communicated and priced in by markets.
- Key issue: the pace of normalization should be gradual and based on clear evidence of firmer wage or price pressures.
- Implications for emerging and developing countries:
- Divergent monetary policies could cause dollar appreciation vis-à-vis the euro and the yen if U.S. tightens while euro area and Japan ease.
- Rising dollar could raise vulnerabilities for sectors with dollar exposures, especially corporates.
- Foreign exchange corporate debt of non-financial firms across major emerging economies is estimated at close to US$3 trillion in 2014, up from about US$1.8 trillion in 2010.
- Total corporate debt estimated at over US$18 trillion in 2014 compared to just US$4 trillion in 2004.
- Potential for increased exchange rate volatility from policy divergence and uncertainty about prospects and policy action.
- Heightened volatility occurs while many emerging economies are already under stress; another global risk aversion episode could trigger further commodity price declines, widening spreads, and depreciating exchange rates.
- Spillbacks to advanced economies:
- Elevated uncertainty and financial market volatility magnify cross-border effects of events and policy decisions (examples: market spike after China’s exchange rate arrangement announcement; Shanghai stock market plunge).
- IMF estimates: a slowdown of one percent in the emerging world would lower growth in advanced countries by at least about 0.2 percentage points.
- Conclusion: the economic health of the emerging world is of first-order importance for advanced economies.
3. A Stronger International Monetary System—The Case for a Global Policy Upgrade
- Call for a global policy upgrade beyond country-level reforms to help emerging and developing economies preserve stability, achieve stronger sustainable growth, and converge with advanced economies.
- Two main pillars: a stronger global financial safety net, and a framework for safer capital flows.
- A stronger global financial safety net
- Post-crisis improvements include IMF insurance and liquidity instruments: Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL).
- The safety net has expanded in size and coverage but also become more fragmented and asymmetric; it has not been fully tested.
- Asymmetry example: existing swap lines among major advanced economies create stronger safety for advanced countries; many emerging and developing economies lack access despite depending on advanced-country currencies.
- Need for a functioning international network of precautionary instruments that works for everyone rather than a fragmented mix of regional and bilateral arrangements.
- Size considerations:
- Recent approval of the 2010 Quota and Governance Reforms will strengthen the IMF’s role, place the institution on a more sustainable financial footing, and enhance representation of dynamic emerging and developing economies.
- Emerging and developing economies are receiving up to $1.5 trillion of capital inflows per year.
- Increasing difficulty to prevent liquidity shocks from causing serious harm suggests the need to increase resources available in times of need and to consider alternatives to excessive reserve accumulation.
- IMF activities: examining speed and duration of instruments, associated cost and stigma, and moral hazard as part of a broader global safety net agenda to be examined in coming months.
- A framework for safer capital flows
- Recognition that short-term nature and volatility of global capital flows are part of the problem for emerging economies.
- An inherent debt bias exists in the global tax system; the international system would benefit from a higher share of equity versus debt flows.
- Policy options to shift composition of flows:
- Examine instruments to move flows away from short-term debt toward longer-term equity flows.
- Source countries may need supervisory adjustments to ensure prudent capital behind short-term debt-creating flows.
- Recipient countries may use prudential and tax policies to enhance financial system resilience to capital flows (tax incentives could encourage less reliance on debt and more on direct investment and equity financing).
- Expected benefits: more long-term equity-based flows would alleviate reversal risks, reduce need for insurance, and lower the size of financial buffers required by emerging and developing countries.
Conclusion
- Successful convergence in the emerging world could triple the size of the global economy in the next 25 or 30 years (according to some estimates).
- The global community cannot afford the costs of stalled convergence; "the 85 percent matter."
- Quotation: Milton Friedman — “Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”
- Final call: the speaker outlined alternatives to existing policies to restore momentum and convergence in emerging and developing countries and urged urgency in considering a global policy upgrade.
Source: By Christine Lagarde, Managing Director, International Monetary Fund; Farewell Symposium for Christian Noyer, Banque de France, Paris, January 12, 2016 (As prepared for delivery).