“Global Challenges, Global Solutions” – an Address at George Washington University By Dominique Strauss-Kahn, Managing Director, International Monetary Fund
IMF News, April 4, 2011
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- Authors: Dominique Strauss-Kahn
- Published: April 4, 2011
Context and purpose
- Speech delivered "Washington, April 4, 2011" and labeled "As Prepared for Delivery."
- Occasion: Address to students and participants ahead of the IMF Spring Meetings ("At the end of next week, the IMF will be having its Spring Meetings").
- Central task identified: "to rebuild the foundations of stability" after the global financial crisis, organized around three core areas: a new approach to economic policies, a new approach to social cohesion, and a new approach to cooperation and multilateralism.
Economic outlook — key findings and risks
- The global economy "continues to recover, but the recovery is unbalanced between countries and within countries."
- Advanced economies: "growth ... is still too low and unemployment is still too high."
- Emerging market economies: "especially in Asia and Latin America—are powering ahead, and dealing with overheating."
- Low-income countries: "proved remarkably resilient, but are now being hit by high food and fuel prices."
- Major regional challenges:
- Japan: immediate priority "to alleviate human suffering and rebuild what has been destroyed."
- Europe: "some countries are at a crossroads—they have taken difficult steps, but need to do more" and "Ultimately, Europe needs a comprehensive solution—based on pan-European solidarity—to deal with lingering financial sector and sovereign debt problems."
- Middle East: undergoing "a historic transformation" with risks from "higher food and fuel price increases," strains on public finances, lower tourism and FDI, and "raising borrowing costs."
- Overall assessment: "the economic situation is still fragile and uneven, beset by great uncertainty." "Numerous black swans are now swimming in the global economic lake."
A new approach to macroeconomic policy — findings and recommendations
- Monetary policy:
- Diagnosis: Pre-crisis focus on inflation and growth was "too simple"; dangers included "soaring asset prices, booming credit growth, investment biased toward housing, a financial crucible of toxic assets, and large current account imbalances."
- Recommendation: "monetary policy must go beyond price stability, and look to financial stability."
- Tools: The policy rate need not be the sole instrument; use "macro-prudential instruments like capital ratios, liquidity ratios, and loan-to-value ratios" and "learn how to design and use these tools more effectively."
- Fiscal policy:
- Diagnosis: Previously "the neglected child of the policy family"; underused except for automatic stabilizers.
- Finding: Fiscal policy "had a Sleeping Beauty moment during the crisis" and "arrived to prop up aggregate demand and save the world from an economic freefall."
- Recommendation: "We need to rethink fiscal policy."
- Financial sector reform:
- Diagnosis: Crisis originated in "a culture of reckless risk-taking."
- Progress noted: "There have been some positive steps, but these are only first steps."
- Specific reforms advocated:
- Implement Basel III to "improve the quality and quantity of bank capital."
- Extend regulation to the "shadow banking system."
- Strengthen supervision: "even the best rules are worthless without proper implementation."
- Improve resolution mechanisms to end "too-big or too-important to fail—including along the critical cross-border dimension."
- Implement "a tax on financial activities to force this sector to bear some of the social costs of its risk-taking behavior."
- Broad conclusion: "the pendulum will swing—at least a little—from the market to the state, and from the relatively simple to the relatively more complex."
A new approach to social inclusion — findings and policy implications
- Assessment of past globalization: It "delivered a lot, lifting hundreds of millions out of poverty" but had "a dark side—a large and growing chasm between rich and poor."
- Distinction: "trade globalization is associated with lower inequality, financial globalization—the big story of recent years—increased it."
- Inequality and crisis linkage:
- Suggestion that "Inequality might have been one of the 'silent' causes of the crisis."
- Evidence cited: "On the eve of the crisis, inequality in the United States was back to its pre-Great Depression levels."
- Mechanism: increased income share of the rich and a growing financial sector allowed borrowing to raise living standards "but on borrowed time."
- Long-run case for equality: "sustainable growth is associated with a more equal income distribution."
- Negative effects of inequality listed: "hinder access to finance," "make countries more prone to adverse shocks," "reduce trust in institutions and encourage instability," and limit domestic demand without "a solid middle class."
- Normative prescription: "We need a new form of globalization, a fairer form of globalization, a globalization with a more human face." The market remains central but "the invisible hand must not become the invisible fist."
A new approach to multilateralism — IMF role and institutional changes
- Core lesson: "cooperation is non-negotiable for stability." Without G20 cooperation "we would probably have seen a second Great Depression."
- Rebalancing global growth: Requires deficit countries to "rely more on external demand" and surplus countries to "shift from external to domestic demand," placing "global interests first, which is ultimately in the national interest."
- Warnings: Countries should not "use currencies or trade restrictions for short-term gain" nor "entice business by easing financial sector regulations or undermining social protections."
- Role of multilateral institutions: Must "stay relevant" and "adapt to the new globalization."
- IMF actions and reforms highlighted:
- The IMF "played a key role in the crisis, drawing a line in the sand with our lending programs—including agreements with some advanced economies that few could have foreseen."
- New instruments and practices: "a new early warning exercise," "new spillover reports that look at how domestic policies in five key systemic economies affect the rest of the world," mandatory Financial Sector Assessment Programs for systemic countries, "improving global monitoring of capital flows," working with the G20 "to seek a cooperative path to higher growth," and "strengthening the global financial safety net."
- Governance reform: Members agreed to "shift voting shares to the emerging market and developing countries by more than 6 percent—on top of a 2.7 percent shift in 2008." Result: "Brazil, China, India, and Russia are now among our top ten shareholders."
- Purpose of reform: To secure "legitimacy" and "reflect the economic reality of the 21st century," placing the IMF "better placed to fulfill our mandate, a mandate for macroeconomic stability that is more relevant today than ever before."
Conclusion — normative framing and call to future leaders
- Historical parallel: Quotation from John Maynard Keynes (1933): "The decadent international but individualistic capitalism ... does not deliver the goods. In short we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed."
- Imperative: Rebuild a postwar-style world where multilateralism mattered and "the gains of growth were broadly shared," while not reverting to a 1940s-era dominance or closing openness.
- Final charge to audience: "Many of you here are future leaders. Ask yourselves: what kind of world do you want to live in? Surely one that is more intelligent, more just, and more virtuous than the old one."
By Dominique Strauss-Kahn, Managing Director, International Monetary Fund; Washington, April 4, 2011.