“Summoning the Will to Act” — John Lipsky, Acting Managing Director, International Monetary Fund
IMF News, May 19, 2011
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- Published: May 19, 2011
Economic backdrop: a strengthening, yet fragile recovery
- Global recovery is gaining strength but remains "fragile and uneven, and beset by uncertainties."
- Two main challenge groups:
- Aftermath of the crisis:
- "Substantial progress" rebuilding buffers and strengthening regulation in the financial sector, but work remains on "supervision and cross-border resolution."
- Fiscal challenge: "At the end of 2010, government debt was as much as 25-30 percentage points of GDP above the pre-crisis level for several advanced economies—and is projected to continue rising, in the absence of bold measures to rein it in."
- IMF engagement in Europe:
- Agreed joint IMF-EU financing package for Portugal worth €78 billion "aimed at reigniting growth and employment."
- Completed the first and second reviews of Ireland’s program.
- Ongoing mission in Greece to support the adjustment program.
- Emphasis: primary responsibility for peripheral euro area countries lies with those countries themselves; need for a "comprehensive and consistent—and ... cooperative and shared" European solution comprising:
- (i) strengthening area-wide crisis management frameworks;
- (ii) accelerating financial sector repair;
- (iii) improving fiscal and macroeconomic coordination; and
- (iv) promoting high-quality growth.
- Unevenness of the recovery:
- Many advanced economies: "moderate recovery" with "unemployment remains stubbornly high" and "risk of higher structural unemployment."
- A few advanced economies with structural reform, e.g., Germany, show growth "notably above-trend."
- Emerging economies: "recovery has been quite robust—and in some, overheating is an increasing concern."
- Commodity prices and headline inflation rising; "increasing food prices—that recently eclipsed the highs set in 2008—have particularly difficult implications for low-income countries."
- Policy cooperation is more difficult as countries are at different stages of recovery, yet global problems require global solutions; IMF role emphasized given "near-universal membership of 187 countries."
Modernizing IMF surveillance for an interconnected world
- Objective: "deepen our understanding of the complex and growing interlinkages across the world," with emphasis on drivers of capital flows and the "quality of growth" including income distribution and unemployment.
- Recent and ongoing tools and reviews:
- Early Warning Exercise: "Since its inception in 2008, the Early Warning Exercise has become firmly established."
- FSAP: "last year, the Financial Sector Assessment Program (or FSAP) was made mandatory for countries with systemic financial sectors."
- Trilateral Surveillance Review: "ongoing ... which should be completed this fall," to assess detection and warning of risks and the "effectiveness, candor, and evenhandedness" of surveillance.
- Three priority surveillance areas called out:
- Spillovers:
- Rising trade and financial interlinkages increase exposure to spillovers from other countries’ policies.
- In-depth analysis of outward spillovers from the five largest economies: "China, the Euro Area, Japan, the United Kingdom, and the United States."
- Results to be presented in a series of Spillover Reports "to be discussed by our Board, alongside each country’s Article IV report, this July."
- Aim: facilitate policies that serve both national and global interests.
- Support for the G-20 Mutual Assessment Process (MAP) with IMF analytical input to address internal and external imbalances.
- Capital flows:
- Capital flows now dominate international transactions for many countries; size and volatility can exacerbate macroeconomic and financial stability risks.
- Policy guidance:
- "First line of defense in dealing with surging capital inflows should be macroeconomic policies, though capital flow management measures could be useful in certain circumstances."
- Recommend structural reforms "including the deepening of domestic financial markets" and prudential measures to strengthen financial resilience.
- Ongoing work to understand drivers of capital flows in supplier and recipient countries and to explore a "voluntary and cooperative approach" or "an agreed reference framework for individual country policies."
- Quality of growth:
- Need to better incorporate social factors (e.g., income distribution, unemployment) into analysis and policy advice.
- "Recent developments in the Middle East and North Africa show that we must deepen our understanding of the broader factors that may affect macroeconomic stability."
- IMF will draw on outside experts to "gain a better appreciation of the social factors that affect macroeconomic stability."
Strengthening the global financial safety net
- IMF has increased financial resources and created "insurance-like instruments intended for crisis prevention, rather than crisis resolution":
- Flexible Credit Line (for members with appropriate policies).
- Precautionary Credit Line (for members implementing policy adjustments).
- Remaining concerns:
- "Doubts remain about whether the global financial safety net adequately reflects potential risks, in view of rising trade and financial linkages."
- Countries lack confidence in "secure access to international liquidity at times of systemic crises."
- Need to "create proper incentives in designing safety net tools" to avoid paradoxical outcomes.
- Ongoing analytical work:
- Studying causes of systemic crises, cross-border linkages, and past systemic crises and policy responses to better appreciate global liquidity needs.
- Exploring ways to provide short-term liquidity at times of systemic stress via collaboration with "major central banks, systemic risk boards, and regional financial arrangements."
- Lessons from ad hoc central bank arrangements during the recent crisis to inform more systematic mechanisms.
- Ongoing work on "the role and composition of the SDR" as a potential mechanism to improve global liquidity provision.
Conclusion and policy recommendations
- Core IMF contributions to sustain collaboration and systemic stability:
- Increase understanding about global economic interlinkages.
- "Demonstrate analytically the benefits of enhanced policy collaboration."
- "Facilitate the international dialogue needed to find global solutions."
- Role of the Bretton Woods Committee: advocate for international cooperation and "summon the will of policymakers to act"—reminding leaders that acting in the global interest serves their national interest.
Source: “Summoning the Will to Act” by John Lipsky—Acting Managing Director, International Monetary Fund, Annual Meeting of the Bretton Woods Committee; May 19, 2011.