Globalization, Flexibility and Interdependence: Equipping Economies for the 21st Century — Plenary Session Keynote Address by Anne O. Krueger
IMF News, June 13, 2006
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- Published: June 13, 2006
Overview and central message
- Delivered at the 10TH St. Petersburg International Economic Forum, St. Petersburg, Russia, June 13, 2006.
- Central argument: economies must increase flexibility to take full advantage of globalization, raise potential growth rates, accelerate poverty reduction, and increase resilience to future global downturns.
- Flexibility is presented as vital for sustained rapid growth, crisis absorption, and enabling firms and individuals to respond to technological and structural change.
Global outlook and downside risks
- IMF expectation: growth in real global GDP this year will be close to 5 percent.
- This will be the fourth successive year that global growth has exceeded 4 percent.
- Downside risks identified:
- Persistent and rising global imbalances
- Lack of progress in the Doha trade negotiations
- High and rising oil prices
- Continuing geopolitical uncertainty
- The threat of an avian flu outbreak
- Policy implication: pre-emptive reforms during the current expansion to strengthen economies before the next downturn.
Importance of flexibility — historical and recent experience
- Countries that achieved rapid, sustained growth undertook ambitious, wide-ranging reforms and maintained commitment over long periods.
- Historical examples cited: Britain, Germany, United States (19th century); postwar industrial countries; post-1960s Korea (real GDP grew roughly tenfold over the four decades from 1960).
- Recent export growth examples:
- Since 2001, export growth averaged more than 22 percent a year in India.
- Since 2001, export growth averaged about 25 percent a year in China.
- India's share of world exports has nearly doubled in the past fifteen years.
- China's share of world exports has tripled in the past fifteen years.
- Interdependence increases the value of national flexibility: more flexible national economies collectively support more rapid global growth and a milder, shorter global slowdown.
Achieving flexibility — macroeconomic management
- Improved macroeconomic management has raised and stabilized growth rates.
- Progress cited: reduction of inflation, sound fiscal policies that curb budget deficits and reduce debt burdens.
- Inflation experience and projections:
- When last in St Petersburg in 2003, average inflation in the CIS countries was around 12 percent (three years earlier it had averaged more than 24 percent).
- IMF expects average inflation in the CIS countries to come in at just over 10 percent this year and to fall to single digits next year.
- Global inflation rate declined from an annual average of almost 30 per cent in 1990-94 to 3.8 per cent in the past 5 years.
- In the early 1990s, average inflation in developing countries was around 80 per cent; that had declined to average of 6 per cent between 2000 and 2005.
- Current projection: a further fall, to below 5 percent by 2007.
- Flexible exchange rates:
- Flexible exchange rate regimes are emphasized as important shock-absorbers.
- Lesson from 1990s capital account crises: fixed exchange rates can force adjustment through wage rates and domestic prices, imposing larger costs and longer adjustments.
- As a result of lessons learned, most countries now have flexible exchange rate regimes.
Financial sector, institutions, and transparency
- A healthy financial sector is a key component of macroeconomic stability:
- Weak financial sectors misallocate resources and reduce average returns.
- Banks must assess creditworthiness, risks and returns; competition enhances efficiency, subject to appropriate regulation.
- Financial sector breadth (equity, bonds, insurance) and innovation are necessary to meet complex and cross-border financing needs.
- Transparency and institutional health:
- Greater openness and public scrutiny improve performance at sectoral, national, and global levels.
- IMF positions itself as one of the most transparent institutions and underscores transparency as a durable lesson.
- Effective judiciary and enforceable property rights are necessary to attract and retain investment.
- Labor market and tax structure:
- Evidence: where it is difficult to fire workers, employers are more reluctant to hire — labor market rigidities reduce hiring and hamper enterprise.
- Tax distortions (exemptions, complex systems) distort price signals and lower efficiency.
Business environment and structural reform — comparative indicators
- World Bank "Doing Business 2006" findings (examples from the speech):
- Time to start a business:
- Australia: 2 days
- United States: 5 days
- Russia: 33 days
- Azerbaijan: 115 days
- Belarus: 79 days
- Debt collection:
- Georgia: 375 days; costs almost half the total debt to collect
- Armenia: 185 days; costs less than a fifth of the total debt
- New Zealand: 50 days; costs less than 5 percent of the debt
- Tax compliance and burden:
- Hong Kong: 1 tax payment representing about 14 percent of gross profits; average 80 hours preparing tax returns
- Armenia: average 1120 hours a year on tax returns; 50 separate tax payments
- Belarus: 1188 hours; tax burden represents 122 percent of gross profits
- Cumulative regulatory burdens can be decisive in firm location and growth decisions in a globalized economy.
The IMF's role and multilateral action
- IMF objectives and functions:
- Principal objective remains maintenance of international financial stability.
- Roles: crisis prevention and resolution, macroeconomic advisory work, technical assistance, Article IV consultations to draw attention to policy weaknesses and recommend reforms.
- Multilateral engagement:
- Fund moving to strengthen surveillance at multilateral and regional levels.
- New process of multilateral consultations agreed at the Spring Meetings in April to address issues of global concern; first issue selected: global imbalances.
- First set of multilateral consultations announced involving China, the Euro Area, Japan, Saudi Arabia and the United States — all agreed to participate in the search for a multilateral solution to imbalances.
- Emphasis: policymakers must adopt reforms, secure civil society support, and ensure implementation for reforms to succeed.
Policy recommendations and priorities (as stated in the speech)
- Implement reforms now during the global expansion to raise potential growth and prepare for the next slowdown.
- Strengthen macroeconomic management:
- Reduce inflation and sustain sound fiscal policies to curb deficits and debt.
- Maintain flexible exchange rate regimes to absorb shocks.
- Promote financial sector soundness, competition, breadth and innovation; strengthen regulation and supervision.
- Enhance transparency and institutional quality, including judiciary effectiveness and property rights enforcement.
- Reform business environment to reduce start-up times, simplify debt collection, and lower compliance burdens.
- Improve labor market flexibility to reduce hiring disincentives and facilitate worker reallocation.
- Reform tax systems to eliminate distortions and reduce compliance costs.
- Pursue coordinated multilateral action to reduce global imbalances and lower the likelihood of disorderly adjustments.
Key statistics and figures cited (verbatim)
- "growth in real global GDP this year will be close to 5 percent."
- "fourth successive year that global growth has exceeded 4 percent."
- "Since 2001, export growth has averaged more than 22 percent a year in India, and about 25 percent a year in China."
- "In the 1950s, the third poorest country in Asia" (referring to Korea).
- Korea: "real GDP grew roughly tenfold over the four decades from 1960."
- CIS inflation history and projections:
- "in 2003, average inflation in the CIS countries was around 12 percent."
- "three years earlier, inflation had averaged more than 24 percent."
- "the IMF is expecting average inflation in the CIS countries to come in at just over 10 percent this year and to fall to single digits next year."
- Global inflation:
- "declined from an annual average of almost 30 per cent in 1990-94 to 3.8 per cent in the past 5 years."
- "average inflation rate in developing countries was around 80 per cent" (early 1990s).
- "declined to average of 6 per cent between 2000 and 2005."
- "We currently project a further fall, to below 5 percent by 2007."
- Business environment time/cost examples:
- Start-up days: Australia 2 days; United States 5 days; Russia 33 days; Azerbaijan 115 days; Belarus 79 days.
- Debt collection: Georgia 375 days and costs almost half the total debt; Armenia 185 days and costs less than a fifth; New Zealand 50 days and costs less than 5 percent.
- Tax compliance: Hong Kong 1 payment representing about 14 percent of gross profits and 80 hours; Armenia 1120 hours and 50 payments; Belarus 1188 hours and 122 percent of gross profits.
Plenary Session Keynote Address by Anne O. Krueger, First Deputy Managing Director, IMF — St. Petersburg, Russia, June 13, 2006.