“The Challenges of Economic Policy Cooperation” By John Lipsky – Acting Managing Director, International Monetary Fund
IMF News, June 21, 2011
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Bibliographic details
- Authors: John Lipsky
- Published: June 21, 2011
Context and central thesis
- Speech delivered as the Kurt Viermetz Lecture at the American Academy in Berlin; date: June 21, 2011.
- Core message: Stepped-up, coherent international economic policy cooperation is essential to secure the global recovery, promote strong, sustainable, and balanced growth, and manage spillovers from highly interconnected economies.
Global economy: greater interconnection and complexity
- Transforming world maps by GDP, trade, and financial assets/liabilities highlights shifting relative importance of economies (United States, Europe, Japan large; some fast-growing economies smaller by these measures).
- Increased interlinkages:
- Were a major contributor to the 2008 crisis through unrecognized macrofinancial linkages.
- Also enabled policy successes, notably sustained global growth and unprecedented international policy cooperation during the crisis.
Policy successes and failures around the crisis
- Successes:
- Trade and financial integration helped produce the strongest sustained period of global growth in world history and significant poverty reduction.
- International policy cooperation during the 2008-09 crisis limited the downturn to three quarters—from mid-2008 through the first quarter of 2009.
- Failures:
- Inadequate recognition of macrofinancial linkages in private and public sectors contributed to crisis severity.
New policy challenges (advanced and emerging economies)
- Global growth outlook:
- IMF forecasts (recently released in the World Economic Outlook): anticipate global growth of about 4½ percent both this year and next.
- Advanced economies:
- Recovery uneven; unemployment remains stubbornly high, especially for young people.
- Crisis increased debt-to-GDP ratios by 25 to 30 percentage points on average for advanced economies.
- Virtually every advanced economy faces the need for substantial fiscal adjustment over the next twenty years to stabilize and return public debt to pre-crisis levels.
- Europe: periphery faces severe competitiveness problems, very high debt levels, and fragile banking systems; cohesive euro-area approach is essential to avoid spillovers to the core and to Germany.
- Emerging economies:
- Many are near or at potential output; real policy rates are negative in real terms (monetary policy remains expansionary despite reduced need).
- Easy liquidity has stoked elevated credit growth (only China is slowing, from very rapid rates).
- Average CPI inflation in emerging economies is now in the 5-7 percent range after a long decline; recent upticks in energy and commodity prices add upward pressure.
- Inflation expectations for the BRICs deteriorated between December 2010 and mid-2011.
IMF contributions to global policy cooperation
- Focus areas: (i) surveillance; (ii) financing instruments; (iii) resources; (iv) governance.
- Surveillance innovations and emphasis:
- “Early warning exercise” introduced in cooperation with the Financial Stability Board to strengthen monitoring of tail risks.
- Financial Sector Assessment Program (FSAP) made mandatory for twenty-five IMF members with systemically important financial systems.
- Conducted first-ever FSAPs for the United States and for China; completed an FSAP update for Germany.
- Increased focus on interlinkages and spillovers from the five most systemically important economies and economic regions: China, Japan, the Euro area, the United Kingdom, and the United States; to be presented in a new series of spillover reports.
- Greater attention to macrofinancial linkages and the quality of growth.
- Financing instruments and cooperation:
- Streamlined financing programs to focus on core policies for growth and stability.
- Introduced the Flexible Credit Line and the Precautionary Credit Line for large-scale liquidity to members with strong policy records.
- Enhanced cooperation with regional financing arrangements; partnerships with the EC and the ECB for financing Greece, Ireland and Portugal; engagement with the Chiang Mai Initiative in Asia.
- Exploring whether the global financial safety net should be strengthened, potentially via a multilateral facility with the IMF and central banks.
- Resources:
- Members agreed to double IMF quotas to about $767 billion, and to expand the New Arrangements to Borrow.
- Since the crisis, the IMF has committed about $330 billion to member countries facing financing pressures.
- Some gold sales were used to provide additional subsidized support for low-income members.
- Governance:
- Historic governance reforms agreed to deliver greater voice for dynamic emerging market economies; after implementation, China, India, Brazil, and Russia will be among the IMF’s top ten shareholders alongside the United States, Japan, and the four largest European economies.
- Voice of poorest members has been protected.
G-20 policy cooperation and the Mutual Assessment Process (MAP)
- Timeline of leaders’ summits and outcomes:
- Washington, November 2008: G-20 action plan for macroeconomic policy cooperation and financial reforms.
- London, April 2009: agreed massive fiscal and monetary stimulus; committed to provide the IMF with $1 trillion in additional resources.
- Pittsburgh, September 2009: G-20 designated as the premier forum; launched the Framework for Strong, Sustainable and Balanced Growth and the Mutual Assessment Process (MAP), with IMF analytical support.
- Toronto, June 2010: IMF analysis showed a cooperative “upside scenario” produces superior global outcomes; agreed policy matrix (advanced surplus economies need structural reforms; advanced deficit economies need fiscal consolidation; emerging surplus economies should rebalance demand toward domestic sources; emerging deficit economies need structural reform and demand management; all need financial repair/reform).
- Seoul, November 2010: countries provided specific policy commitments for the upside scenario; MAP extended to assess excessive internal and external imbalances for seven key economies.
- Cannes (scheduled for November 2011 in the speech): Framework Working Group to assess commitments and produce a Cannes Action Plan—the acid test for G-20 cooperation.
- Key point: G-20 commitments create a repeated-game mechanism to support policy cooperation over time; political support will be essential.
Financial sector reform
- Institutional development:
- Financial Stability Board (FSB) created in April 2009 as successor to the Financial Stability Forum, expanded to include all G-20 members with a broadened mandate.
- Four pillars agreed by the FSB:
- (i) regulation;
- (ii) supervision;
- (iii) resolution mechanisms for systemically important financial institutions (SIFIs);
- (iv) assessment of the implementation of new standards.
- Progress and gaps:
- Regulatory reform (e.g., Basel III) has received substantial public attention and progress.
- Supervision (pillar ii) was as important as regulation in the crisis, but progress on strengthening supervision has been much slower.
- Resolution mechanisms for cross-border systemically important institutions remain fiendishly complicated and will take considerable time to resolve.
- Assessment of implementation (pillar iv) has seen progress: FSAP mandatory for most systemically important economies; FSB peer review process will draw on FSAPs.
- Macroprudential policy:
- Recognized as essential to increase financial system stability.
- Shift from instrument- and institution-focused regulation to consideration of how the global economy affects financial stability and vice versa.
- The new European Systemic Risk Board cited as a key initiative.
Concluding observations
- The world faces serious headwinds but also an opportunity to strengthen policy cooperation to build a stronger global economy.
- Europe has made unprecedented progress post-crisis on fiscal discipline, single financial market, competitiveness, and crisis resolution; more efforts are needed for the euro area to reach its full potential.
- Sustaining cooperation—through IMF reforms, G-20 mechanisms, and financial-sector reforms—will be critical to securing balanced global growth.
Source: “The Challenges of Economic Policy Cooperation” — John Lipsky, Acting Managing Director, International Monetary Fund; June 21, 2011.