Partnership & Recovery - The Shared Path to Global Stability & Growth, Nikkei Symposium Keynote Speech by By Christine Lagarde, Managing Director of the International Monetary Fund

IMF News, July 6, 2012

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Authors: Christine Lagarde
Published: July 6, 2012

I. The Main Economic Challenges of our day

Occasion and context
- Nikkei Symposium Keynote Speech by Christine Lagarde, Tokyo, Friday July 6, 2012. As prepared for delivery.
- Marks sixty years of Japan’s partnership with the International Monetary Fund.
Current global outlook and risks
- Recent months: outlook has become more worrisome; indicators of economic activity—investment, employment, manufacturing—have deteriorated across advanced and key emerging markets including Brazil, China, India.
- IMF updated assessment of the world economy to be released ten days from now: global growth outlook will be somewhat less than anticipated three months ago, and that lower projection will depend on the right policy actions being taken.
Global nature of the crisis and regional spillovers
- The crisis “does not recognize borders” and poses risks in Europe, the United States, Asia, and Japan.
- Since 2008, Asia has contributed more than half of total global economic growth.
- Visible spillovers to Asia: lower stock prices, capital outflows, higher spreads.
Specific risks for Japan
- Upward pressure on the yen from a continued flight to safety threatens Japanese growth.
- A deeper crisis in Europe would take its toll on Japan’s growth due to a large share of exports destined for Europe.

II. Solutions Through International Cooperation & Partnership

Principle
- Effective solutions must be grounded in cooperation and coordinated policy action.
Quantified potential benefits of coordination
- IMF research indicates a coordinated strengthening of policies across the G-20 countries could raise global GDP by 7 percent, and boost jobs by 36 million over the medium term—at a time when global unemployment has reached crisis proportions.
Role of the IMF
- Lay out interconnections between countries and conduct “spillover” analysis to show how policies in one country affect others.
Recent examples of coordination
- Europe: ECB steps to ease bank funding pressures; expanded European financial safety net; last week’s European Summit establishing the first building block of a banking union—a unified supervisory framework.
- Asia: decision to double the size of the Chiang Mai Initiative Multilateralization and broaden its use for crisis prevention.
Three chains to break for recovery
- First, restoring sovereign strength
- Countries must deal decisively with public debt; deficit reduction is essential.
- For those facing market pressure, adjustment must occur now; for others, adjustment can be more gradual but must not undermine recovery.
- The United States must avoid the ‘fiscal cliff’—the expiring tax cuts and automatic spending reductions legislated to begin next year—which would abruptly shrink the budget by some 4 percent and jeopardize the US and global recovery.
- Fiscal cooperation in Europe must reach new heights.
- Credible medium-term commitments to reduce public debt are a priority for the US, Europe, and Japan.
- Recent passage of the consumption tax bill by Japan’s Lower House is a very positive step and critical that it be implemented as planned.
- Second, repairing and reforming the financial sector
- Goals: better regulation, stronger supervision, proper incentives for the private sector, coordinated across institutions, markets, and borders.
- Progress examples: Basel III agreements; Financial Stability Board steps on systemically important financial institutions and OTC derivatives markets.
- Asia’s banks: bank balance sheets in Asia are healthier than in many other regions; regional banks have stepped in for the exit of some euro area banks in Asia.
- Nonetheless, the global financial system is “not yet” safer than pre-Lehman.
- Third, sustained growth through structural reform
- G-20 goal: strong, sustainable, and balanced growth that is inclusive and job-creating.
- Structural reforms across labor, product, and service markets are key; IMF-supported programs include such reforms and dialogue with social partners, including trade unions.
- Asia’s progress: debt-to-equity ratios have fallen by two-thirds over the past decade, resulting in stronger corporate balance sheets.
- Rebalancing: lower trade surpluses in some Asian countries are promising, but the crisis-induced rebalancing has not been enough; countries need to strengthen domestic demand.
- Examples of rebalancing: shift toward consumption-led growth in China; improved conditions for private investment in many ASEAN economies.
- Inclusive growth measures—more spending on social safety nets, strengthening financial inclusion—can improve quality of life and boost domestic demand.

III. Japan’s Role in the Global Community

Domestic challenges and potential
- Ongoing recovery from the tsunami and an aging population are major challenges.
- Tremendous growth potential exists, notably from increasing female labor force participation.
- Increasing participation of well-educated female workers to levels common in most other G-7 countries would increase Japan’s potential output by 25 percent by 2030.
- Japan’s membership in the Trans-Pacific Partnership will strengthen integration with Asia and catalyze domestic reforms.
Community spirit and societal response
- Japanese spirit of ‘kizuna’ demonstrated after the Great East Japan earthquake and tsunami; community response and adaptability noted.
- Conservation efforts after loss of more than a quarter of the country’s electricity generation helped keep the economy moving.
- Combined with reconstruction spending, Japan’s economy will turn around.
Japan’s international contributions and leadership
- Japan stepped forward in 2008 and again this year as the first to offer loans to boost the IMF’s resources.
- Japan’s leadership in the recent decision by member countries to increase the IMF’s resources by $456 billion is emphasized as especially important.
- Japan has been a generous and consistent supporter of the IMF:
- Contributed more than any other country to the IMF’s concessional lending to the poorest countries.
- Contributed more than any other country to support the Fund’s technical assistance and capacity building efforts in more than 120 countries—contributing more than $400 million since 1990.
- Supported the IMF scholarship program, which has benefited more than 500 students.
- Japan is well represented at the most senior levels of the IMF (Deputy Managing Director Naoyuki Shinohara cited).

Conclusion: Japan’s Partnership with the IMF

Governance and representation
- IMF governance must reflect its membership; the ‘quota’ reforms agreed in late 2010 will ensure that once in effect, three Asian countries—China, India, and Japan—will be among the IMF’s ten largest shareholders.
- Asia’s voice in the IMF will become even more powerful.
Upcoming event
- October: the 2012 Annual Meetings of the IMF and World Bank will be hosted in Tokyo; global attention will focus on Japan’s leadership, spirit, and commitment to multilateralism.
Closing
- The Fund looks to use growing global interconnections to bring nations together in response to crisis; Japan’s partnership and multilateral commitment are indispensable.

Source: Partnership & Recovery - The Shared Path to Global Stability & Growth, Nikkei Symposium Keynote Speech by By Christine Lagarde, Managing Director of the International Monetary Fund; July 6, 2012.