Prospects for International Economic Cooperation, Remarks by John Lipsky, First Deputy Managing Director, IMF
IMF News, September 15, 2010
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- Published: September 15, 2010
Market and Policy Failures and the Global Crisis
- Crisis resulted from a confluence of market and policy failures after the Great Moderation.
- Key failures identified:
- Progressive breakdown in market discipline, regulatory flaws, and inconsistent economic policies.
- Supervision and regulation of cross-border financial institutions were weaker and more fragmented than recognized.
- Financial safety nets and frameworks for resolution of non-viable financial institutions were internationally inconsistent and inadequate.
- Bilateral, regional and multilateral arrangements to address financing and liquidity needs were reactive and ad hoc.
- Macroeconomic policies developed outside of an effective collaborative framework, allowing substantial differences in growth rates of domestic demand and the build-up of unprecedented international payments imbalances.
- Immediate global policy responses:
- Largest-ever coordinated countercyclical budgetary actions.
- Rapid and massive rate cuts by major central banks and provision of unprecedented sums through currency swap lines to support global market liquidity.
- Large increases in resources available to international financial institutions, including a tripling of the resources available to the IMF.
- Strengthening of the global financial safety net and coordinated G-20 efforts to enhance macroeconomic policy coherence.
From Crisis to Recovery
- Global growth developments:
- First half of this year: global growth reached an annual rate of about 4-3/4%.
- Emerging economy first half growth: annual rate of about 7-1/4%.
- Advanced economies first half growth: annual rate of about 3%.
- World Economic Outlook (WEO) update: second-half global growth likely a bit more sluggish than the 3-3/4% annual rate forecast in the latest WEO update.
- WEO release: new World Economic Outlook will be released in early October.
- Regional dynamics:
- Emerging Asia (China, India, Indonesia) leading, followed by Brazil in Latin America.
- Euro area: growth held up relatively well overall, driven by unexpectedly strong German expansion and buoyant exports, especially to emerging Asia.
- Euro area challenges: heavy reliance on bank credit and still-tight bank lending conditions leave domestic demand gains sluggish in many countries.
- Risks and policy stance:
- Recovery has slowed somewhat; downside risks have risen.
- Key risks: turbulence in public debt markets precipitating adverse feedback between sovereign credit perceptions and financial sectors; renewed weakness in property markets (including the United States).
- Timing exits from accommodative monetary and fiscal policies will be country-specific.
- Current monetary and budget policy settings viewed as broadly appropriate for the base case.
- Key challenge: formulation of credible plans for substantial fiscal deficit reduction for the medium-term in most advanced economies.
- Base case expectation: sustained recovery, though fiscal consolidation might need to be delayed if private demand weakens.
Need for Collective Action
- Two complementary rebalancing moves required to sustain the recovery:
- Internal rebalancing in advanced economies: stronger private demand accompanying fiscal consolidation to allow the private sector to retake its role as the main engine of growth and to rein in burgeoning public debt.
- External rebalancing: increase in net exports in current account deficit countries (such as the United States) and decrease in net exports in surplus countries (notably emerging Asia) to ensure adequacy of global demand and prevent reemergence of global imbalances.
- Financial sector repair and reform needs:
- Restore credit flows to support transition to stronger private demand.
- Address legacies of the crisis: bank funding concerns, resolution of weak banks, regulatory uncertainty.
- Reduce bank refinancing risks, strengthen balance sheets, and reform regulatory frameworks.
- Carefully sequence exits from extraordinary financial system support while funding risks remain high.
- Mutual Assessment Process (MAP) under the G-20 Framework:
- G-20 Leaders launched “Framework for Strong, Sustainable and Balanced Growth” implemented via MAP; IMF staff providing technical and analytical support.
- First stage: G-20 members shared policy plans and economic projections for next 3–5 years.
- IMF analysis found submitted projections relatively optimistic and subject to notable downside risks; additional efforts needed across membership.
- IMF staff produced two alternative scenarios:
- Downside scenario: quantified implications of key risks materializing.
- Upside scenario: assessed impact of three mutually-reinforcing policy approaches:
- (i) “growth-friendly” and credible fiscal consolidation in major advanced economies, beginning in 2011 and going beyond countries’ submitted medium-term plans;
- (ii) policies aimed at bolstering domestic demand in emerging economies with large external surpluses;
- (iii) structural reforms in labor and product markets across the G-20 to boost supply potential and reduce unemployment.
- Upside scenario demonstrated appropriate collective action could make everyone better off while minimizing downside risks.
- June 2010 Toronto Summit: G-20 Leaders reaffirmed commitment to the Framework; second stage of MAP underway to identify policies for a Comprehensive Action Plan to be articulated at the Seoul Summit in November.
Architectural Issues for Further International Cooperation
- Strengthen the international financial system:
- An ambitious program of financial system repair and reform is underway.
- Basel Committee recently agreed on a reform package on bank capital standards; many issues remain including implementation, macro-prudential elements, systemic institution risk, and cyclical calibration of capital requirements.
- Strengthening supervision is critical.
- Strengthen global financial safety net:
- Fund’s Executive Board enhanced country insurance facilities and extended reach to a broader set of countries following sound policies.
- Flexible Credit Line (FCL) made more adaptable for countries with very strong policies and fundamentals.
- New Precautionary Credit Line (PCL) introduced for countries with moderate vulnerabilities as contingent protection.
- Fund will explore options for improving crisis prevention facilities and greater synergies between lending and surveillance with key regional financing arrangements.
- Consideration of a Global Stabilization Mechanism to allow proactive crisis prevention measures during a systemic crisis.
- IMF governance reforms:
- Intense efforts underway to reach agreement on governance reforms so international institutions reflect shifting economic weight of emerging economies.
- Quota reform (voting shares and overall size of Fund’s quota pool) is one aspect; a broader package of governance reforms is being debated.
- Progress anticipated during the upcoming October IMF Annual Meetings and the November Seoul G-20 Summit.
- Task is complex and challenging; success would represent a concrete step toward enhanced international cooperation.
Conclusion
- Key challenges remaining:
- To sustain and build a global recovery;
- To secure the basis for strong, sustainable and balanced growth;
- To build a more robust global economic and financial infrastructure;
- To strengthen global governance.
- Progress has been achieved but remains incomplete.
- International community, through the G-20 Leaders process and other venues, has pledged further progress in coming months.
- Immediate tests: IMF Annual Meetings in October and G-20 Seoul Leaders Summit in early November.
- Importance of public support: informed and interested citizens can encourage political authorities to commit to and execute needed reforms; benefits expected to accrue broadly.
Remarks by John Lipsky, First Deputy Managing Director, IMF (September 15, 2010).