Making the Most of an Historic Opportunity: Three Principles for Reshaping the Global Economic and Financial Framework
IMF News, October 2, 2009
Source details
- Canonical URL
- Making the Most of an Historic Opportunity: Three Principles for Reshaping the Global Economic and Financial Framework
Other formats
Bibliographic details
- Published: October 2, 2009
Overview
- Speech delivered in Istanbul, Çırağan Palace, October 2, 2009. As Prepared for Delivery.
- Central thesis: the 2008–09 financial crisis presents an historic opportunity to reshape the global economic and financial framework to achieve strong, sustainable, and balanced growth.
- Three guiding principles:
- International policy collaboration is essential.
- Financial stability demands better regulation and supervision.
- The international monetary system must be more stable, and anchored by a global lender of last resort.
Economic Backdrop and Near-Term Outlook
- Crisis impact and social costs:
- Asset markets sold off globally, decimating savings.
- Global activity and trade experienced their steepest drops since World War II.
- Unemployment in the OECD economies has reached a post-war record high.
- Up to 90 million people in low-income countries may have been pushed into extreme poverty on account of the crisis.
- The crisis has already thrown about 15 million people out of work in the advanced economies.
- Growth outlook:
- Recovery underway but fragile.
- Growth projected at about 3 percent in 2010.
- Over the medium term, growth likely to remain modest and lower than in previous post-crisis episodes.
- Main near-term risks:
- Recovery stalls if private demand in advanced economies remains too weak when policy stimulus and inventory restocking lose steam.
- Reversal in financial markets, particularly if non-performing loans increase more than expected.
- Unemployment certain to worsen before improving.
- Policy implications:
- Maintain macroeconomic and financial support measures until a sustainable recovery is underway.
- Leaders of the G-20 pledged at Pittsburgh to avoid any premature withdrawal of stimulus.
- Prepare now for eventual unwinding of crisis support measures to ensure credibility and address fiscal sustainability concerns.
- Recommend policies to support labor demand (temporary cuts in employers’ social security contributions; subsidies for workers put on short-time), active labor market policies (job search assistance and training), and measures to cushion poorer segments of the labor force (earned-income tax credits or similar support).
Principle 1 — International Policy Collaboration is Critical
- Rationale:
- Coordinated fiscal and monetary stimulus helped arrest the decline in output and stabilize financial markets.
- Global financial interconnectedness means unilateral actions have cross-border consequences.
- Key elements and initiatives:
- G-20 launched the “Framework for Strong, Sustainable and Balanced Growth” with a cooperative mutual assessment (“peer review”) of countries’ policy frameworks.
- IMF tasked to assist in mutual assessment by developing forward-looking analysis of collective policy consistency with sustainable and balanced global trajectories.
- The IMF’s mandate to assess members’ policies aligns with this role; surveillance should leverage cross-country perspectives and new engagement forms (e.g., Early Warning Exercise in cooperation with the Financial Stability Board).
- Country-level responsibilities:
- Some countries need to increase savings; others need policies to support increased domestic demand, including structural reforms.
- Avoid ring-fencing and withdrawal from global markets; seek ways for all countries to benefit from financial integration while containing negative spillovers.
- Surveillance and traction:
- G-20 peer review can complement IMF surveillance.
- Encourage candid, even-handed, and balanced analysis to improve policy traction.
Principle 2 — Financial Stability Requires Better Regulation and Supervision
- Core lesson: inadequate regulation and supervision—and insufficient appreciation of systemic risks—were key failings in the crisis.
- Progress to date:
- Strengthening prudential oversight, improving risk management, increasing transparency, promoting market integrity, reinforcing international cooperation.
- G-20 commitments and timelines:
- Develop, by the end of 2010, international rules to improve both the quantity and quality of capital and to discourage excessive leverage.
- Endorse Financial Stability Board recommendations on compensation practices aligning pay with long-term value creation.
- Improve over-the-counter derivatives markets to enhance transparency, mitigate systemic risks, and protect against market abuse.
- Make significant progress, by the end of 2010, on cross-border resolution issues and systemically important financial institutions.
- Immediate actions needed:
- Move faster to repair bank balance sheets; stress tests needed in several countries to identify capital shortfalls.
- Restart securitization markets under proper regulation to diversify credit risk and provide alternate funding.
- Emerging and developing countries:
- Financial development should continue to support growth, within a framework that controls excess risk while rewarding innovation.
- Risks and warnings:
- Complacency as markets recover could undermine reforms.
- Abundant liquidity risks fueling asset bubbles and sudden reversals of capital flows, especially when advanced economies tighten policy.
- Systemically important institutions have grown larger through crisis-era consolidation; new rules needed to address their specific risks.
- IMF role:
- Not a global financial regulator, but improved financial sector surveillance and a modernized Financial Sector Assessment Program can contribute to reform.
Principle 3 — A Strengthened International Monetary System Anchored by a Global Lender of Last Resort
- Reserve accumulation and its drivers:
- Official foreign reserves rose from about $2 trillion in the late 1990s, to over $8 trillion today.
- Primary driver: absence of adequate insurance against sudden stops in private capital flows → countries self-insured.
- Costs of self-insurance:
- Country-level: inefficient use of resources; foregone investments in education or infrastructure; complications for monetary and exchange rate policy and potential inflationary pressures.
- Global-level: export-led reserve accumulation contributed to current account surpluses and ever-widening global imbalances.
- Need for reliable emergency financing and a global lender of last resort:
- IMF has potential to provide such insurance.
- G-20 called for tripling IMF lending resources to $750 billion; commitments received to meet this target and expected to exceed it.
- To date, IMF has already committed more than twice the amount lent during the Asian crisis.
- Introduction of the Flexible Credit Line (FCL) as a pre-emptive insurance facility; Mexico, Poland and Colombia have used the FCL with favorable market reception (decline in sovereign spreads).
- Membership agreed a $283 billion SDR allocation; about $110 billion has gone to emerging and developing economies.
- Limitations and uncertainties:
- $500 billion in new lending resources provided through the New Arrangements to Borrow are temporary (require approval every five years) and contingent (activated only when a crisis is looming or underway).
- These features could add uncertainty about availability of Fund crisis financing and mean the IMF cannot yet serve as a fully credible global lender of last resort.
- Options and recommendations to strengthen credibility and stability:
- Increase the resource base of the IMF; discussions have suggested figures such as $1 trillion or more, and permanent additional resources via a quota increase would enhance credibility.
- Assess the role of regional reserve pooling arrangements and cooperation between the IMF and such arrangements.
- Make SDR allocations more responsive to global developments and flexible to country circumstances.
- Build on the FCL’s success and enhance predictability of access to IMF crisis financing (e.g., make consideration of FCL eligibility an automatic part of regular surveillance).
- Design alternative contingent instruments with elements of automaticity for members that do not qualify for the FCL.
Governance Reform and Closing Thoughts
- Legitimacy and effectiveness:
- IMF must be regarded as the institution of all members for surveillance to be seen as even-handed and independent and for the Fund to be an effective global lender of last resort.
- G-20 governance commitments:
- Modernize IMF governance by shifting quota share to dynamic emerging market and developing countries by at least five percent, from over-represented to underrepresented countries, using the current IMF quota formula as a starting basis.
- Protect the voting share of the poorest members of the IMF.
- Urgent call for all 186 member countries to move quickly to make the commitment a reality, hopefully before January 2011, and to proceed with ratification of the April 2008 quota and voice reform.
- Additional governance improvements:
- Strengthen channels for the Fund’s Governors to give strategic direction and hold management accountable.
- Ensure selection of the Managing Director and senior leadership is open, transparent, and merit-based.
- Final appeal:
- Use this historic window to build a safer, more stable financial system and a more credible and effective IMF to secure prosperity and more peaceful coexistence.
- Quotation invoked: Kemal Atatürk — “Countries are diverse, but civilization is one, and it is necessary to participate in this single civilization for the progress of the nation.”
Key Statistics and Exact Figures from the Speech
- About 3 percent — projected global growth in 2010.
- Up to 90 million — people in low-income countries potentially pushed into extreme poverty due to the crisis.
- About 15 million — people thrown out of work in the advanced economies by the crisis.
- Foreign reserve holdings: from about $2 trillion in the late 1990s, to over $8 trillion today.
- G-20 called for tripling IMF lending resources to $750 billion.
- To date, IMF has already committed more than twice the amount that it lent during the Asian crisis.
- $283 billion SDR allocation agreed by the membership.
- About $110 billion of the SDR allocation has gone to emerging and developing economies.
- $500 billion — new lending resources made available through the New Arrangements to Borrow.
- Quota share shift committed: at least five percent to dynamic emerging market and developing countries.
- Number of IMF member countries referenced: 186.
- Target timing urged: before January 2011.
Speech — Istanbul, Çırağan Palace, October 2, 2009. As Prepared for Delivery.