An Address to the 2011 International Finance Forum by Christine Lagarde, Managing Director, International Monetary Fund
IMF News, November 9, 2011
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- Authors: Christine Lagarde Managing Director
- Published: November 9, 2011
Global and regional economic challenges
- Global economy has entered "a dangerous and uncertain phase."
- Adverse feedback loops between the real economy and the financial sector have become prominent.
- Unemployment in the advanced economies remains "unacceptably high."
- Risk scenario: without coordinated action, possible downward spiral of uncertainty, financial instability, and a collapse in global demand could lead to "a lost decade of low growth and high unemployment."
- Asia is rebounding and is "a real bright spot" but remains exposed:
- The trade channel matters because the region "still relies a lot on external demand to propel growth."
- Emerging Asia is vulnerable to developments in the financial sector.
- Interdependence emphasized: "no country and no region can go it alone."
Policy path
- Advanced economies bear special responsibility for restoring confidence and lifting growth.
- Positive recent political steps cited:
- October 26 Euro Area leaders agreed on a framework to restore debt sustainability in Greece; recapitalize European banks; strengthen the firewall against financial contagion; and lay foundations for robust economic governance in the euro area.
- G20 leaders at the Cannes Summit endorsed this framework and emphasized "expeditious implementation."
- Policy mix recommendations for advanced economies:
- Strike the appropriate balance in fiscal and monetary policies to promote stability and growth.
- Push ahead with structural policies to boost competitiveness and employment.
- Strengthen financial regulation to make the financial sector safer and put it "back in the service of the real economy."
- Emphasize the social dimension: need for growth that produces jobs and is inclusive; "more equal income distribution is good for macroeconomic stability and sustainable growth."
- Policy guidance for Asia:
- Countries must prepare for external shocks while managing domestic overheating and financial-stability risks from prolonged easy financial conditions.
- Monetary policy: tighten when inflation pressures are high and monetary policy is accommodative; hold off on tightening when inflation is under control and exposure to external dangers is high.
- Fiscal policy: "since fiscal deficits and debts are higher than before the crisis, for the vast majority of countries, continued deficit reduction is the right course of action."
- If global environment deteriorates further, quickly change course and deploy measures to cushion activity, including:
- Ease off fiscal brakes.
- Draw on reserves or regional reserve pooling arrangements.
- Reactivate central bank swap lines.
- IMF role: prepared to help complement regional financial arrangements in Asia.
- Social policies: continue building social safety nets and investing in infrastructure, health and education to create inclusive growth and stronger domestic engines of growth.
The role of China
- Overall assessment: "fundamentally, China is on the right path" aligned with the 12th five-year plan.
- Financial stability measures: moderating pace of credit growth, increasing provisioning and capital, expanding scope of macroprudential policies; "there is still scope for using monetary policy to restrain credit growth."
- Fiscal policy: "Fiscal policy is appropriately moving back to balance. But if the growth outlook deteriorates significantly, it could become the first line of defense, given ample fiscal space and capacity to deploy resources quickly."
- Rebalancing toward domestic demand:
- Current account surplus fell "from an all-time high of 10 percent of GDP in 2007 to just over 5 percent last year."
- Shift further from exports and investment toward consumption by boosting household incomes and expanding social safety nets.
- Other reforms needed:
- Continue reform of the financial system.
- "China also needs a stronger currency in real effective terms."
- Social dimension reiterated: poverty reduction progress and ongoing efforts to build social safety nets and invest in human capital.
Global economic governance
- Asia's and China's rise described as "spectacular" and central to global growth.
- China contributes to lifting growth in low-income countries through trade, investment, and financing.
- China plays a leading role at the G20 and at the IMF.
- IMF governance reforms aim to make the Fund "truly representative of our membership—all 187 countries" and to give emerging market and developing countries a greater voice.
- Outcome highlighted: "China is now in our top three shareholders."
Conclusion
- Central message of interdependence: "we are all in one boat. One global economy. Our fortunes rise together, and they fall together."
- Ethical/cultural appeals: quoted "All men are brothers", said the Analects.
- Collective responsibility: to "bring about a more stable and more prosperous world" in which every person can reach their full potential.
- Historical note: China historically "among the most technologically advanced, the most populous, and the most prosperous of nations" and "has once again taken the global central stage."
By Christine Lagarde, Managing Director, International Monetary Fund — Beijing, November 9, 2011. As prepared for delivery.