Transcript of the interview granted by Maurice Obstfeld, IMF Economic Counsellor and Director of Research to a group of media
IMF News, December 4, 2018
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- Published: December 4, 2018
Changes in global political economy and multilateralism
- Maurice Obstfeld notes a marked change in the political sphere since he started the job: institutions of multilateralism that had been "basically unquestioned" are now more contested, especially by the U.S. government.
- He observes a "more conflictual approach to international economic relations" and uncertainty whether this will stabilize after adjustments in trading relationships or become an ongoing feature.
- Embedding rising economies into multilateral frameworks is emphasized as important; the IMF has pursued initiatives (for example, the SDR initiative) intended to "keep them at the table."
China’s growth, technological advancement, and policy implications
- Algebraic point: if China and the U.S. keep growing at close to current rates, China will eventually reach U.S. size; the "size issue" is less important than the character of China's economy.
- China increasingly produces "more advanced products and more technological sophistication."
- IMF World Economic Outlook work highlighted technology spillovers and identified a relatively small group of technological leaders; China and Korea have joined frontier producers (China still classified as emerging, Korea as advanced).
- Trade disputes center on intellectual property; reforming the IP regime is presented as "a big to-do for the global multilateral order."
- Policy implications and recommendations:
- Entice China into a global framework via multilateral negotiations under which China changes some trading practices while accommodating legitimate Chinese economic goals.
- Encourage further opening to foreign investment.
- Reduce official support that prevents hard budget constraints for state-owned enterprises; address "an excessively high rate of credit growth."
- Move toward a more flexible currency to help adjustment and potentially defuse trade tensions.
Globalization versus "de-globalization"
- Obstfeld considers talk of de-globalization "a little bit overdone."
- Financial globalization remains intact; observed shifts are more about trade and technological trends prompting some reshoring.
- He believes current trade tensions are damaging because "so much of global investment and production are tied up with trade" but unlikely to recreate the Great Depression–era collapse of trade.
Reflections on 40 years of China’s reform and opening up
- Deng Xiaoping–era opening produced "remarkable positive effects" on China’s standard of living and spillovers to other emerging economies.
- Significant room remains for further opening and market reforms to enhance growth and stability.
- Specific areas for further reform: intellectual property, foreign investment openness, enforcement of hard budget constraints, financial sector oversight, and currency flexibility.
Populism, European politics, and fiscal rules
- A strong showing of populists in European Parliament elections could push toward "more national sovereignty and away from some of the rules of the EU," risking backtracking on single-market–promoting rules and efficient resource allocation.
- Potential pressure to relax budgetary rules is noted as problematic given indebtedness in some countries; the task is to rebuild fiscal buffers, not to increase reckless spending.
Angela Merkel’s economic legacy and European institutional reform
- Merkel provided leadership in preserving the Euro and advancing institutional reforms after the Euro crisis.
- Progress cited: single supervisory mechanism, single resolution mechanism, stronger surveillance practices.
- Broad recognition has grown (though not universally accepted) for the need for common deposit insurance, a full banking union, and capital markets union—described as "huge progress" linked partly to Merkel’s leadership.
Central bank independence, remit, and accountability
- The crisis changed views: central banks proved to have broader responsibilities beyond setting policy interest rates—financial stability, payments system, lender-of-last-resort functions.
- Actions since the crisis (special facilities, unconventional policies, negative interest rates, LTROs, large sovereign debt purchases) increased political attention and questioned independence.
- Two main consequences highlighted:
- Politicians increased scrutiny because central banks exercised wide-ranging powers that affect broad segments of the economy.
- Central banks became more involved in areas that verge on fiscal policy, raising concerns about transparency and accountability.
- Policy challenges and recommendations:
- Central banks must improve transparency and communication to the public to reduce risks of politically motivated attacks and misperceptions.
- Distinguish legitimate accountability questions from purely political motivations; reassess monetary policy frameworks (e.g., planned Fed reassessment in June at Chicago).
Global slowdown, U.S. fiscal stimulus, and downside scenarios
- Obstfeld expects somewhat lower growth for 2019 compared with the current year, partly due to reversal of fiscal incentives and public spending; sharper fiscal reversal possible in 2020 than in 2019.
- Signs of slowdown outside the U.S. are "more dramatic" with negative or disappointing Q3 outcomes for parts of Asia and Europe (Germany had negative Q3 growth).
- Nightmare scenario: rising U.S. inflation leads to a high Fed policy rate just as fiscal stimulus is withdrawn.
- Current market and Fed signals suggest expectations for a more moderate pace of interest rate increases than earlier anticipated.
- Baseline: U.S. growth "well above potential next year but on a slowing path into 2020"; recession is not the baseline though probabilities exist.
India: reforms, vulnerabilities, and shadow banking
- Reforms under the Modi government highlighted as "fundamental": goods and services tax, insolvency and bankruptcy code, and financial inclusion efforts.
- Growth generally "quite solid" (with a weaker Q3 in the referenced year).
- Key vulnerabilities:
- Shadow banking (non-bank finance) has become a more evident risk; stricter oversight is needed.
- Legacy corporate debt from bad infrastructure projects remains concentrated in banking and has migrated to shadow banking as banking oversight tightened.
- Policy recommendations:
- Maintain reform momentum through the election period.
- Continue fiscal adjustment and contain financial pressures to avoid rapid deterioration of vulnerabilities.
Gita Gopinath appointment, future research emphases, and emerging macro risks
- Gita Gopinath described as an "illustrious" economist with longstanding collaboration; judged a "fantastic appointment" as IMF Chief Economist.
- Major issues for the Research Department and the Fund going forward:
- Continued focus on income distribution, market power, determinants and effects of trade, and trade tensions.
- Two standout frontier challenges for coming years:
- Climate change: expect more macro effects from extreme weather events; macro implications will grow in importance.
- Major cyber event: the risk of a cascading cyber event with significant financial and macroeconomic consequences—private sector underinvestment due to public-good externalities argues for stronger government action and international focus on spillovers.
Transcript of the interview granted by Maurice Obstfeld, IMF Economic Counsellor and Director of Research to a group of media — December 4, 2018