## Decisive Action to Secure Durable Growth; Lecture by Christine Lagarde, IMF Managing Director, at an event hosted by Bundesbank and Goethe University, Frankfurt, Germany, April 5, 2016

_IMF News, April 5, 2016_

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## Bibliographic details
- Published: April 5, 2016

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### Introduction / Overview
- Context: Lecture delivered in Frankfurt, hosted by the Bundesbank and Goethe University; remarks “As prepared for delivery.”
- Key framing: interconnectedness and internationalism as essential principles to confront global economic risks.
- Status of the global economy: “the recovery continues; we have growth; we are not in a crisis” but the recovery is “too slow, too fragile, and risks to its durability are increasing.”
- Membership context: the IMF’s 188 member countries will focus on the state of the global economy at the Spring Meetings.

### Today’s Global Challenges: A Time of Uncertainty
- Recent trend: “the global outlook has weakened further over the last six months—exacerbated by China’s relative slowdown, lower commodity prices, and the prospect of financial tightening for many countries.”
- Advanced-economy conditions:
  - United States: growth flat, partly due to the strong dollar.
  - Euro Area: low investment, high unemployment, weak balance sheets.
  - Japan: weaker-than-expected growth and inflation.
- Emerging-market conditions:
  - China: transition to a more sustainable model; growth lower though still strong.
  - Brazil and Russia: downturns larger than expected.
  - Middle East: hit hard by the oil price decline.
  - India: “a bright spot—with strong growth and rising real incomes.”
  - ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam) performing well.
- Recent improvements in sentiment: driven by further easing from the ECB, a slower pace of Fed rate increases, relative firming of oil prices, and lower capital outflows from China.
- Key downside risks identified:
  - Advanced economies: high debt, low inflation, low investment, low productivity, and high unemployment in some countries; strained bank and non-bank balance sheets by non-performing assets and low operating profit margins.
  - Emerging/developing economies: lower commodity prices, higher corporate debt, volatile capital flows, de-risking, reduced bank lending.
  - Macrofinancial feedback loops: possible spillovers to sovereign balance sheets (example: implicit guarantees of large and inefficient state-owned enterprises).
  - Increased frequency and force of cross-border spillovers from emerging economies (trade, commodities, financial markets); reference to Global Financial Stability Report, April 2016, Chapter 2.
  - Slowing global trade and elevated financial stability risks; recent market turmoil reflecting lower confidence in policy effectiveness.
- Political and non-economic risks:
  - Terrorism, global epidemics, conflict and persecution leading to refugee flows (Jordan, Lebanon, Turkey, some European countries).
  - Inequality: reference to Oxfam’s claim that “the world’s richest 62 individuals own the same wealth as the poorest 3.6 billion.”
  - Rising public frustrations that can drive inward-looking, protectionist responses.
- Macro priority: “secure the recovery and lay the foundation for stronger and more equitable medium-term growth.”

### Key Actions at Country Level: A Three-Pronged Approach
- High-level strategy: structural, fiscal, and monetary measures implemented decisively and in combination so country actions add up globally.

- I. Structural Reforms: More Specificity
  - G-20 commitment: raise global GDP by an additional 2 percentage points by 2018; Lagarde calls to advance these commitments into 2016.
  - Examples of country-specific structural measures:
    - United States: expand the earned income tax credit, increase the federal minimum wage, strengthen family-friendly benefits.
    - Euro Area: improve training and employment-matching policies, especially for youth.
    - Commodity-exporters and many low-income developing countries: increase diversification.
  - Policy design note: accompany supply-side measures with supportive fiscal and monetary policies to offset short-term demand dampening.

- II. Fiscal Policy: More Growth-Friendly
  - Reorient revenue and expenditure composition to be growth-friendly.
  - Country examples:
    - India: reduced spending on costly energy subsidies to invest more in social infrastructure.
    - Japan: investing in childcare to boost female labor force participation and medium-term growth.
    - Germany: expand public investment by €17 billion in the years 2015-18 and provide labor tax relief in 2016.
    - Canada: cited as using available fiscal space with a recent budget.
  - Efficiency and returns:
    - IMF staff research: the most efficient public investors get twice the growth “bang” for their investment “buck” than the least efficient.
    - IMF Fiscal Monitor finding: GDP in advanced economies could increase by 5 percent over the next two decades if private R&D investment was raised by 40 percent; estimated fiscal cost of around 0.4 percent of GDP per year.
  - Domestic resource mobilization:
    - Strengthen domestic revenue, including by reducing energy subsidies—the direct and indirect cost of which is estimated at about $5.3 trillion globally (IMF working paper).
  - Fiscal strategy:
    - Countries with high and increasing debt and elevated sovereign spreads need further fiscal consolidation.
    - Others may expand fiscally if backed by credible, medium-term consolidation plans.
    - Prepare fiscally smart contingency measures for swift implementation if downside risks materialize.

- III. Monetary Policy: More Help from Fiscal and Structural
  - Role to date: accommodative monetary policy and quantitative easing have been crucial to support recovery.
  - Policy assessments:
    - Positive view of ECB and President Draghi’s actions to improve confidence and financial conditions in the Euro Area.
    - Negative interest rates introduced by the ECB and Bank of Japan seen as net positives in current circumstances though they carry side effects requiring vigilance.
    - U.S. Fed’s December decision and data-dependent approach described as appropriate.
  - Limitations: monetary policy “can no longer be the alpha and omega to recovery”; more effective with fiscal and structural support.
  - Transmission channel concerns:
    - High levels of non-performing loans—from EU to China—impede transmission of lower interest rates.
    - Strengthen bank balance sheets via enhanced prudential oversight, debt enforcement regimes, and insolvency frameworks.
  - Emerging/developing economy guidance:
    - Monetary policy should adapt to circumstances, including exchange rate flexibility where feasible to cushion terms-of-trade shocks.

- Political Will and Leadership
  - Implementing the three-pronged approach may require crossing political red lines; leadership and cooperation are essential.

### International Action: Time for Greater Global Cooperation
- Collective priorities requiring cooperation:
  - Shore up global trade.
  - Press ahead with financial regulatory reform.
  - Tackle “global public goods” (climate change, corruption).
  - Maintain and revisit the global financial safety net.
- Crisis-era reforms acknowledged:
  - Creation of the Financial Stability Board and European Stability Mechanism, strengthened central bank swap lines, expanded prominence of the G-20.
  - IMF reforms: overhauled surveillance and lending toolkits, doubled quotas following passage of the 2010 Governance Reforms earlier in the year, enhancing financial resources and representation of dynamic emerging markets.
- Areas for revisiting the global safety net:
  - Reflect on its size given financial globalization and the scale and speed of spillovers.
  - Improve access because many emerging and developing countries cannot use key elements (e.g., advanced-economy swap lines).
  - Increase responsiveness to new challenges: digital currencies, block chain technology, cyber-hacking.
- IMF’s forward role:
  - Membership discussions on options in coming months.
  - A well-resourced Fund is fundamental.
  - Strengthen approach to helping members manage risk, volatility, and uncertainty—including a financial backstop as needed.
  - Deepen work on structural reforms, capital flows, and de-risking.
  - Be more agile on emerging issues: migration impact on growth, women’s role in labor markets, inequality, climate change—identified as “urgent macro-critical problems.”

### Conclusion
- Overall assessment: global economy faces “a time of increased risk and uncertainty.”
- Call to action: leadership and cooperative, decisive policy implementation are required now.
- Epigraph: Goethe quotation used to underscore the imperative to act—“It is not enough to know, we must also apply; it is not enough to will, we must also do.”

*Lecture by Christine Lagarde, Managing Director, IMF; Bundesbank and Goethe University, Frankfurt, April 5, 2016.*

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## References

- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Christine Lagarde](https://www.imf.org/external/np/omd/bios/cl.htm)
- [https://www.imf.org/external/spring/2016/index.htm](https://www.imf.org/external/spring/2016/index.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Webcast](https://www.imf.org/external/mmedia/view.aspx?vid=4832803837001)
- [Global Financial Stability Report](https://www.imf.org/external/pubs/ft/gfsr/2016/01/index.htm)
- [Making Public Investment More Efficient](http://www.imf.org/external/pp/longres.aspx?id=4959)
- [IMF Fiscal Monitor](https://www.imf.org/external/pubs/ft/fm/2016/01/fmindex.htm)
- [How Large Are Global Energy Subsidies?](https://www.imf.org/external/pubs/cat/longres.aspx?sk=42940.0)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp040516_