Stability, Growth, and Prosperity: The Global Economy and the IMF — Speech by Anne O. Krueger

IMF News, June 7, 2006

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On current projections, 2006 is likely to be the fourth consecutive year that real world GDP has grown by more than 4 percent; growth this year is expected to be close to 5 percent.
Every region shared in the expansion: the United States a major engine, emerging Asia growing more rapidly, strong growth in the Middle East, Latin America and Africa, promising signs in Western Europe, and a firmly entrenched recovery in Japan.
Canada: average annual real GDP growth of 3.4 percent over the past decade; per capita income grew by an average of 2.4 percent a year; unemployment at a 30 year low; inflation contained.
Downside risks that could slow growth include: persistent and rising global imbalances; lack of progress in the Doha trade negotiations; high and rising oil prices; continuing geopolitical uncertainty; the threat of an avian flu outbreak.
Despite risks, the Fund revised upwards its central growth forecast for the year in April.

Historical inflation reduction:
- 25 years ago, 111 IMF member countries had double digit inflation rates.
- Last year, only 35 countries had double-digit inflation (described as "less than a fifth" of members).
- In 1980, 39 members had inflation rates above 20 percent; last year only five did.
Global inflation rate changes:
- Declined from an annual average of close to 15 per cent in 1980-84 to 3.8 per cent in 2005.
- Average inflation in industrial economies: almost 9.5 per cent between 1975 and 1979; nearly 9 per cent in the early 1980s; 2.3 per cent in 2005 (projected to decline further per the WEO).
- Developing countries: average inflation around 80 per cent in the early 1990s; 5.4 per cent by 2005; IMF forecasts project a further drop to below 5 percent by 2007.
Contributing factors: improved macroeconomic management, central bank independence, inflation targeting, fiscally prudent policies enabling counter-cyclical responses during downturns.

Core lessons:
- Importance of macroeconomic stability, flexible exchange rate regimes, attention to debt sustainability, and financial system health.
- Transparency in policymaking and structural reforms raise potential growth and resilience.
Opportunities during strong growth:
- Easier planning and consensus-building for reforms.
- Need for fiscal adjustment in industrial economies to aim for balance over the business cycle.
- Address demographic challenges: aging populations, rising elderly dependency ratios, and strains on public pension systems require early action to avoid fiscal crunches.
Emerging market priorities:
- Further fiscal reforms, debt reduction, reducing foreign currency exposure, lengthening debt maturities.
- Many emerging market countries still have uncomfortably high debt levels limiting counter-cyclical policy space.
- Structural reforms to reduce labor market rigidities, burdensome business regulations, and weak enforcement of contracts and property rights.

Core mandate: maintenance of international financial stability; main focus on macroeconomic policy and national surveillance (Article IV consultations).
Technical assistance: improving customs procedures, tax and public expenditure administration, monetary policy management; significant element of Fund work.
Crisis prevention and resolution: fewer borrowers currently may indicate improved prevention, but aim to further strengthen economic performance and resilience.

IMF is strengthening multilateral and regional surveillance and establishing a new process of multilateral consultations to address global issues.
Causes of current large imbalances: low consumption and rising surpluses in Asia; the large and rising US current account deficit; sluggish growth in Europe; rising surpluses in main oil-exporting countries.
Risks of failure to unwind imbalances smoothly: potential disorderly adjustment (described as low risk but not impossible), costly unilateral actions, negative spillovers.
Broad agreement on needed steps:
- Raise national saving in the United States (reduce fiscal deficit and spur private saving).
- Implement structural reforms to increase flexibility and growth in the Euro area and several other countries.
- Further structural reforms, including fiscal consolidation, in Japan.
- Increase consumption and exchange rate flexibility in a number of surplus countries in emerging Asia.
- Promote efficient absorption of higher oil revenues in oil-exporting countries with strong macroeconomic policies.
First set of multilateral consultations announced and involving China, the Euro Area, Japan, Saudi Arabia and the United States.

A satisfactory outcome to the Doha round could significantly boost world trade and global growth through lowering barriers in agriculture, services, and further liberalization in manufactures.
Failure of Doha would weaken the global trading system and encourage protectionism, slowing global growth and reducing resilience to shocks.
The WTO leads Doha negotiations; the Fund supports WTO efforts and collaborates closely.

Urgent priorities: progress in the Doha negotiations; multilateral resolution of global imbalances.
National policymakers: implement reforms to strengthen economies, raise potential growth rates, preserve macroeconomic stability, and build fiscal space for downturns.
Multilateral: IMF to facilitate coordinated, effective responses to global imbalances through strengthened multilateral surveillance and consultations.
The current favorable environment—strong global growth, subdued inflation, progress in macroeconomic management—is an opportunity to press ahead with reforms at national and global levels.

Speech by Anne O. Krueger, First Deputy Managing Director, IMF; Conference De Montreal, Montreal, Canada; June 7, 2006.