## Globalization, Flexibility and Interdependence: Equipping Economies for the 21st Century — Plenary Session Keynote Address by Anne O. Krueger _IMF News, June 13, 2006_ ## Source details **Canonical URL:** [Globalization, Flexibility and Interdependence: Equipping Economies for the 21st Century — Plenary Session Keynote Address by Anne O. Krueger](https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061306a) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/sp061306a/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/sp061306a/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/sp061306a/bundle-manifest.json) ## Bibliographic details - Published: June 13, 2006 --- ### Overview and central message - Delivered at the 10TH St. Petersburg International Economic Forum, St. Petersburg, Russia, June 13, 2006. - Central argument: economies must increase flexibility to take full advantage of globalization, raise potential growth rates, accelerate poverty reduction, and increase resilience to future global downturns. - Flexibility is presented as vital for sustained rapid growth, crisis absorption, and enabling firms and individuals to respond to technological and structural change. ### Global outlook and downside risks - IMF expectation: growth in real global GDP this year will be close to 5 percent. - This will be the fourth successive year that global growth has exceeded 4 percent. - Downside risks identified: - 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 - Policy implication: pre-emptive reforms during the current expansion to strengthen economies before the next downturn. ### Importance of flexibility — historical and recent experience - Countries that achieved rapid, sustained growth undertook ambitious, wide-ranging reforms and maintained commitment over long periods. - Historical examples cited: Britain, Germany, United States (19th century); postwar industrial countries; post-1960s Korea (real GDP grew roughly tenfold over the four decades from 1960). - Recent export growth examples: - Since 2001, export growth averaged more than 22 percent a year in India. - Since 2001, export growth averaged about 25 percent a year in China. - India's share of world exports has nearly doubled in the past fifteen years. - China's share of world exports has tripled in the past fifteen years. - Interdependence increases the value of national flexibility: more flexible national economies collectively support more rapid global growth and a milder, shorter global slowdown. ### Achieving flexibility — macroeconomic management - Improved macroeconomic management has raised and stabilized growth rates. - Progress cited: reduction of inflation, sound fiscal policies that curb budget deficits and reduce debt burdens. - Inflation experience and projections: - When last in St Petersburg in 2003, average inflation in the CIS countries was around 12 percent (three years earlier it had averaged more than 24 percent). - IMF expects average inflation in the CIS countries to come in at just over 10 percent this year and to fall to single digits next year. - Global inflation rate declined from an annual average of almost 30 per cent in 1990-94 to 3.8 per cent in the past 5 years. - In the early 1990s, average inflation in developing countries was around 80 per cent; that had declined to average of 6 per cent between 2000 and 2005. - Current projection: a further fall, to below 5 percent by 2007. - Flexible exchange rates: - Flexible exchange rate regimes are emphasized as important shock-absorbers. - Lesson from 1990s capital account crises: fixed exchange rates can force adjustment through wage rates and domestic prices, imposing larger costs and longer adjustments. - As a result of lessons learned, most countries now have flexible exchange rate regimes. ### Financial sector, institutions, and transparency - A healthy financial sector is a key component of macroeconomic stability: - Weak financial sectors misallocate resources and reduce average returns. - Banks must assess creditworthiness, risks and returns; competition enhances efficiency, subject to appropriate regulation. - Financial sector breadth (equity, bonds, insurance) and innovation are necessary to meet complex and cross-border financing needs. - Transparency and institutional health: - Greater openness and public scrutiny improve performance at sectoral, national, and global levels. - IMF positions itself as one of the most transparent institutions and underscores transparency as a durable lesson. - Effective judiciary and enforceable property rights are necessary to attract and retain investment. - Labor market and tax structure: - Evidence: where it is difficult to fire workers, employers are more reluctant to hire — labor market rigidities reduce hiring and hamper enterprise. - Tax distortions (exemptions, complex systems) distort price signals and lower efficiency. ### Business environment and structural reform — comparative indicators - World Bank "Doing Business 2006" findings (examples from the speech): - Time to start a business: - Australia: 2 days - United States: 5 days - Russia: 33 days - Azerbaijan: 115 days - Belarus: 79 days - Debt collection: - Georgia: 375 days; costs almost half the total debt to collect - Armenia: 185 days; costs less than a fifth of the total debt - New Zealand: 50 days; costs less than 5 percent of the debt - Tax compliance and burden: - Hong Kong: 1 tax payment representing about 14 percent of gross profits; average 80 hours preparing tax returns - Armenia: average 1120 hours a year on tax returns; 50 separate tax payments - Belarus: 1188 hours; tax burden represents 122 percent of gross profits - Cumulative regulatory burdens can be decisive in firm location and growth decisions in a globalized economy. ### The IMF's role and multilateral action - IMF objectives and functions: - Principal objective remains maintenance of international financial stability. - Roles: crisis prevention and resolution, macroeconomic advisory work, technical assistance, Article IV consultations to draw attention to policy weaknesses and recommend reforms. - Multilateral engagement: - Fund moving to strengthen surveillance at multilateral and regional levels. - New process of multilateral consultations agreed at the Spring Meetings in April to address issues of global concern; first issue selected: global imbalances. - First set of multilateral consultations announced involving China, the Euro Area, Japan, Saudi Arabia and the United States — all agreed to participate in the search for a multilateral solution to imbalances. - Emphasis: policymakers must adopt reforms, secure civil society support, and ensure implementation for reforms to succeed. ### Policy recommendations and priorities (as stated in the speech) - Implement reforms now during the global expansion to raise potential growth and prepare for the next slowdown. - Strengthen macroeconomic management: - Reduce inflation and sustain sound fiscal policies to curb deficits and debt. - Maintain flexible exchange rate regimes to absorb shocks. - Promote financial sector soundness, competition, breadth and innovation; strengthen regulation and supervision. - Enhance transparency and institutional quality, including judiciary effectiveness and property rights enforcement. - Reform business environment to reduce start-up times, simplify debt collection, and lower compliance burdens. - Improve labor market flexibility to reduce hiring disincentives and facilitate worker reallocation. - Reform tax systems to eliminate distortions and reduce compliance costs. - Pursue coordinated multilateral action to reduce global imbalances and lower the likelihood of disorderly adjustments. ### Key statistics and figures cited (verbatim) - "growth in real global GDP this year will be close to 5 percent." - "fourth successive year that global growth has exceeded 4 percent." - "Since 2001, export growth has averaged more than 22 percent a year in India, and about 25 percent a year in China." - "In the 1950s, the third poorest country in Asia" (referring to Korea). - Korea: "real GDP grew roughly tenfold over the four decades from 1960." - CIS inflation history and projections: - "in 2003, average inflation in the CIS countries was around 12 percent." - "three years earlier, inflation had averaged more than 24 percent." - "the IMF is expecting average inflation in the CIS countries to come in at just over 10 percent this year and to fall to single digits next year." - Global inflation: - "declined from an annual average of almost 30 per cent in 1990-94 to 3.8 per cent in the past 5 years." - "average inflation rate in developing countries was around 80 per cent" (early 1990s). - "declined to average of 6 per cent between 2000 and 2005." - "We currently project a further fall, to below 5 percent by 2007." - Business environment time/cost examples: - Start-up days: Australia 2 days; United States 5 days; Russia 33 days; Azerbaijan 115 days; Belarus 79 days. - Debt collection: Georgia 375 days and costs almost half the total debt; Armenia 185 days and costs less than a fifth; New Zealand 50 days and costs less than 5 percent. - Tax compliance: Hong Kong 1 payment representing about 14 percent of gross profits and 80 hours; Armenia 1120 hours and 50 payments; Belarus 1188 hours and 122 percent of gross profits. *Plenary Session Keynote Address by Anne O. Krueger, First Deputy Managing Director, IMF — St. Petersburg, Russia, June 13, 2006.* --- ## References - [Anne O. Krueger](https://www.imf.org/external/np/omd/bios/ak.htm) - [PRESS CENTER](http://presscenter.imf.org/) - [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/sp061306a_