Global Economic Challenges and Global Solutions: an Address at the Woodrow Wilson Center, By Christine Lagarde, Managing Director, International Monetary Fund
IMF News, September 15, 2011
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- Authors: Christine Lagarde
- Published: September 15, 2011
Global outlook
- Speech delivered in Washington DC, September 15, 2011; "As prepared for delivery".
- Overall assessment: global growth is continuing, but slowing down.
- Advanced countries: "an anemic and bumpy recovery, with unacceptably high unemployment."
- Euro area: "debt crisis has worsened. Financial strains are rising."
- Emerging markets: facing "inflation pressures, strong credit growth, rising current account deficits."
- Low-income countries: "reasonable growth, but remain highly vulnerable to economic dislocation ... including from commodity price volatility."
- Regional note: the Horn of Africa drought described as a "devastating catastrophe" with urgent international assistance needed.
- Middle East and North Africa: "embarking on a historic transformation" with IMF recognition of the National Transition Council as the government of Libya and readiness to provide "technical assistance, policy advice, and financial support as requested."
Core problems identified
- Three distinct, related issues:
- "balance sheet pressures sapping growth",
- "instability in the core of the global economic system",
- "social tensions."
- Balance sheet pressures: "still too much debt in the system"—uncertainty over sovereigns, banks in Europe, and U.S. households; weak growth and weak balance sheets feeding a crisis of confidence.
- Core instability: financial linkages transmit tremors "rapidly and broadly"; "financial stability risks have risen significantly."
- Social tensions: "entrenched high unemployment, especially among the younger generation"; fiscal austerity eroding social protections; perceptions of unfairness between "Wall Street" and "Main Street"; growth that "predominantly benefited the top echelons of society."
Policy framework proposed — the "4 R’s" (repair, reform, rebalance, rebuild)
- Overarching message: "There is a path to sustained recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world—leadership over brinksmanship, cooperation over competition, action over reaction."
- Repair:
- Immediate priority: "relieve some of the balance sheet pressures" on sovereigns, households, and banks.
- Sovereigns: need "credible medium-term plans to stabilize and lower public debt ratios." Warning that consolidating too quickly can hurt recovery and jobs.
- Policy sequencing: allow "a slower pace of consolidation" where credible measures anchor medium-term savings while creating space for growth today.
- Country differentiation: "Some have no choice but to cut deficits today... Others should stick to their adjustment plans... Others still are probably pushing too hard today, and could slow down a bit."
- Emphasis on the "how" of adjustment: prioritize measures with "the biggest bang-for-the-buck" that create jobs, support growth, and account for distributional considerations.
- Medium-term fiscal focus: tax reform (including broadening bases) and entitlement reforms to establish long-term debt sustainability in "virtually all advanced economies."
- Households and banks: relieve overburdened households (e.g., "more aggressive principal reduction programs" or helping homeowners use low interest rates); in Europe, sovereigns must address financing problems and "all banks must have sufficient capital buffers."
- U.S. context: welcomes President Obama's proposals to address growth and employment while urging clarification of medium-term plans for public debt sustainability.
- Reform:
- Objective: "laying the foundations for a more stable economic future tomorrow."
- Financial sector reform priorities: higher quality capital and liquidity standards with phase-in arrangements; remaining gaps in supervision, cross-border resolution, too-important-to-fail, and shadow banking systems.
- Need for international cooperation to avoid regulatory arbitrage; concern that issues remain "three years after Lehman."
- Develop macro-prudential tools (e.g., higher capital in good times, maximum loan-to-value ratios to guard against housing bubbles).
- Social dimension: "Employment must be central" and growth should be inclusive; quote: Dostoevsky—"deprived of meaningful work, men and women lose their reason for existence."
- Rebalance:
- Two senses:
- Domestic: "shifting back demand from the public to the private sector, when the private sector is strong enough to carry the load."
- Global: "a global demand switch from external deficit to external surplus counties"—advanced economies need lower spending and higher savings while key emerging markets should provide demand to power recovery.
- Assessment: "any rebalancing so far is largely due to lower growth." Obstacles include policies that keep domestic demand growth too slow and modest currency appreciation, and dangers to some emerging markets from rapid capital inflows.
- Warning: "This lack of sufficient rebalancing hurts everyone"—"any thought of decoupling is a mirage."
- Rebuild:
- Focus on low-income countries: rebuild economic policy buffers, including fiscal positions, to protect against future shocks.
- Purpose: provide space for growth-enhancing public investment and social safety nets; allow well-targeted subsidies to protect the poor from commodity price swings "with minimal damage to fiscal sustainability."
The role of the IMF (a proposed fifth "R")
- The Fund's unique positioning: "with its 187 member countries—uniquely positioned to foster collective action."
- Core functions highlighted:
- Surveillance: identify risks and opportunities from economic interconnectedness.
- Policy advice: "shine a light on the key issues—growth, core vulnerabilities, spillovers" and guide international cooperation, using technical assistance.
- Lending: provide "breathing space" for countries facing external instability, emergency or transition needs, and vulnerable low-income members.
- System construction: help "construct a safer and more stable international financial system"—the Fund's core mandate.
- Internal note: IMF must "raise our game" to be more effective; further remarks to come at the Annual Meetings.
Conclusion and call to action
- Urgent tone: "this is no time for retreat, for half-measures, or for muddling through."
- Appeal to collective action: reclaim the "spirit of 2008, or the spirit of 1944" and the "Wilsonian spirit—the belief that the whole is greater than the sum of its parts."
- Final exhortation: "If we seize the moment, we can navigate our way out of this crisis and restore strong, sustainable, and balanced, global growth. The path is clear. The time is now. We must act."
Source: Global Economic Challenges and Global Solutions: an Address at the Woodrow Wilson Center, By Christine Lagarde, Managing Director, International Monetary Fund (September 15, 2011).