Managing the New Transitions in the Global Economy, an Address by Christine Lagarde, October 3, 2013

IMF News, October 3, 2013

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Published: October 3, 2013

Overview

Speech delivered by Christine Lagarde, Managing Director, International Monetary Fund, at George Washington University, Washington DC, October 3, 2013.
Core message: the global economy is undergoing multiple long-term transitions that require active national policy management and active international policy collaboration; “these new global transitions need a new global agenda.”
The IMF’s role: provide a platform for global cooperation with economic analysis, financial resources, and technical expertise across its membership of 188 countries.

Transition 1 — Patterns of Economic Growth (advanced economies; emerging markets and developing countries)

Findings and near-term outlook (advanced economies)

Global outlook described as subdued; signs of improvement in many advanced economies.
United States: growth this year “below 2 percent”; growth next year expected “about a percentage point higher.”
Euro Area: after six quarters of recession, “growth should be back in positive territory next year—almost 1 percent.” Unemployment “at 12 percent”; in some countries “one in four people cannot find work, and one in two young people.”
Japan: government stimulus appears to boost GDP “by about 1 percent”; deflation “is coming to an end.” Japan’s public debt “approaching 250 percent of GDP” and “amounts to about $90,000 for every man, woman, and child in Japan.”

Policy recommendations (advanced economies)

Monetary policy:
- U.S. must manage the exit from unconventional measures “very carefully,” linking normalization to recovery and employment, communicating clearly, and conducting dialogue with others.
- In Euro Area and Japan, monetary policy “might yet be called upon to do more.”
Financial policy (Euro Area):
- Restore bank health by assessing and filling capital shortfalls.
- Push ahead with banking union to reduce fragmentation and financing costs (noted increase in SME loan costs by “1-2 percentage points” in stressed regions).
Fiscal policy (United States):
- “Slow down and hurry up” — less fiscal adjustment today and more tomorrow; replace the sequester with more back-loaded measures; contain entitlement spending and raise revenues to ensure long-term debt sustainability.
- Resolve budget uncertainty and the debt ceiling crisis urgently—described as “mission-critical.”
Fiscal policy (Japan):
- Implement a credible plan to reduce debt, with the initial consumption tax increase noted as a first step; follow with entitlement reform.
Structural reforms:
- Euro Area: comprehensive and coordinated product and labor market reforms could boost GDP by 3¾ percent after five years.
- Japan: increasing female labor force participation to match the G7 average would boost per capita GDP by 4 percent by 2030.
International engagement:
- Emphasized that the group of advanced economies discussed “accounts for about 40 percent of world GDP,” making international collaboration essential.

Findings and policy guidance (emerging markets and developing countries)

Emerging markets’ contributions and vulnerabilities:
- For the past five years, emerging markets “accounting for three-quarters of total growth.”
- Momentum slowing: “growth 2½ percentage points lower than in 2010.”
- Past capital inflows: bond inflows “rose by over $1 trillion—more than 2 percentage points of GDP a year for the recipient countries.”
- IMF estimate: turbulence since last May could reduce GDP by “½ to 1 percent” in major emerging markets.
Policy recommendations (emerging markets):
- Allow currencies to depreciate to absorb shocks.
- Provide liquidity to address dysfunctional markets.
- Consider looser monetary policy where inflation allows; limited monetary space in countries with inflation pressures (examples: Brazil, India, Indonesia, and Russia).
- Limited fiscal space in many emerging markets due to high debt and deficits.
- Undertake structural measures: infrastructure investment (India, Brazil), deepen financial markets, open trade regimes.
- China-specific: reduce reliance on credit that “hit 180 percent of GDP this year”; liberalize interest rates; strengthen financial oversight; open protected sectors; ramp up social safety nets.

Findings and policy guidance (low-income countries)

Sub-Saharan Africa: described as “the second most dynamic region in the world after developing Asia,” with growth rates over the past several years “around 5 percent.”
Risks: low-income countries are vulnerable to fragility in advanced and emerging markets.
Policy recommendations:
- Build sufficient foreign and fiscal reserves and mobilize more revenue.
- Make growth more inclusive through public investment and expanded access to healthcare, education, and finance.
- Require deeper engagement with the international community and multilateral institutions, including the IMF.

Findings and policy guidance (Arab transition countries)

Economic transition is entwined with social and political transition; fiscal deficits “in the 5-15 percent range” across the region.
Policy recommendations:
- Promote economic reform that breaks down vested interests to release private-sector job creation.
- Reduce fiscal deficits at the right pace with external financing to cushion hardship.
- IMF engagement: partnering with Jordan, Morocco, and Tunisia through financing arrangements and in discussions with Yemen.

Transition 2 — The Financial Sector

Findings

Overall assessment: “mission not yet accomplished.”
Progress:
- Implementation of tougher capital standards (Basel III), agreed liquidity standards, and plans for a leverage ratio.
- Identification and higher regulatory and resolution standards for systemically-important financial institutions.
Persistent problems:
- Delay and divergence across countries slowing progress.
- Lack of progress on effective cross-border resolution regimes.
- Derivatives market transparency shortfalls: total outstanding derivatives “amounted to $633 trillion, of which only $24 trillion were traded on organized exchanges.”
- Shadow banking risks:
- In the United States, the nonbanking sector is “now twice the size of the banking sector.”
- In China, “about half of the new credit extended so far this year has come through the shadow banking system.”
Some steps taken: adoption of principles for money market funds and proposals for regulating securities lending and repos.

Policy recommendations and implications

Speed implementation of agreed derivatives reforms and increase transparency.
Strengthen oversight of non-bank financial intermediation while recognizing its potential to provide alternative credit channels.
Address divergence in regulatory approaches (e.g., discrepancies in capital requirements and differing business-model restrictions such as the Volcker Rule).
Engage industry in co-responsibility: regulators and the financial sector must align incentives so that the financial sector focuses on serving the real economy (financing investment and innovation).
Anticipate shifts in banking business models and geographic footprints when designing regulatory and resolution frameworks.
Emphasize international collaboration to build a consistent global financial framework.

Key statistics and figures (preserved exactly)

IMF global membership: 188 countries.
United States growth: “below 2 percent” this year; “about a percentage point higher” next year.
Euro Area growth: “almost 1 percent” next year.
Euro Area unemployment: “12 percent”; some countries: “one in four” unemployed, and “one in two” young people unemployed.
Japan GDP boost from stimulus: “about 1 percent.”
Japan public debt: “approaching 250 percent of GDP”; “about $90,000 for every man, woman, and child in Japan.”
SME loan cost increase in stressed European regions: “1-2 percentage points.”
Potential Euro Area GDP boost from reforms: “3¾ percent” after five years.
Japan per capita GDP boost from higher female participation: “4 percent by 2030.”
Advanced economies group share: “about 40 percent of world GDP.”
Emerging markets’ share of recent global growth: “three-quarters of total growth.”
Emerging market growth slowdown: “2½ percentage points lower than in 2010.”
Bond inflows into emerging markets: “rose by over $1 trillion—more than 2 percentage points of GDP a year for the recipient countries.”
Turbulence impact on major emerging markets: could reduce GDP by “½ to 1 percent.”
China credit level: “hit 180 percent of GDP this year.”
Sub-Saharan Africa growth rates: “around 5 percent.”
Fiscal deficits across Arab region: “5-15 percent range.”
Outstanding derivatives: “$633 trillion,” of which “$24 trillion” on organized exchanges.
U.S. nonbanking sector size: “now twice the size of the banking sector.”
IMF’s historical references: IMF helped transition after World War II and after the Cold War.

Conclusion and overarching policy prescription

Core assertion: managing both economic and financial transitions requires international cooperation; “mutual help is the best form of self-help.”
The IMF’s mission: help countries manage transition and help the world solve common problems with common purpose—acting “not leading, not following, but helping.”
Final appeal: cooperation, shared goals, and sustained international engagement are necessary to ensure that globalization delivers broadly shared benefits.

International Monetary Fund