## 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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## Bibliographic details
- Published: October 3, 2013

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### 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*

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## Content in this bundle

- [100313apdf (PDF)](/-/media/websites/imf/imported/external/arabic/np/speeches/2013/100313apdf.pdf){rel="external" type="application/pdf"}
- [100313cpdf (PDF)](/-/media/websites/imf/imported/external/chinese/np/speeches/2013/100313cpdf.pdf){rel="external" type="application/pdf"}
- [100313jpdf (PDF)](/-/media/websites/imf/imported/external/japanese/np/speeches/2013/100313jpdf.pdf){rel="external" type="application/pdf"}
- [100313rpdf (PDF)](/-/media/websites/imf/imported/external/russian/np/speeches/2013/100313rpdf.pdf){rel="external" type="application/pdf"}

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## References

- [Japan and the IMF](http://www.imf.org/external/country/JPN/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/am/2013/index.htm](https://www.imf.org/external/am/2013/index.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Video of the Speech](https://www.imf.org/external/mmedia/view.aspx?vid=2717048198001)
- [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/sp100313_