Annual Meetings Speech: The Road Ahead—A Changing Global Economy, A Changing IMF

IMF News, October 12, 2012

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Authors: Christine Lagarde Managing Director
Published: October 12, 2012

Introduction — the World Comes to Japan

Speaker: Christine Lagarde, Managing Director, International Monetary Fund.
Occasion: Annual Meetings, Tokyo, Friday, October 12, 2012. As prepared for delivery.
Opening themes: gratitude to Japanese hosts and recognition of Sendai recovery; emphasis on collective action and cooperation.

A. World in Flux — Big Sweeping Changes

Long-term improvements in living standards:
- real GDP per capita: nearly 3½ times higher for the world, 4 times higher for Japan, 9½ times higher for emerging Asia.
- world trade volumes are 16 times higher.
- half a billion people in Asia have pulled themselves out of poverty over the past few decades.
Megatrends reshaping the global economy:
- Demographics: vast youth cohorts in rising regions; graying populations in advanced and major emerging economies; increasing female economic participation.
- Projection: By 2035, Africa will have the world’s largest labor force of more than a billion people—more than India or China.
- Projection: By 2035, there will also be more than a billion people aged over 65 in the world.
- Economic power shifts: Emerging markets and developing economies now account for half of world GDP, up from a quarter in 1964.
- Technology and connectivity: nearly 3 billion people are connected to the internet.
Regional notes:
- Asia: strength and dynamism evident.
- Brazil: example of inclusive growth focus under President Dilma Rousseff.
- Europe: undergoing deep integration; Eurozone severely tested; need for deeper banking and fiscal integration plus structural reforms.
- Middle East: transformation with difficult road ahead; potential for Arab transformation with commitment and external support.
- Sub-Saharan Africa: growing strongly; rise of “frontier markets”; Nigeria cited as a reform success story.
Overarching caution: global recovery remains too weak; unemployment and inequality persist; optimism must be translated into action.

B. Navigating the Road Ahead — Three Milestones

Three milestones to manage change:
- Putting the crisis behind us.
- Completing reform of the financial sector.
- Addressing inequality and building inclusive growth.

Putting the crisis behind us — policy package:
- accommodative monetary policy;
- the right pace of fiscal adjustment with solid and realistic plans to bring debt down over the medium term;
- finishing the banking sector clean-up;
- structural reforms to boost productivity and growth;
- rebalancing global demand toward dynamic emerging markets.
Fiscal constraint concern:
- public debt now averages almost 110 percent of GDP for the advanced economies—the highest level since World War II.
- reducing public debt is difficult without growth; high debt hinders growth and policy flexibility.
A better financial system — priorities:
- complete the agenda of financial sector reform: better regulation, better supervision, better resolution of cross-border entities, sensible incentives, level playing field.
- progress noted on Basel III for capital and liquidity buffers, but momentum at risk.
- outstanding areas: derivatives, shadow banking, too-important-to-fail institutions.
- IMF findings: better regulation nudges bank lending rates up, but by relatively little; increasing capital buffers to appropriate levels helps growth; reforming financial sector taxation can reduce excessive risk-taking and leverage.
- mobilizing savings: emerging Asia accounts for about a third of world savings; developing local financial markets can redirect savings to domestic investment.
Inequality and inclusive growth — policy implications:
- Recent IMF research: less inequality is associated with greater macroeconomic stability and more sustainable growth.
- Policy directions: balance efficiency with equity in fiscal policy; fairness in burden-sharing; protection for the weak and vulnerable; better financial inclusion; better transparency and governance.

C. The Future IMF — Serving our Members in the New World

Overarching principle: need for greater cooperation; multilateral institutions are more important in an interconnected world.
IMF’s evolving role: new approaches, new tools, renewed relevance grounded in mandate.
IMF as trusted adviser:
- recent judgment calls: recapitalize European banks; larger European financial firewall; more balanced approach to fiscal adjustment; urgent attention to the fiscal cliff.
- increased focus on economic and policy spillovers.
- new instruments and initiatives:
- Integrated Surveillance Decision to cross-fertilize country-level and global surveillance.
- External Sector Report to sharpen multilateral assessments, including exchange rates.
- Financial Surveillance Strategy to strengthen focus on financial sector stability.
IMF resources and lending activity (crisis period metrics):
- committed $540 billion and disbursed $157 billion in 126 lending programs—57 non-concessional, 69 concessional.
- membership decision earlier this year to boost resources by $456 billion, bringing total lending power to over $1 trillion.
- windfall profits from gold sales used to top up the Poverty Reduction and Growth Trust for concessional lending.
Governance and global ownership:
- 2010 reforms: 6 percent in quotas will shift to the dynamic emerging and developing countries, or 9 percent in total since the start of the previous 2006 reform.
- For the first time, Brazil, China, India, and Russia will be among the top ten shareholders.
- For the first time at any international financial institution, an all-elected Executive Board will be established.
- Progress toward reform completion: over 75 percent of consents for the quota increase; more than 120 countries for Board reform.
- Remaining requirement: secure 85 percent of voting power to complete the Board reform and the 2010 package.
- Call to membership to finalize reforms.

Conclusion — The Spirit of Tokyo: Cooperation

Tribute to Japan: champion of multilateralism and global cooperation; celebrating 60 years of partnership with the IMF.
Appreciation for IMF staff and Executive Directors for commitment and guidance.
Human story and metaphor: essay by Nao Yonemoto recounting the proverb “give salt to your opponent” — be generous to those in need; helping each other in difficult times is the only way forward.
Final message: the spirit of cooperation is essential; encourage delegates to carry it home.

Source: Annual Meetings Speech: The Road Ahead—A Changing Global Economy, A Changing IMF, by Christine Lagarde; Tokyo, Friday, October 12, 2012. As prepared for delivery.