Reflections on International Spillovers and Cooperation
IMF News, November 1, 2018
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- Published: November 1, 2018
Introduction and Purpose
- Opening Remarks to 19th Annual Research Conference
- IMF First Deputy Managing Director David Lipton
- November 1, 2018
- Conference focus: international spillovers and cooperation; bringing together academics and policymakers to address these issues.
Context and Risks to Global Integration
- Technological advances, rapid growth of trade, and the explosion of gross capital flows have produced cross-border integration over the past 75 years.
- Current threats to global interconnectedness highlighted:
- an escalating tariff war
- heightened restrictions on investment
- concerns about intellectual property
- risk of dismantling global supply chains
- Political developments are forcing attention on dislocations from increased trade and globalization, including broader discussions of inequality and stagnant middle class incomes, at least in the West.
- Emphasis: a renewed commitment to international cooperation is more essential than ever.
The Growth of Trade — Findings and Implications
- Trade in goods and services increased from around 40 percent of global GDP in 1990 to about 60 percent now.
- Production has become fragmented across borders; a significant share of trade comprises intermediate goods and related services.
- Key implications:
- Shocks are likely to spread more widely across borders and within countries due to reliance on parts and services from producers in many countries.
- Example cited: the 2011 earthquake in Japan disrupted the automobile supply chain and produced global reverberations.
- Once supply chains are established, imposing trade barriers can trigger a costly adjustment process; uncertainty alone may lead to adjustments in investment and trade patterns.
- Technology transfer and intellectual property have been key elements of trade expansion; uncertainties about policies are casting shadows on investment.
- The future of e-commerce may become an issue (example: debate about how online payment systems like China’s Alipay will or will not be allowed to expand across borders).
Capital Flows and Financial Stability — Findings and Policy Questions
- Cross-border holdings of financial assets are now at around 200 percent of global GDP, compared with about 70 percent in 1995.
- Potential spillovers and financial stability risks have grown exponentially.
- Observations:
- The Global Financial Crisis illustrated how interconnected counterparty risk threatened the world economy.
- A “global financial cycle” can produce globally synchronized fluctuations in capital flows and asset prices.
- Balance sheets of global banks are an important transmission channel for spillovers from monetary policy; going forward, balance sheets of asset managers may be the driving force of cross-border spillovers.
- Since the crisis, advanced economy monetary policy (unprecedented loosening, then normalization and episodes like the Taper Tantrum) has had consequences for the rest of the world.
- Capital flow boom-and-bust cycles remain a challenge; many countries face uncomfortable levels of corporate and sovereign debt.
- The increased role of non-bank institutions is an important new development for policy consideration.
- Policy questions raised:
- How to think about monetary, exchange rate, capital flow management, and macroprudential measures in a coherent and integrated way.
- The Fund’s institutional view on liberalizing and managing capital flows will be integrated with a broader set of policy questions in collaboration with policymakers and academics.
- Current account imbalances:
- The External Sector Report found that approximately half of last year’s global current account balances were excessive, and that they pose risks to global stability.
- It is essential that countries work together to reduce them.
International Cooperation Under Stress — Analysis and Recommendations
- Symbolism: conference logo (sailors’ knots) representing connections and cooperation; analogy to danger if knots come undone during storms.
- Achievements of cooperation to date:
- coordinated monetary policies in the aftermath of the Global Financial Crisis
- the response to the European debt crisis
- financial reforms enacted under the umbrella of the Financial Stability Board
- constructive regional collaboration (example: ASEAN)
- Current challenge:
- Rise of distrust and discord, risk of fragmentation.
- Need to hear voices of those left behind by global integration and do more to ensure benefits of globalization are retained and widely shared.
- IMF stance:
- At the IMF annual meetings in Bali, the Managing Director reiterated the Fund’s call for a new multilateralism that is “more inclusive, more people-centered, and more results-oriented.”
- The IMF supports efforts to reform parts of the multilateral framework that may be outdated or in need of modernizing, including with respect to trade.
- Reform has been central to IMF work for the past 20 years, affecting governance, lending, policy advice, and analytic capabilities.
- A results-oriented multilateralism must be based on a clear understanding of the facts on the ground; research and conferences are timely and important for this purpose.
Institutional and Personal Acknowledgments
- Tribute to Maury Obstfeld for vision and intellectual leadership in addressing spillovers at the Annual Research Conference.
- Under his leadership, the Research Department prepared high-impact World Economic Outlook chapters on:
- the post-crisis global economy
- the wage and inflation puzzles
- the macroeconomic effects of climate change
- the weakness of global trade
- The External Sector Report has received greater prominence; the Research Department produced a trade paper with the World Bank and the WTO.
- Transition of leadership:
- Gita Gopinath will take over as Economic Counsellor in the New Year.
Reflections on International Spillovers and Cooperation — Opening Remarks to 19th Annual Research Conference, IMF First Deputy Managing Director David Lipton, November 1, 2018.
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