September 27, 2021
PRESS OFFICER:
Phone: +1 202 623-7100Email: MEDIA@IMF.org
It’s a great pleasure to join you and your “EuroFinance” colleagues here today, at the 30th annual International Treasury Management Week.
I’m grateful to Daniel Franklin, the Executive Editor of The Economist magazine, who has posed a series of thought-provoking questions to me, to help shape our discussion.
His eight major questions will help us focus on the broad contours of the global economy of the future, and on the trajectory of international finance in helping shape that future.
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As we look ahead toward the world of 2040 — aiming to foresee how the economy, the financial sector, and society will take shape — Daniel’s first question asks us to discern the major factors that will shape the economy and society by mid-century.
Overall, many scholars and many policymakers have largely agreed that five key global forces will be pivotal in influencing the economy of the future:
Let me briefly outline the key features that will define each of these factors — and, throughout today’s discussion, we’ll come back to these key features, and we’ll explore them in greater depth.
First, in digital technologies: Technological developments — such as digitalization and automation — will play a major role in driving inclusive and long-term growth, will interact with demographic changes, and may reshape entire industries and sectors. In addition, the rise of digital assets and novel forms of financial intermediation — within and across borders — will also shape the international monetary system. That factor could fundamentally alter the global macro-financial landscape.
Second, in sustainability and climate change: On the one hand, climate change and global warming will have severe macroeconomic and financial damages, and harm some, often already poor and/or food insecure countries disproportionally. Policies to mitigate and adapt to climate change will have fiscal and financial consequences that could affect many countries’ economic prospects. On the other hand, technological innovation and diffusion — which can be facilitated by governments — will play a critical role. That will open up vast new opportunities.
Third, in demographics: The divergent dynamics of working-age population ratios, across the world, will have major implications for the global economy — because most major Advanced Economies, and some big Emerging Markets, will see a faster reduction in their working-age population ratios, while some other Emerging Markets, along with most parts of Sub-Saharan Africa, face a demographic boom. As a result, countries’ policy responses — including equal opportunities for women in economic activity — are also critical in mitigating or enhancing the impact of demographic change on the global economy.
Fourth, in geopolitics: The increasing multipolar nature of the world — with new actors gaining influence — will continue to have impacts on global trade, including supply chains, and financial networks. This could change the current multilateral landscape, and globalization more generally. Such changes must be resolved in mutually acceptable ways. The increasing number of large global corporations is also likely to present new challenges for policymaking across various areas, such as taxation, regulation, the provision of services and market power.
Fifth and finally, in structural transformation: The pandemic has been a catalyst for structural transformation, spurring technological change, automation, and supply-chain reallocation. This transformation is presenting important challenges, as well as opportunities. Key risks are associated with disorderly labor displacement and supply disruptions. But there are also opportunities to leverage this change to “build forward better” — including by investing in climate transition, mitigation, and resilience; creating jobs for the growing population in EMDEs; and leveraging digitalization to improve efficiency of government service provision and financial inclusion. Government policies will be instrumental in shaping these changes — aiming to accelerate a green, sustainable, digital, and inclusive recovery.
All these continuing trends will interact in profound ways — and they will need careful management. The fact that these trends are happening at the same time — and that they will interact and influence each other—makes sound management and good governance all the more important.
As the pace of change intensifies, what will these transformations mean for our organization’s role, at the International Monetary Fund? In our work, even today, we are working to address the challenges that we see are developing.
For example: Our comprehensive review of surveillance, earlier this year, asked exactly these questions: How do we prepare to answer tomorrow’s challenges?
The IMF is adapting and strengthening its economic analysis of countries. To keep up with the pace of change, the IMF is modernizing surveillance to help policymakers better prepare for a transforming economic landscape. This year’s Comprehensive Surveillance Review is a good example of that trend.
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Daniel’s second question invites me to explore, in greater depth, the most crucial of these challenges — starting, he suggests, with demography. What do the fundamental demographic trends tell us, asks Daniel, about the global economy’s shifting centre of gravity?
It’s clear that a steady shift has been occurring in demographic developments, and we expect that shift to continue. In particular, population growth is slowing in most advanced economies — and in some large Emerging Markets, such as China.
At the same time, most low-income countries in Africa and other regions — along with some major Emerging Market economies, such as India — are expected to continue enjoying demographic dividends, with the working-age population increasing.
Given that labor inputs are critical to economic growth, these demographic trends favor a shift of the global economic activity away from aging economies toward relatively young economies that have growing populations.
However, the extent to which this shift occurs will depend on a number of factors — including the ability of young economies to realize their demographic advantages, and the adaptability of aging economies to cope with their declining working-age populations.
For young economies, the key question is whether they can create jobs for their growing populations by providing better education and relevant skills. In addition, it is critical that these economies maintain inclusive and sustained growth by providing a sufficient level of health services and social spending. That will help keep them attractive for an increasingly mobile global workforce. Moreover, it is important for those economies to be able to attract capital from the rest of the world to complement their labor abundance. This requires progress on structural reforms.
In an increasingly interconnected world: When the prospects of one country or region change — whether that shift is caused, for example, by the effects of climate change or by a lack of inclusive economic progress — migration patterns can change quickly. A loss of young and educated people can severely hurt a country’s economic prospects.
For aging economies, by comparison, offsetting the impact of declining populations will depend on the extent to which they can increase productivity through labor-saving technologies such as automation and increase labor participation rates, and rely on migration.
In addition, technological change and other trends — such as climate change — will interact with demographic trends. Companies will increasingly be able to source their labor input globally. So ensuring the flexible flow of capital and labor, and goods and services — through globalized supply chains that are destined to become ever more stretched, and thus ever more fragile — poses the most serious of challenges.
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Daniel’s third question suggests that we move on to the related question of the continuing rise of Emerging Markets. For a couple of decades, we’ve explored the concept about the economy being driven by the BRICs — namely, Brazil, Russia, India and China. But the BRICs represent a disparate range of economies — and a great many factors have changed since Goldman Sachs coined the concept of the “BRICs” in November 2001. For his third question, Daniel invites us to explore: How should we think about the future of the big Emerging Markets today?
That’s a very timely question, indeed: The pandemic has made the divergences and unevenness among Emerging Markets even larger. The pandemic-era policy responses varied substantially across countries, given their policy space. Some commonalities have become clear, however, even as various countries have been forced to improvise with policies tailored to the specific challenges each economy faces, as they struggle to navigate the daunting challenges that have confronted them during the pandemic.
Clearly, deep economic “scarring” has occurred. The global recovery is increasingly asynchronous, and it is expected to be more divergent than earlier anticipated. Gaps are expected to persist among Emerging Market economies.
There is a considerable slack in some EM economies, with output gaps persisting through 2024, according to IMF staff estimates. That factor may cause an increase in inequality and social tensions in the future.
There are significant price pressure in the short run. Some Emerging Market economies are facing inflationary pressure, reflecting a combination of factors — including higher commodity prices and food prices, as well as weaker nominal exchange rates. Some central banks have already moved toward a tightening of interest rates.
So far, despite the recent interest-rate hikes, monetary conditions remain broadly stimulative and supportive of growth. However: The tightening in domestic monetary conditions could be amplified, should the normalization process in advanced economies be accompanied by a sudden sharp rise in global rates — especially in the United States. Such a scenario would be particularly difficult for many Emerging Market economies, given their more limited monetary and fiscal policy space to cushion a slowdown.
There are elevated financing and debt vulnerabilities. Although external market access remains comfortable at this point — even for low-rated issuers — there is continued stress in local bonds. Yields have risen, and they remain elevated despite the declines in U.S. yields. This reflects the role played by other fundamentals, such as large issuance needs, inflation credibility, the winding-down of APPs, and lackluster foreign flows.
It is crucial that Emerging Markets put in place the right mix of fiscal, monetary and structural policies to secure a reliable local funding channel to finance the recovery.
Profound transitions are underway, especially in the areas of climate change and digital technologies. Flows to Emerging Markets that are based on “ESG” criteria — which consider Environmental, Social and Governance concerns — have grown significantly, even during the pandemic.
The adoption of cryptocurrencies has also increased dramatically in several Emerging Markets. There is a large divergence between some Emerging Markets that are trying to embrace these trends — in ESG investing and in digital technologies—and many others that, so far, have been staying behind.
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For his fourth question, Daniel suggests that we explore, in greater detail, the challenges posed by technology. What are the major tech trends, he asks, that are likely to affect the world economy over the next two decades?
In my department at the IMF — focusing on Monetary and Capital Markets: We focus a great deal of attention on the new wave of technological innovation — often called “fintech.” How fintech will accelerate changes in the financial sector, is a factor that will have profound implications for the world economy.
Fintech has an impact on all aspects of the financial-services realm — including payments, lending, insurance and investments.
Let’s focus on one important and timely aspect of that trend: the adoption of new forms of digital money.
Over the next two decades, digital money will transform the way we think about currency and how it operates. Digital currencies are emerging at a fast pace, thanks to the convergence of fundamental technological transformations. These include such factors as leaps in enabling technologies, such as distributed ledger technology (DLT); encryption; analytics of “big” datasets; and artificial intelligence.
These technological innovations are highly complementary with one another, interacting in ways that drive rapid change.
Digital currencies come in many forms. On the one hand, there are private-sector-led innovations such as stablecoins (for example, Diem and USD Coin), e-Money (such as M-Pesa), and the more volatile cryptoassets (such as Bitcoins). On the other hand, there are digital currencies designed by central banks (“CBDCs”).
CBDCs are currently being explored by many countries. One country — the Bahamas — has already issued its own CBDC, called the “Sand Dollar.” Several countries, such as China, are now pursuing experiments.
Let me highlight three aspects of this trend — all of which are making the innovation brought by digital money transformative:
First: Payments are becoming cheaper, faster and easier. Thanks to its underlying technology and infrastructure, digital money reduces the cost and increases the speed of transactions. Their integration into existing digital services also promises to make transacting as easy as using social media.
Second: Payments are crossing borders more seamlessly. Traditional cross-border payments typically rely on long payment chains, and require the multiple intermediaries involved to coordinate and trust one another. By sharing common technical standards, and data and compliance requirements, digital money has the potential to overcome these frictions and enable immediate payments – thereby facilitating international trade, and remittances. The other side of the coin is that it can also facilitate the substitution of savings into more stable foreign currencies.
Third: Payments are becoming more accessible. Access to payments is often the first step toward broader participation in the financial system. Not only do the unbanked gain a safe place for their savings; the digital availability of micro-payment data offers a way to gain access to credit.
Amid all these concerns, one result is clear: The adoption of digital money, whether private or public, has the potential to revolutionize the organization of our international monetary system. It raises new policy questions, challenges, opportunities, and tradeoffs — all of which require innovative thinking and structural changes across the policy spectrum.
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For his fifth question, Daniel asks if we can explore another major concern: sustainability. How might the growing sense of climate crisis, asks Daniel, affect the shape of the world economy of 2040?
Clearly, the challenge we face is enormous. Taking determined policy action is an urgent priority.
Climate experts now estimate that current policies are unlikely to restrain global warming to 1.5°C — or even 2°C — during this century. “The world is on a catastrophic pathway,” in the words of the United Nations Secretary General, António Guterres. That’s “nothing less than a code red for humanity. The alarm bells are deafening," the Secretary-General has said.
Global emissions need to be cut by one-third by 2030 — an enormous amount, within this decade — if we are going to have any chance of achieving the goal of emissions neutrality by the year 2050. We’re now approaching the COP26 meetings in Glasgow in November — where 190 countries will review their progress toward meeting the goals set by the Paris Agreement of 2015.
Policymakers will have a chance to accelerate the process of adopting climate-focused regulations. The task will not be easy — but taking strong action is urgent.
As we anticipate COOP26, coming up next month, here’s how my department at the IMF approaches the challenges ahead.
Vulnerable countries need to integrate disaster risk and resilience spending into their macro-financial and fiscal frameworks.
Developing comprehensive mitigation and adaptation strategies also requires scaling-up “green finance” opportunities — including action by the private sector — to ensure that financial decisions take into account the risks and opportunities of climate change.
Even more important: Policymakers, standard-setters, financial institutions and non-financial private-sector firms must work together on the development of “green finance.”
Policymakers should promote “green finance” while managing risks to the financial sector during the transition. This is vital, in order to avoid macro-financial disruptions in the future.
This will require strong action in several areas.
First: We must strengthen the climate information architecture — which includes data, disclosures, and principles for sustainable finance classifications (including taxonomies).
Second: We must pay close attention to financial-stability risks by improving climate risk-assessment frameworks and by developing proper mitigation strategies. That entails conducting diagnostic exercises to measure physical risks and transition risks, and carrying out climate-risk stress-testing for the banking and corporate sectors, when needed.
Third: Adaptation strategies must incorporate climate risks in regulatory and supervisory frameworks — aiming to develop a prudential framework.
Fourth: It is vital to adapt monetary policy, and central-bank operations to incorporate the macroeconomic implications of climate change.
The world economy in 2040 will be shaped by the effectiveness of these climate-related actions taken today particularly in related to climate transition risks.
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For his sixth question, Daniel asks that we discuss geopolitics: How might globalization evolve in the light of growing rivalry between America and China, and what looks increasingly like a multipolar world?
The long-term trends in the financial landscape that we have just discussed will only increase the need for international cooperation across the spectrum of regulatory policies.
Finance is already global, and new technologies will make it even more so — and cross-border financial flows will become faster and more fungible.
That means that consistent global policies that preclude “regulatory arbitrage” will become even more important for securing global financial stability.
Let me give you another example: climate change. Redirecting finance toward climate-change mitigation and adaptation efforts will require better quality and more comparable data to align investments with climate goals — and this, in turn, requires international cooperation on identifying data gaps and strengthening classifications and disclosures.
The trends that we are seeing are, overall, encouraging. Global challenges require global solutions, and policymakers are now working together to ensure that the global financial sector is a part of the solution toward a better future — not part of the problem, as we saw during the Global Financial Crisis, more than a decade ago.
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For his seventh question, Daniel invites us to “gaze into our crystal ball.’ How might all of these various challenges intersect? He wonders if there are broad scenarios that we can sketch out for the future of the global economy? Can we identify, perhaps, a few of the potential alternative futures that we should watch out for?
Well, that’s a wide-ranging invitation. At the risk of slightly disappointing Daniel here today, I certainly wouldn’t want to speculate about any specifics — or offer any sweeping prediction of long-range forecasts.
When it comes to the economy’s near-term prospects, however, I’ll invite you to watch for the three flagship reports that we’ll issue in mid-October, at the Annual Meetings of the IMF and the World Bank. Our flagships — the World Economic Outlook; the Global Financial Stability Report; and the Fiscal Monitor — offer discussions on the near-term outlook and present deep-dive analyses of topical issues.
Even if I politely decline Daniel’s invitation to “gaze into a crystal ball” and make any specific projection about the long term, I’ll emphasize this point: Wise policymaking will be the crucial factor in shaping the future of our people and the planet.
The economy of tomorrow, after all, depends on the wisdom of the policy choices we make today. Or, to quote the economists Mariana Mazzucato and Michael Jacobs of University College London — in their remarkable recent book, which brings together the insights of many of today’s leading economists, “Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth”: “The economy we have is the economy we choose to build. It is time to make different choices.”
Depending on the choices we, as a society, resolve to make: I imagine that we can envision a relatively optimistic scenario, a relatively pessimistic scenario — and also something in-between.
In an optimistic scenario, society would reap the benefits of wise planning — by reducing carbon emissions and restraining the rate of global warming; by adopting wise regulation that captures the benefits of digital innovation; by promoting sensible safeguards that allow us to respond to new trends and protect against emerging risk, some of which we discussed; and by adopting far-sighted social policies that protect public health, preventing a resurgence of the pandemic. We can take practical steps that maximize our up-side potential.
In a more pessimistic scenario, society might delay making the hard choices that confront us — by hesitating to take strong action to limit carbon emissions, until the environmental effects of climate change intensify; by neglecting the risks that may accompany digital technologies, until we invite instability; by delaying the adoption of sound regulation, thus risking speculative excess in our financial markets; and by letting down our guard on public health, thus allowing for a resurgence of the coronavirus and its variants. We have to hope that we reach a social consensus that minimizes our down-side risk.
Perhaps the most likely outcome is somewhere in-between the “best case” scenario and the “worst case” scenario: where we delay — either through inertia or inattention — making the difficult choices that we know we must make, sooner or later.
For all of society’s sake, let’s hope that we have the wisdom and the courage to make sensible decisions sooner, rather than later.
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For his eighth and final question, Daniel suggests that we explore some of the implications of all of these trends for the people who are here in this audience today: treasury managers. What will all this mean for the future of debt, financial markets, currencies, and risk management?
In our discussion today, I’ve suggested how profound transformations are taking place, across all the various topics we discussed. Daniel’s question invites us to bring together many of the themes we’ve been exploring, and to foresee practical and pragmatic approaches that we can take.
Let me sketch out a few themes and priorities that may be especially relevant to the treasury managers among you. As we focus on this specific area, perhaps these ideas will also help meet Daniel’s request, from his previous question, that I do at least a little bit of “gazing into a crystal ball,” as we analyze what these broad themes may mean for treasury managers.
Dealing with climate change will require a reliable data infrastructure, because climate will become a new risk category in any risk management. The official sector is making substantial effort at the global level. Our immediate priorities are to improve the quality of climate disclosure, to harmonize global “green finance” standards, and to promote the sharing of best practices across borders.
These shifts can also interact and present new risks. In Emerging Markets, for example, the advent of cryptoassets and stablecoins may be accelerating dollarization, and may be eroding the effectiveness of existing exchange restrictions and capital control measures even as the innovation brought by digital money is substantial.
Moreover, the widespread adoption of digital money will have profound implications for the banking sector. It will likely affect the traditional banking and financial ecosystem in four main ways:
There will be increased pressure on the business model of traditional banks, due to competition for deposits. In their scramble for survival, banks may respond to diminishing profits by paying higher rates on deposits, taking greater risks, or attempting to raise lending rates.
More generally, there may be a shift of credit intermediation away from banks and toward non-deposit taking institutions. It’s possible that we may see a shift in value-added from commercial banks to Big Techs, due to their competitive advantage in gathering and analyzing data.
Big Techs may play a bigger role as distributors, facilitators and aggregators of digital money and financial services (such as wallet services, Amazon, and Alibaba). This could drive down the profits of traditional intermediaries and lead them to take more risk, to consolidate, and to reorganize their activity around back-end treasury services.
We may see the rise of decentralized finance (so-called “DeFi”) — that is, automated and decentralized capital markets and related securities, trade finance, and lending. The market is still small, at this point: The value of assets in DeFi contracts is about $1 billion, as of January 2021. But there are important potential implications for market structure and functioning, and challenges on how to appropriately regulate this space. It’s also possible that we may see the reduced availability of collateral. Fully-backed stablecoins could immobilize central-bank liquidity and could put pressure on overnight interbank markets. That could affect shape and stability of the yield curve.
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Thanks to Daniel’s insightful questions, we’ve had an opportunity today to explore some of the crucial challenges that we will confront in the near-term future, about which we must make sometimes-difficult decisions that will shape our long-term future. Not just for the strength of our economy, but for the character of our society, let us hope that our policymakers and the public will resolve to make the difficult choices now that will forestall even more drastic choices later.
With that, let me thank you, Daniel, for your insightful and thought-provoking questions. And let me give my thanks to you, for those in our audience today, for considering these pivotal themes for the global economy and for global finance.
And now, I’ll be pleased to consider any questions you may have.
Thank you very much.
