As prepared for delivery
Thank you, my friend Fred Kempe, for your gracious introduction.
Governor Huntsman, thank you and the Atlantic Council for this opportunity to speak before such a distinguished audience.
The Council is renowned for its distinctive ability to bring together top international policymakers from both sides of the Atlantic. This convening power is something that the Council has in common with the IMF.
Next week, Central Bank Governors and Finance Ministers from our 188 member countries will be coming together here in Washington for our Spring Meetings. The focus of their discussions will be the state of the global economy.
Since our Annual Meetings last fall, there have been a number of significant developments. The global economy has benefited from a shot in the arm provided by reduced oil prices and by the strong performance of the world’s largest economy, the United States. Overall, macroeconomic risks have decreased.
So the global recovery continues, but it is moderate and uneven. In too many parts of the world it is not strong enough. In too many parts of the world, people do not feel it enough. In addition, financial and geopolitical risks have increased.
It is not that overall growth is bad—at 3.4 percent last year it is roughly the average for the last three decades. It is rather that, given the lingering impact of the Great Recession on people—including 50 percent youth unemployment in some countries—growth is just not good enough.
Six months ago, I warned about the risk of a “new mediocre”—low growth for a long time. Today, we must prevent that new mediocre from becoming the “new reality”.
We can do better. We must do better.
That great Atlanticist, John F. Kennedy, once said:
“There are risks and costs to action. But they are far less than the long range risks of comfortable inaction”.
“Comfortable inaction” is what must be avoided. How to do so is the focus of my remarks.
(i) How to lift growth today by using all available tools and policy space more effectively;
(ii) How to lift growth tomorrow—and prevent a new mediocre; and
(iii) How to work together to strengthen the international financial architecture, foster development, and make growth more inclusive and sustainable.
1. Lifting Today’s Growth
Let me begin with a quick health check on the global economy and the immediate challenge of lifting today’s growth. The World Economic Outlook will be released next week. So here I speak to the broader trends and policy recommendations.
As I indicated previously, growth remains moderate—roughly the same as last year.
Advanced economies are doing slightly better than last year: the recovery is firming up in the United States and the United Kingdom. Prospects in the Euro Area are improving, with the welcome support of the ECB’s monetary easing.
Forecasts for most emerging and developing economies are slightly worse than last year, with lower commodity prices one of the main drivers. While they still represent more than two-thirds of global growth this year, there is tremendous diversity within this group. For example:
- India is a growth bright spot;
- China is slowing but growing more sustainably;
- Sub-Saharan Africa continues to perform strongly;
- Russia, on the other hand, is experiencing economic difficulties;
- Brazil is also stagnating;
- And many parts of the Middle East are beset by political and economic turmoil.
So we should not think of emerging economies as just one single group. Each country faces very specific circumstances, some of them easier, some of them more difficult.
What does this imply?
With overall growth moderate, the global economy continues to face a number of significant challenges. For example, what I have called the “low-low, high-high” scenario: the risk of low growth-low inflation, and high debt-high unemployment persists for a number of advanced economies.
Clearly, all policy space and levers must be utilized. It begins with demand support.
Continued monetary accommodation is needed, especially in the Euro Area and Japan. Fiscal policy also needs to be calibrated to the strength of the recovery, without losing sight of debt sustainability over the medium term.
The effectiveness of demand-support policies can also be improved. For example:
- Unclogging the channels through which monetary easing and fiscal policy work in the Euro Area. Effective insolvency frameworks are crucial to tackle the private debt overhang and deal with the total stock of €900 billion in non-performing loans that is blocking credit channels.
- In Japan, the authorities need to sustain the momentum of the second and third “arrows”—fiscal consolidation and structural reforms—if the first arrow of monetary easing is to have the intended effect of lifting inflation and growth.
- By leveraging lower oil prices to reduce energy subsidies, emerging and developing oil-importers could save, on average, a full one percent of GDP in 2015—resources that could be reallocated to growth-enhancing investments such as infrastructure, education, or health.
These are some of the macroeconomic dimensions. What about the financial stability dimensions?
The bottom line is that risks to global financial stability are rising. The “new mediocre” growth environment is not a comfortable place with respect to financial stability.
Financial risks may have declined in some areas, but they have also been migrating to others—for example, from banks to non-banks, and from advanced economies toward emerging markets.
For one, there are adverse side effects of the very low, or even negative, interest rates caused by otherwise necessary accommodative monetary policies. These foster a higher risk tolerance on the part of investors, which can lead to overpricing. And if the low interest environment persists, it can create solvency challenges for life insurers and defined benefit pension funds.
Or think of the wide movements in exchange rates recently. Over the past six months, the U.S. dollar has appreciated against a basket of major currencies by 12 percent in real terms.
Some countries with more difficult macroeconomic conditions and less policy space have, of course, benefited from the relative depreciation of their currencies. In others, with large amounts of debt denominated in foreign currency, these dramatic swings can be destabilizing. This is particularly the case for businesses in emerging market economies that are wedged between a strong U.S. dollar, lower commodity prices, and higher borrowing rates—and which may not have hedged their position.
These risks may be manageable individually, but we also have to contend with a structural decline in market liquidity. This is due primarily to recent changes in the structure of the asset management industry in advanced economies, which have created a mismatch in the maturity of assets and liabilities. This means that liquidity can evaporate quickly if everyone rushes for the exit at the same time—which could, for example, make for a bumpy ride when the Federal Reserve begins to raise short-term rates.
This new configuration of financial risks underscores the importance of strengthening financial policies:
- At the global level, it means ensuring market liquidity during times of stress, improving macro- and micro-prudential policies for non-banks, and following through on the regulatory reform agenda—especially for too-big-to-fail institutions.
- And at the country level—it means curtailing excessive risk-taking and managing existing vulnerabilities.
Again, while the appropriate menu of measures must be country-specific, this overall set of policies can help us to lift growth today.
What about growth tomorrow?
2. Lifting Growth Tomorrow
Here is the big issue: while current growth is moderate, so too are medium-term prospects.
In both advanced and emerging economies, potential growth is being pared down. This largely reflects lasting scars from the financial crisis, but also the undercurrents of changing demographics and lower productivity.
To prevent the “new mediocre” from becoming the “new reality”,structural reforms need to go hand-in-hand with macroeconomic and financial policies to raise confidence and generate investment. Frankly, in too many countries, these reforms have been lagging.
Structural reforms span a wide range of policies – some reforms have a more immediate effect on demand, others operate on the supply side and take longer to bear fruit.
There is one set of reforms that sit at the intersection of both demand and supply—infrastructure investment. Our own research shows that boosting efficient infrastructure investment can be a powerful impetus for growth both in the short run and in the long run.
Other reforms, such as those to labor, product, and services markets, are likely to unfold over a longer time horizon. Yet they are essential to enhance productivity and innovation which, in turn, can be powerful antidotes to the impact of population aging.
Recent IMF research fleshes out priorities and payoffs in the areas of productivity growth, labor force participation, and trade.
For example, reversing the decline in productivity growth in advanced economies requires lowering barriers to entry in product and services markets.
- Our research shows, for instance, that improving the allocation of labor and capital across sectors can significantly increase total factor productivity.
- Another example is the potential benefits from improving access to finance for smaller businesses:
- In Europe, small and medium enterprises – that account for almost 100 percent of the 20 million non-financial enterprises, and nearly two-thirds of employment – hold a share of non-performing loans that is 50 percent higher, on average, than larger corporations. Clearly, putting the small business sector on a firmer footing would yield a big payoff.
- In China, small businesses play a critical role in the economy in terms of output, employment, tax revenue, and innovations. Access to financing, however, remains a key obstacle, which the government is trying to address.
- Emerging market economies such as Indonesia and Russia can reap productivity gains by easing investment limits and improving the business climate. In other countries such as Brazil, India, and South Africa, the focus should be on reforms to education, labor, and product markets.
- And in low-income countries, the Middle East and Central Asia, improving governance and financial inclusion will help lay the foundations for a thriving private sector.
Another important set of measures is needed to remove barriers tolabor force participation, which is key to tackling inequality and ensuring broad-based growth. For example:
- In Japan and the Euro Area, too many tax disincentives still exist.
- In too many countries, legal inequities still exist—and create barriers to greater participation by women in the economy, in particular.
- Closing the gender gap by 25 percent over the next decade, a key goal of the G-20 growth strategy, would create an estimated 100 million more jobs by 2025. This would be a huge impetus to growth as well as reduced poverty and inequality.
And finally, there are potentially huge global gains to be had from further trade reform and integration.
- Trade has been a major driver of economic progress over the past three decades, yet 2015 is likely to mark the fourth consecutive year of below-average trade growth.
- Recent efforts are welcome, such as the WTO deal struck in Bali that would cut trade costs and deliver an economic boost of US$1 trillion annually.
- Not only should this be implemented, but we need to be even more ambitious: trade remains an essential engine for the global economy—to lift growth, create jobs, and dispel the new mediocre.
Yes, the political economy of these reforms is difficult. Yes, they involve tough choices and tradeoffs, and short-run winners and losers.
But in the long run, everybody wins.
3. Improving the Way We Work Together
How do we win? By working together.
Again, I am struck by how action to lift growth is becoming increasingly country-specific, yet multilayered and interconnected. The challenge for policymakers around the world is to combine the policies needed to boost today’s growth with those fortifying tomorrow’s prospects, and to leverage nationalinitiatives for the benefit of the global community.
It is often the case that what is good for a country is also good for the global community.
- If countries strengthen their banks, for example, it will not only serve them well, but also reinforce the global financial system.
- If countries anticipate and hedge against currency variations and volatility, it will not only serve their own financial sectors, but also support global financial stability.
- If countries implement climate-friendly policies, it will benefit their population and also contribute to reducing global emissions.
This is why we need an open and resilient multilateral system that can leverage these national benefits and help avoid inconsistencies that can generate negative spillovers. In a highly interconnected world with new and dynamic centers of political and economic gravity emerging, there is simply no alternative to what I have called the “new multilateralism.”
What needs to be done?
Emerging markets and developing countries must have greater weight and voice in global economic institutions—to reflect the new reality of their contributions and responsibilities regarding the global economy.
The IMF’s 2010 quota and governance reform is intended to help meet that objective. Virtually our entire membership agrees and we now only await ratification by the U.S. Congress. It is overdue, but we are not giving up and our membership is currently considering interim steps that can take us closer to the ultimate objective.
Further measures to strengthen the resilience of the international financial architecture would include:
- Enhancing cooperation with regional facilities and institutions, including the new Asian Infrastructure Investment Bank;
- Increasing the role of the SDR as a global reserve asset and facilitating the integration of dynamic emerging markets into the global economy; and
- Firming up the IMF’s resources—which again relates to the quota reform.
As a result, the international monetary system will be reinforced and become more stable.
What about the international development system?
Here, 2015 presents a special moment: an opportunity to make a tangible difference in the lives of a large number of people in the world—especially the poorest people.
Three critical issues are on the agenda:
- financing for development;
- the new “sustainable development goals”—the SDGs (to succeed the MDGs);
- climate change.
The IMF is a committed partner in this effort. I intend to discuss with our membership next week how the Fund can contribute through deliverables in the three core areas of our business:
- First, financing. We have already made a “down payment” by recently contributing $390 million to the Ebola-affected countries, including $100 million in debt relief under a newly established Catastrophe and Containment Relief Trust. In addition, we will explore the potential to increase access to IMF resources for our poorest members.
- In our second core area, policy advice and analysis (surveillance), we will continue to help our members with essential support for domestic resource mobilization, capital market development, and foreign direct investment. In addition, we will push further on macro-critical issues such as inequality and women’s participation in the labor market, as well as energy subsidy reform and carbon taxation. We all know that “the time is right to price it right”—and this can help us to “get it right” on climate change.
- Our third core business area is capacity building and technical assistance. Here, we are expanding services—including through nine regional technical assistance centers and seven regional training centers located in Africa, Asia, Latin America and the Middle East. We are also increasing our massive online open courses (MOOCs), which already have 10,000 active participants and 5,400 graduates. In addition, as a specific contribution to the 2015 effort, we will be looking at how we can ramp up our capacity building in fragile state
Conclusion: Now is the time
As I said, we can only get it right by working together.
This applies to all the areas that I have touched on: from stronger growth today to better growth tomorrow; from a more resilient international monetary system to a more robust international development system; from the world we live in today to the better world we can create in the future.
Success will require a recommitment to the principles of international cooperation that have served us so well in the face of great global challenges. This new multilateralism is urgently needed to boost growth and generate confidence in our common future.
I began this morning with a great Atlanticist from these shores: President Kennedy. Let me conclude with an echo from the other side of the ocean: Winston Churchill, who once said:
“I never worry about action, only inaction.”
We can and must lift better growth today, tomorrow—and together.