2010: A year of transformation
For the world and for Asia:
Over the past decades, Asia has become a major player in the global
economy. Today, Asia is leading the world in terms of economic recovery
from the crisis. And over the coming decades, the region’s continued
dynamism will give it an even greater role.
As economic power grows, so too does Asia’s interest in promoting the
successful performance of the global economy. And as the region enhances
its role in the global policy debate, I see great potential for the
world to benefit from Asia’s ideas and experience. We all have a lot to
learn from Asia.
Speaking for the IMF, one of our priorities is to deepen and indeed
renew our engagement with Asia. We recently established an advisory
group of eminent persons from across the region. We are also seeking to
strengthen our ties with regional groups, such as ASEAN and EMEAP.
This July, the IMF and the Government of Korea will be co-hosting a
high-level conference, focusing on the region’s economic dynamism, and
what I believe will be Asia’s leadership role in the 21st century.
International Monetary Fund Managing Director Dominique
Strauss-Kahn |
2010, of course, is going to be a crucial year - the first year after
the crisis when countries can lift their eyes to the longer
term-horizon. A year of transformation for the world.
And, I might add, a year of transformation for the IMF. To speed our
ability to respond to crises, the Fund has changed a lot over the past
two years - reforming lending instruments, streamlining conditionality,
and improving governance. But we recognize that to serve our membership
even more effectively, we must go further.
In broad terms, we are looking at a fundamental reform of our
mandate; focusing more on systemic, not just country-level risks,
especially in the financial sector; and on developing financing
instruments that provide the kind of insurance needed to tackle modern
crises.
I will not say more on this transformation of the IMF today, but
promise that you will hear more about it in the year ahead.
Today, I want to touch on three issues.
First, to set the backdrop, I will present the IMF’s view on the
global economic outlook. Second, I will highlight some of the key
priorities for building a stronger post-crisis global economy. And
third, I will share my thoughts on how Asian leadership can help bring
about the changes needed to secure a successful new economic order.
I. Global economic outlook
Beginning with the outlook, the global recovery appears to be
stronger than previously anticipated. We expect growth in 2010 to exceed
our previous projection of three percent - this will be updated later
this month. That is the good news. I would emphasize, however, that the
situation remains fragile and recovery is proceeding at different speeds
in various regions.
In most advanced economies it is likely to be sluggish, and still
dependent on government support. High unemployment, in particular, is a
major concern - especially in Europe and the U.S. This is why policy
support should be maintained until there are clear signs of a recovery
in private demand and employment growth.
Also, to tackle the jobs crisis, governments should shift part of
their stimulus spending to support employment.
Turning to emerging market economies, the outlook is considerably
better. As I said, the recovery is being led by Asia, thanks to the
resilience of domestic demand, sound economic frameworks, and a swift
policy response to the crisis. For the Asia region (excluding Japan),
growth is likely to exceed seven percent this year (which was our
forecast last October).
This means that many emerging market economies will be able to exit
from crisis support measures sooner than the advanced economies - with
monetary tightening generally preceding fiscal tightening.
The differing speeds in economic recovery have been reflected in the
performance of financial markets. As you know, there has been a
resurgence in capital flows to emerging markets, with Asia receiving a
large part.
These flows appear to be driven primarily by fundamentals, reflecting
the favourable outlook for these economies. Expectations of future
currency appreciation are also playing a role.
The return of capital to emerging markets is generally a positive
development. Let us not forget that as the crisis unfolded, there was
tremendous concern that these flows would cease altogether, or even
reverse.
Understandably, however, policymakers in recipient countries are
concerned now with how to manage these flows - their impact on exchange
rates, domestic demand, financial stability - and the danger of asset
bubbles.
What tools can policymakers use to respond to surges in capital
flows? In many countries, exchange rate appreciation should be the key
response - especially in those where the exchange rate is undervalued
based on medium-term considerations.
Other policies include lowering interest rates, accumulating
reserves, tightening fiscal policy and prudential policies in the
financial sector. Capital controls can also play a role, particularly
where the surge in capital flows is expected to be temporary, or where
exchange rate overshooting is a real danger. The right policy mix, of
course, depends on each country’s circumstances. I see this as a
pragmatic issue.
II. Building a stronger global
economy
Turning to my second issue - building a stronger global economy - let
me begin with financial sector reform.
A. Financial sector reform
In Asia, banking systems have on the whole proved resilient. But
worldwide, progress in this area is critical for building a global
economy that is less prone to crises in the future.
The lessons of this crisis are clear: regulation and supervision must
be stronger - and smarter. Closer scrutiny of financial firms is needed
at the institutional level. We also need significantly better monitoring
and management of systemic risks.
Already we have seen good progress in devising proposals for how to
reform the financial sector. But I see two major problems for achieving
lasting reform. First, as financial markets and economies recover, there
is a real danger that political momentum for reform is lost. Second, the
financial sector itself seems to be going back to business as usual.
This must not be allowed to happen. We cannot return to the financial
system of yesterday.
An important question is who should bear the costs imposed by the
financial sector’s more risky activities. One thing is clear: we must
move away from a system that privatises the gains and socializes the
losses.
As you may be aware, the G-20 has asked the IMF to look into this
issue. Our work is being guided by two objectives. First, how can we
make the financial system safer, so that it poses less systemic risk?
And second, what can be done to reduce the financial burden on taxpayers
of a financial crisis?
In this context, we are looking at a range of options - including
financial sector taxes, as well the formation of resolution funds, and
the possibility of capital charges. We have not ruled anything out. We
will present our initial analysis at our Spring Meetings in April.
B. New sources of growth
Looking ahead, as you in Asia are so good at doing, new sources of
growth are needed in most of the world’s economies to ensure a robust
global economy. What does this mean?
First and foremost, strong growth must be restored. This will require
a rekindling of private demand. In many countries, structural reforms
will be needed. In particular, labour and product market reforms can
boost productivity, and speed the transition. Efforts to boost the
‘green’ economy can also support this restructuring effort.
A second goal is for growth to be sustainable. That is, to restore
and sustain private demand, both consumption and investment will be
needed. For sure, this will require dealing with pending fiscal
challenges.
Third, global growth should be balanced. For this to happen, economic
policies must be consistent with healthy external positions. This means
maintaining sound fiscal, monetary, and exchange rate policies, and also
avoiding domestic market distortions.
To achieve this, all countries will need to play their part.
Countries that have traditionally run large current account deficits
recognize that they need to raise saving - often both private and public
- and boost productivity. In the United States, for example, this is
beginning to happen, with the household saving rate already up sharply
since the start of the crisis, to about 5 percent in 2009. It could rise
even higher.
Countries that have traditionally run large current account surpluses
and relied heavily on export-led growth recognize that new growth
drivers, in their own countries, will need to be found. In China, for
example, the government is taking steps to boost private consumption.
These major shifts in growth patterns will not be easily achieved - and
certainly not overnight. But if we can move in this direction in the
coming year, we can have a “win-win” situation, with more sustainable
global growth for all.
C. Stronger international policy
collaboration
For this economic transformation to be successful, international
policy collaboration will need to be more effective.
The recent experience in dealing with the crisis gives cause for
hope. The nations of the world pulled together to respond to a profound
economic - and potentially human - calamity. Governments worked together
on many fronts-undertaking concerted and significant monetary easing;
implementing large fiscal stimulus, where possible; and shoring up
ailing financial sectors.
This spirit of cooperation has produced a much strengthened framework
of international collaboration. The G-20 - in which Asia is playing a
major role - has emerged as a key forum for the world’s major economies
to discuss policy priorities.
These priorities have then been taken forward to the IMF, where its
186 members have provided the broad-based international endorsement
needed to make them truly global in spirit and in commitment.
So-much has already been achieved in terms of strengthening the
international policy dialogue. But we can - and must - do even more.
The G-20’s new Mutual Assessment Framework is an important step.
Through this process, the world’s largest economies will be accountable
- to each other - for adopting the policies needed to ensure strong,
stable and sustainable growth over the medium term.
The IMF is providing analytical support for this innovative approach
to multilateral cooperation. And I believe that this new framework can
be one of the keys to the transformation of the global economy in 2010
and beyond.
Let me also add here one other issue that is of immense importance to
the long-term welfare of us all - the tackling of climate change.
A major challenge emerging from last month’s meeting in Copenhagen is
how the large amounts of resources needed to finance adaptation and
mitigation efforts will be financed.
This is a very complex subject that will require the highest level of
international collaboration. The IMF will do everything in its power to
contribute to a solution.
III. Asia’s role in the new economic order
My final - and most important - topic today is Asia’s role in the new
economic order.
The transformation that has taken place in Asia over the last decade
has been truly remarkable. Rapid growth has raised the region’s share in
the global economy to a third, and has allowed hundreds of millions to
escape poverty.
The strength of Asia’s economies has helped them weather the recent
crisis and lead the world into recovery. Continued strong growth has the
potential to lift a billion people out of poverty and into the global
economy.
To sustain this performance, Asia - like the rest of the world - will
need to adapt to new challenges presented by the post-crisis economy.
From my conversations with Asian leaders, I can tell that this
imperative is widely recognized. They are moving rapidly to identify the
key elements of a new model that can deliver sustained economic growth.
In particular, they realize that because there are limits to the pace
of export growth, domestic and regional demand will need to play an
increasingly important role in underpinning Asia’s growth.
This does not mean that Asia should become inward looking. Rather, it
means reinvigorating domestic demand and boosting intraregional trade.
Such a recalibration of Asia’s growth model is in the region’s
self-interest, since it would reduce the region’s dependence on demand
from outside Asia. As I indicated previously, it is also in the global
interest.
What should this recalibration look like?
In many Asian economies, stepping up public investment is an
important part of the solution.
Asia has significant long-term development needs, including in
infrastructure and education.
Investment in low-carbon, or ‘green’ growth would also be useful.
Technological innovation is key to managing climate change at a
reasonable cost. And innovation in Asia is already making major
contributions.
And as I already noted earlier, in China a shift towards stronger
private consumption will be essential for developing new sources of
growth.
The region’s long-term success will also depend critically on the
active participation of Asian nations in international efforts to build
a stronger global economy.
As Asia’s economies have risen in global stature, so too has their
voice on the international stage-and their responsibility to help find
solutions to global policy challenges. As I mentioned, Asia is
represented at the G-20 by six countries.
And as you know, Asia will host the G-20 Leaders Summit in November.
At the IMF too, Asia’s role is rising. As our governance reforms
proceed, Asia’s economic voice - reflected in its quota at the IMF - is
being brought more into line with its weight in the global economy.
Now is the time for Asia to use its stronger voice to contribute even
more to the shaping of the post-crisis global economic landscape.
Potentially, this is a historic moment for Asia. A moment of
transformation.
Let me conclude by setting in context the challenges facing the world
in the coming period:
2008 was a year of humility: our confidence in markets, institutions,
and the status quo turned out to be complacency; we learned how
fallible, fragile, and interconnected we are.
2009 was a year of unity: the world pulled together to collaborate
and redeem the promise of international cooperation.
2010 must be a year of transformation - we must complete the global
project to address the failings in regulation, economic policy, and
governance that lay behind the crisis.
The challenges are great. But the rewards are even greater. And Asia
has a crucial role to play.
Working together, I am confident that we will find the way to secure
economic success - for Asia, and for the world.
IMF |