Building a Post-Crisis Global Economy—An Address to the Japan Society By John Lipsky, First Deputy Managing Director, International Monetary Fund New York, December 10, 2009
~snip
In this light, the Japanese government’s commitment to rebalance growth away from exports towards domestic sources seems appropriate.
Private domestic demand in Japan accounts for nearly two-thirds of GDP, but it has grown by a mere 1 percent annually since 2000, one-fifth the growth rate for exports registered in the same period.
It is only natural that discussions about rebalancing growth inevitably touch on the issue of exchange rates policies. Based on our analysis, many Asian countries’ currencies are undervalued relative to their major trading partners when viewed in the context of medium-term, multilateral equilibrium values.
**As long as this condition persists, balanced global growth will be difficult to achieve. While these policies should be analyzed in a broad context, it seems inevitable that increased currency flexibility in many Asian countries, including China, will form part of the rebalancing effort.
As should be obvious, deficit countries will have to contribute importantly to the rebalancing process. In these countries, including the United States, fiscal consolidation is imperative.
Financial sector reforms also will be part of the effort. Here, there is broad agreement on what must be done. The perimeter of regulation should be widened, so that all systemically important institutions are covered. Existing regulations should shift their focus from individual instruments and institutions to encompass the macro-prudential dimension. Almost certainly, this will imply larger capital buffers and new limits on risk-taking. A robust resolution regime for large, complex, financial institutions that operate in multiple jurisdictions will also be part of the solution.
Increasingly, attention has been directed to a potential role for some form of financial sector taxation in helping to pay the costs of the current crisis as well as to complement regulation in limiting the risks and costs from any future crises. Many of you will have seen in today’s Wall Street Journal an opinion piece by Prime Minister Brown and President Sarkozy. As they point out, the IMF is responding to a request from the G-20 to explore broad options in this area, and we will be presenting our report to the G-20 in the coming months. (Tobin tax?)
**As you no doubt are aware, the newly formed Financial Stability Board – in which the Fund is an active participant -- is taking the lead in setting standards. Implementation will be the responsibility of national authorities, while the Fund will help to ensure that implementation is effective.
Policy collaboration and the role of the IMF
Seen broadly, there is really only one way to meet the Framework’s key challenges—by sustaining the spirit of collaboration that was the hallmark of global economic policymaking over the past year. Just as the effectiveness of anti-crisis measures was amplified by their simultaneity, global prospects would be improved notably if policymakers established a coherent agenda, and followed through on their commitments.
Early signs in this regard are promising. As noted, at their Pittsburgh leaders summit in September, G-20 authorities agreed to create an innovative process for the mutual assessment of policies centered on shared objectives. If effective, this would signal a seismic shift in global governance. And the Fund will be playing a key role in supporting this process by working with other partner institutions to provide analytical underpinnings for the G-20 policy discussions.
More generally, global leaders turned to the Fund to play an important role in fighting the crisis. The IMF responded by creating the Flexible Credit Line (FCL), a new, more flexible lending instrument for crisis prevention. At the same time, our programs in general have become more flexible and better tailored to country circumstances. Now the Fund is being called on to play a constructive and innovative role in the post-crisis world.
The London G-20 Leaders Summit in April endorsed a substantial increase in resources available to the Fund in support of its crisis prevention role. Leaders mandated the injection of $283 billion in Special Drawing Rights into the global economy in the form of increased official reserve assets.
And details are being finalized on expanding the New Arrangements to Borrow (NAB) by up to $600 billion. The NAB’s contingent assets will allow the Fund to deploy its new crisis prevention facilities in a timely manner and on the scale needed. And we continue to enhance our surveillance efforts—both bilateral and multilateral—to focus most effectively on future crisis prevention.
A key risk going forward is that countries will learn the wrong lesson and conclude that they need to self-insure against global capital market volatility by aggressively building international reserves. Clearly, this is a strategy that cannot be pursued successfully by all. Such an approach would perpetuate inbalances and stunt growth. We hope that by improving our crisis-prevention facilities, our members will opt for collective insurance in preference to self-insurance.
However, the cooperative impulse that has served us well over the past year can only survive if the Fund is viewed to be evenhanded and representative, as well as effective. Notably, the IMF’s membership agreed recently on a new initiative to shift quota shares toward dynamic, under-represented emerging markets and developing countries, to be completed by January 2011. This will be a complex endeavor, involving all 186 Fund members. However, success will represent a landmark achievement in the shift to a post-crisis global economy.
The role of Asia
Finally, I would like to speak about Asia’s role in the post-crisis economy. With six members in the G-20, the region has a solid platform from which to contribute to reshaping the global economic and financial architecture. Notably, Japan was the first country to provide extra resources to the IMF in 2009.
In a sense, Japan’s provision of $100 billion in liquid resources was the catalyst of the agreement at the London Leaders Summit to provide around $1 trillion in anti-crisis funding. As one of the world’s leading economic powers, Japan will help to shape the multilateral agenda. And next year, Korea will hold the G-20 chair, and will host the November 2010 Leaders Summit.
While Asia is assuming a larger global role, it also faces regional challenges. After all, Asia comprises a wide range of economies, from the industrial power of Japan, the rising giants, China and India, but also newly industrializing economies and a large number of low-income economies. Moreover, Asia’s trade relations are shifting subtly, to a complex order in which China increasingly is both a source of final demand for their neighbors, but also a competitor on global markets.
In this context, the region will require an economic and monetary policy framework—including with regard to exchange rate arrangements—that will help ensure strong and sustainable growth. It is notable that Prime Minister Hatoyama has signaled his strong interest in strengthening his collaboration with East Asia.
**Of course, the IMF is actively partnering with its Asian members in meeting the challenges, and we are confident that this engagement will strengthen over time. We are deepening our interactions with APEC, ASEAN and other regional organizations. And we are actively exploring ways to strengthen ties with the Chiang Mai initiative, Asia’s regional reserve pool, that already provides an important complement to IMF financing.
Most important, we stand at a major turning point in global governance and in economic development. The value of broad multilateral collaboration and cooperation in economic and financial policymaking is clearer today than at any time since the foundation of the IMF in the immediate aftermath of the Second World War. Asia has an important leadership role to play in helping to guide the global economy toward a new, revitalized, global growth model. The challenges are daunting but the opportunities to create a new period of progress are exhilarating.
full report @ http://www.imf.org/external/np/speeches/2009/121009.htm
