Speech by John Lipsky, First Deputy Managing Director of the International Monetary Fund
At G8 Social Summit 2009
Rome, Italy, March 31, 2009
I would like to welcome you to this session and also to thank the Italian Government for organizing this meeting. The issues being discussed here are central to the IMF’s mandate, as laid out in our Articles of Agreement: It is “to facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of a high level of employment and real income.” Of course, the global economic crisis we are facing today serves to underscore the central importance of these issues.
The Economic and Financial Crisis
As we are all aware, we are confronting a major challenge. Our latest projection is that world output will decline by between 0.5 and 1.5 percent in 2009, with only a very gradual recovery beginning in 2010. The crisis began in advanced economies, but it has spread to emerging and low income countries, and the ranks of the unemployed are swelling everywhere. And this worrisome trend isn’t likely to be reversed quickly.
Even these grim projections assume the implementation of strongly supportive policy actions, without which the outcome would be far worse. In discussions with our global membership about how unprecedented global cooperation will be needed in order to overcome this crisis, we have emphasized four key messages:
• First, priority must be given to supporting financial sector restructuring wherever normal credit channels have ceased to function effectively. Our long experience has demonstrated clearly that a sound financial sector is a “sine qua non” for economic recovery. Already, public funds are being used for this purpose, but more will be required. Such efforts may be politically difficult and controversial, but they also are necessary if satisfactory growth is to be re-established any time soon.
• Second, expansionary monetary and budget policies are needed to support aggregate demand both this year and next. However, with the impact of monetary policy weakened by financial system problems and with interest rates in key economies already approaching zero, innovative credit policy also may be needed in some economies. At the same time, fiscal policy inevitably has to play a key role. The IMF recommended an overall discretionary fiscal stimulus for the G20 economies of 2 percent of GDP in 2009 and 2010, with the distribution across countries depending on their specific conditions. By and large, countries have responded appropriately and decisively to this recommendation for 2009, but more likely will be needed next year. In every case, however, care should be taken to ensure that medium-term fiscal sustainability can be preserved.
The recommended fiscal expansion will have a significant impact on labor markets: assuming that it raises GDP growth by 2 percentage points—close to the mid-point of our estimated range—about 20 million jobs would be saved in the G-20 countries alone. Moreover, the unprecedented simultaneity of the policy response is proving to be powerful. According to IMF analysis, fully one-third of the beneficial growth impact of the anticipated 2009 fiscal action stems from international spillovers.
• Third, with emerging market economies suffering from both a drying up of capital flows and weakened exports—in several cases despite fundamentally strong domestic policies—the Fund needs to step in to directly provide much-needed financing and to catalyze financing from others. In response to this need, as I will describe in a moment, we are increasing our lending capacity and undertaking fundamental reforms to make our lending facilities more appropriate and effective.
• Fourth, low income countries are especially vulnerable and can ill afford a significant slowdown in economic growth. The Fund and its international partners must play their critical supporting role, including by significantly increasing concessional lending.
Safeguarding Globalization’s Benefits
In addition to the actions I just outlined, it is important to ask whether the crisis suggests that even more fundamental changes to our global economic system are needed. Some perspective is appropriate: World trade grew by five times in real terms since 1980, rising as a share of world GDP from 36 percent to 55 percent. Financial integration also intensified: Total cross-border financial assets more than doubled as a share of global GDP since 1990, rising from 58 percent to more than 130 percent. These developments shouldn’t be taken for granted.
At the same time, legitimate concerns have been raised about the potential social costs of an increasingly integrated global economy, most notably rising inequality. In the current crisis, some observers also have questioned whether globalization is conducive to sustainable growth. While such questioning is natural, it seems to me that the post-1990 phase of globalization has been extremely positive on balance, accelerating growth and helping to bring literally hundreds of millions of people out of poverty.
This positive view certainly remains dominant: Despite the almost unprecedented economic pressures of recent months, no country has responded by trying to close itself off from global markets. Indeed, G-8 leaders—including the participants in this Summit—have spoken forcefully against both trade and financial protectionism and have committed themselves to enhancing global economic cooperation.
Nonetheless, a crisis-heightened challenge exists to ensure that the benefits of globalization are fully grasped and broadly shared. The Fund has been engaged in meeting this challenge. For example, our October 2007 World Economic Outlook focused on the theme of Globalization and Inequality. Our analysis suggested that it is the specific form of recent technological advances, rather than globalization per se, that has contributed most to rising inequality. In fact, our research indicates that increased trade integration is associated with a decline in inequality (Although the most recent phase of financial integration may have been associated with higher inequality).
There is no doubt, however, that we can and should do better at spreading the gains from global integration. Thinking beyond the current crisis, there are several basic ways this might be accomplished:
• Reducing labor market rigidities enables workers to pursue changing opportunities by lower the costs and risks of job changes.
• Workers should receive support and assistance in the process of reacting to economic evolution. Improved education and training helps workers keep up with technological advances and to upgrade skills.
• Strengthened social protection measures, such as more effective unemployment benefits, also can ease the transition process and encourage skill upgrading.
• Policies that increase the availability of finance to the less privileged and that advance trade liberalization—for example by helping to increase agricultural exports from developing countries—also would help spread the benefits of globalization.
These policies—and others—are relevant even in the current crisis environment. For now, it will be necessary to focus on strengthening and better targeting social safety nets and on providing opportunities for displaced workers to regain employment as rapidly as possible. Such measures also would boost automatic stabilizers, thereby supporting near-term fiscal expansion, but without creating sizable long-term fiscal obligations.
As alluded to earlier, increased global integration also creates broader macroeconomic challenges. The current crisis has demonstrated that we need more cooperative and coordinated efforts to ensure that the benefits of globalization can be sustained. Shocks to large and systemic countries can transmit rapidly to the rest of the world through both trade and financial channels.
The IMF emphasized these risks during the innovative Multilateral Consultation on Global Imbalances we sponsored in 2006 and 2007 with the euro area, China, Japan, Saudi Arabia and the United States. Early and decisive implementation of the recommended policies that emerged from the Consultation would have reduced considerably the risk of a subsequent financial and economic crisis, not least because it would have raised savings in those countries where the household sector was accumulating excessive debt, and increased consumption in countries where saving was exceptionally high, and where growth was unusually dependent on external demand. More recently, we have seen all too clearly the need for a coherent international approach to financial regulation and supervision.
The Role of the Fund
Let me now turn to the role the Fund is playing in the context of the crisis, and how we are working to contribute to both economic and social sustainability.
• First, the Fund is providing very significant financing—more than $50 billion to date—to countries hardest hit by the global recession, including several emerging market countries here in Europe that are suffering from a drying up of capital inflows. The Fund’s resources have cushioned the painful economic adjustment currently underway, although these countries’ circumstances remain difficult.
• The design of Fund programs has reflected the need for increased social protection. For example, Hungarian low-income pensioners were excluded from otherwise unavoidable benefit reductions. In Ukraine, authorities are committed to appropriating more funds for unemployment insurance. In Pakistan, social safety net spending is being tripled. Subsidies and social assistance for low-income groups also have been protected in El Salvador and Belarus. Working in close collaboration with the World Bank, Fund programs also seek to improve benefit targeting.
• Second, the Fund’s members just last week approved a set of far-reaching reforms to the way we lend. Most notably, we have created a Flexible Credit Line for countries with a track record of strong policies. Once approved, these loans can be disbursed quickly and without traditional ex-post performance criteria, if and when the need arises. We intend that this new facility will make it far more likely that countries will consult with the Fund well before they are in serious difficulty, thereby contributing importantly to crisis prevention.
• Third, we have increased the amounts that we can lend. Normal access limits are being doubled, giving confidence to countries that adequate resources will be available to meet their basic financing needs, while helping to avoid the worst effects of the “sudden stop” in capital flows that already has taken place.
• Fourth, the Fund is redesigning its lending policies for low-income countries, in order to strengthen our capacity to provide concessional short-term and emergency financing. The IMF’s objective is to at least double its concessional lending capacity.
• Fifth, our members are organizing to increase the Fund’s resources. As many of you are aware, the Japanese government already finalized a $100 billion loan to the Fund and we anticipate commitments for significant additional resources at this week’s G-20 Leader’s Summit. This historic initiative will provide confidence that the Fund will have financial resources adequate to deal with any eventuality.
• Last, but certainly not least, the IMF is focused on learning from the ongoing crisis to help ensure that the global economy will become more resilient. We are working closely with other international organizations to help national authorities strengthen their financial supervision. And we are enhancing our ability to identify, and communicate effectively about systemic risks. In particular, the G20 Leaders requested the Fund to assess the implementation of anti-crisis monetary and budget policies, to collaborate with the WTO to guard against the risk of growing protectionism, and to produce an early warning exercise jointly with the Financial Stability Forum.
In summary, we are facing the most difficult economic challenge in many decades, requiring a coordinated response on several fronts. It is critical that we not allow our current difficulties to obscure the important gains that increased global integration has delivered, and I am confident that we will not. The Fund has been seeking to respond quickly and creatively to help our members deal with their near-term problems and to ensure that the global economy emerges stronger and more resilient from this exceptionally difficult period. In all our efforts, we remain alert to the social dimensions of our actions and on the essential point that a nation’s economic policies must be aimed at improving the lives of all its citizens. We look forward to working with you and your colleagues around the world towards this overarching and enduring goal.
