New Perspectives on Asia's Role in the Global Economy
Inaugural Bank of Thailand Policy Forum – Dinner Speech
By Christine Lagarde, Managing Director of the International Monetary Fund
Bangkok, Thursday, July 12, 2012
As prepared for delivery
INTRODUCTION: DYNAMIC ASIA
Good evening and Sawasdee Kha. I am delighted, as always, to be in Bangkok and in Thailand.
I would like to thank the Thai authorities for extending me such a warm welcome. I am deeply grateful to Governor Prasarn Trairatvorakul for hosting tonight’s dinner for the inaugural Bank of Thailand Policy Forum. I have been in Asia for nearly ten days, starting in Tokyo and then Jakarta. Visiting Bangkok is a wonderful way to finish my trip on a high point.
I must confess that every time I visit the region, and observe its multiple facets, I feel a rush of energy. Asia does not stand still—it is constantly reshaping itself and each time I am here I see a new, improved, upgraded version. I wish sometimes that I could pick up a packaged version of dynamic Asia and take it to other parts of the world!
There have been times in history when Asia has been important for the world; it certainly is another moment in history when that is the case. So it is time for the IMF to open our ears to Asian voices and our minds to Asian ideas, and our textbook to Asian solutions.
This is no mere rhetoric. Asia is a linchpin for global economic stability and is being heard, both through its growing stature in the global economy, and also in the corridors of the Fund, from which we try to understand the global economy and be an agent for improved stability.
The task is monumental at the intersection of economics and politics. As you know, these are troubled times for the global economy. The prospects for bringing closure to the global crisis are not yet clearly on the horizon. And over the past few months, the outlook has, regrettably, become more worrisome. Many indicators of economic activity—investment, employment, and manufacturing—have slightly deteriorated. And not just in Europe and the United States. Also in key emerging markets and here in South East Asia.
In the IMF’s updated assessment of the world economy, to be released next week, the growth outlook will be somewhat less than we anticipated just three months ago. And even that lower projection will depend on the right policy actions being taken.
Given that the eyes of the world are on Europe right now, I would like to note the efforts recently made.
The ECB has taken steps to ease bank funding pressures and the European financial safety net has been expanded to nearly a trillion dollars at peak times. And, just two weeks ago, European leaders agreed to significant steps to address the immediate crisis. These measures, in my view, go some way toward breaking the vicious cycle between weak sovereigns, weak banks, and weak growth.
But it is not the end of the story. Without continued progress, we will continue to see damaging effects on stability and growth. Not just in Europe, but across the globe.
In that context, I want to focus tonight on three main issues:
- First, Asia’s robust response to the crisis and what the rest of the world can learn from Asia’s experience;
- Second, the importance of regional cooperation within Asia;
- Third, somewhat parochially—particularly since I am in the company of central bankers—I want to talk about the importance of building a new and stronger partnership between Asia and the IMF.
I. ASIA’S ECONOMIC RESILIENCE AND ADAPTABILITY
So my first point: Asia’s resilience.
In the face of this global crisis, we have seen Asia emerge; not just with its global economic standing intact, but with its standing strengthened. It is useful to explore why this is the case and the useful lessons for other regions, including Europe.
As His Majesty once said of progress through change: “These changes have not come by themselves, these changes have come from the doings of everyone in the country.” To paraphrase His Majesty, Asia and Thailand have been working extremely hard over the past decade or more to get macroeconomic fundamentals right.
The courage and commitment of Thailand and the rest of Asia to undertake extensive reforms, many of them not an easy sell to their people, is an example that others should follow. By reducing corporate, financial, and external vulnerabilities, these reforms helped position Asia as a major engine for global growth. Let me cite two concrete examples:
- One, the aggressive restructuring of the nonperforming loans of Asian banks that began a decade or so ago, produced much healthier financial sector balance sheets.
- Two, Asia’s vastly improved fiscal positions, both debts and deficits, ensured that countries were able to take a strong policy response, when needed.
So when the financial crisis touched Asian shores in 2008-2009, the region was well prepared. Sure, the crisis hit Asia hard—not surprising for a region that is so well integrated into the global economy. But as a testament to the region’s resilience, Asia bounced back quickly to be a leader of global growth.
This is also illustrated in Thailand’s experience. Growth declined sharply in the aftermath of the 2008 crisis—and then just as quickly rebounded to 8 percent in 2010. Now we are in the midst of another sharp rebound from the devastating floods of 2011.
This positive story has parallels elsewhere in the region. Since 2009, growth across Asia and the Pacific has been nearly twice as fast as global growth—an average of almost 6 percent a year compared to around 3 percent for the world.
And the contrast becomes even starker compared to the astonishing 8 percent growth in emerging and developing Asia. If there is such a thing as economic growth envy, others must have it! Asia is the only region in the world where policymakers fret when growth slows, as it has in some countries, to 6 percent.
Taken together, stronger bank balance sheets and stronger fiscal positions have allowed Asia to avoid the downward spiral of weak sovereigns and weak banks that is threatening Europe. I hasten to add that this does not mean that Asia is immune to fresh turbulence in the global economy. In today’s interconnected world, as we well know, crisis does not recognize borders.
Indeed, the “spillovers” from the heightened stresses in Europe have become more visible across Asia. Export growth has lost steam. Regional stock markets have suffered sell-offs as investors everywhere have become more risk averse. Capital inflows from earlier this year have reversed.
So we cannot overlook Asia’s growing financial ties with the rest of the world. There are potential vulnerabilities. And yet, should they materialize, Asia is well placed to respond.
The main near-term challenge across the region is for policymakers—especially central bankers—to determine how much to loosen policies to support growth, without unleashing domestic vulnerabilities. While the balance naturally varies from country to country, overall there would seem to be ample policy space.
Looking ahead, Asia must continue to build its “second engine of growth”—based on domestic investment and consumption—beyond its clear strength in exports, which it must not give up. On current trends, Asia’s economy will be larger than the G-7 by 2030.
So the message is clear: Asia has a growing stake in the global economy—and the global economy has a growing stake in Asia.
II. ASIAN LEADERSHIP THROUGH REGIONAL COOPERATION
Which brings me to my second point—the value and importance of Asian leadership through regional cooperation.
We have seen the benefits of global policy coordination in the response to the crisis. For example, the major fiscal stimulus in the immediate wake of the crisis helped avert a far greater economic calamity. But five years into the crisis, we can see how costly the absence of effective cooperation can be.
ASEAN for many years has been a good model for successful regional political and economic cooperation. In recent years, this has been expanded to include ASEAN + 3, with the concerted objective to enhance intra-regional financial mechanisms.
I also have in mind the revamped Chiang Mai Initiative—boosted by the recent doubling of amounts available and the decision to broaden its use for crisis prevention. I might also mention other cooperative mechanisms in the region—such as the newly announced collateral arrangement between the Thai and Singapore central banks; and arrangements outside the region—such as the swap lines with the U.S. Federal Reserve Board.
These efforts echo the growing interconnections between countries in the region—which is already underpinned by trade and investment. These connections also help provide a better understanding of how to sustain economic growth and to guard against “spillovers” from one country’s policies to others.
These “spillover” effects are also something to which the IMF is giving much greater focus in our work. With our membership of 188 countries, we are in many ways uniquely placed to provide that analytical service—and we have begun to do just that.
III. THE NEW ASIA – IMF PARTNERSHIP
Which brings me to my third point: the role of the IMF, and the Asia–IMF relationship.
As Asia moves forward, we want to be your partner. That is my message.
But let me also be candid. We are well aware of the history of our relationship with Asia. We recognize that sometimes we have not listened enough when in fact you were right. And we know that not all bad memories have completely gone.
Tonight, I want you to know that the IMF has learned—and the IMF has changed. In our interconnected world, we know we must continue to change. We must continue to work toward being an even more effective partner for Asia—and for Thailand. We must listen and be prepared to revise the textbook of crisis resolution depending on country specifics, on regional ties.
What does this mean in practice? I see three main elements:
First, our economic analysis and policy advice must become even more relevant and more useful for our members.
Second, we must continue to adopt our lending instruments to meet Asia’s needs—smarter lending.
Third, we must keep pushing to ensure that Asia’s role and voice in the IMF is a true reflection of the region’s new economic standing in the world.
Let me touch on each of these dimensions.
(i) The IMF’s Policy Advice
We recognize that our advice needs to be more in tune with a changing global economy. So as I just mentioned, we are making a more concerted effort to examine potential “spillover” effects—for Asia and other regions. Our recent reports on China, Japan, the Euro area, UK, and US are at the frontier of this new type of integrated analysis.
We are also delving more deeply into the health of financial sectors and their impact on the real economy—the so-called “macro-financial” linkages. We will not reinvent the wheel nor try to be standard setters. But we will develop our surveillance mission in the financial sector, in good understanding and coordination with the likes of the FSB or the Basel Committee.
In addition, we are giving new emphasis to capacity building and training. In this regard, I was delighted to announce earlier today that we will have a new office here in Bangkok—aimed at supporting our technical assistance for Myanmar and Lao. Let me add that the IMF is very grateful to the Thai authorities for their generosity in making this possible.
(ii) The IMF’s Lending Instruments
As well as more timely, more relevant policy advice, the IMF must also be able to lend in a way that is even more suited to the needs of countries today. In part, this is about ensuring that we have sufficient resources.
The important principle here is that the IMF needs to be able to stand behind all its members and meet the needs of all those affected by the crisis. Asia’s contribution to the Fund’s firepower has been instrumental in securing that. In fact, Asia has been a major contributor to the global safety net, to boost IMF resources by $456 billion. Thailand has been one of the key participants and I am very grateful to the Thai authorities.
It is not just about how much we lend, but how we lend. Here too, Asia’s voice has been a critical part of change in the IMF’s approach. And this has helped to ensure that our lending instruments are better tailored to individual countries. We have expanded our lending toolkit for that purpose—making it more flexible and adaptable, precautionary in some specific instances.
(iii) Asia’s voice at the Fund
None of these technical issues will matter, however, if the IMF is not even-handed in its policy advice. This is a critical building block for our credibility and legitimacy in Asia and beyond. On this point, I want to assure you that I am personally committed to ensure that the Fund is exactly that—even-handed, telling our objective analysis, no matter whether the country concerned is large or small, pleased with the analysis or not.
Being even-handed also relates to the IMF’s governance structure and representation, and ensuring that it is truly reflective of the changing dynamics of our members and their standing in the global economy.
The good news here is that the package of so-called quota reforms agreed by our members in late 2010 will significantly boost the voting power of emerging market economies—and Asia in particular—in the IMF. In fact, once these reforms come into effect, three Asian countries—China, Japan, and India—will be among our ten largest shareholders.
This is not simply about technicalities. This is about Asia having a more powerful say in the IMF—and about the IMF being a more effective partner with Asia.
CONCLUSION: TAKING THE JOURNEY TOGETHER
On that note, allow me to conclude: I am reminded of a Buddhist saying: “Nothing ever exists entirely alone; everything is in relation to everything else.”
Asia has transformed the idea of partnership, and adopted a holistic approach, into concrete policy action and outcomes. The results have been spectacular. The rest of the world, as I said before, can learn many lessons from what you have achieved.
The IMF has learned as well. And we want to put that learning to good effect in service to our Asian member countries—in service to Thailand.
This is very important to me, it is important to the Fund, and it is important to the global economy. I hope you believe that it is important to you and to the region as well.
In partnership, and in friendship, let us take this journey together.