A Leadership Role for Asia in Reshaping the Post-Crisis Global Economy
INTERNATIONAL MONETARY FUND
Monetary Authority of Singapore
Annual Lecture – November 13, 2009
It is my great honor to deliver the 2009 Annual Lecture of the Monetary Authority of Singapore. I thank Managing Director Heng for inviting me to speak to you this evening. I have already spent two very stimulating days in Singapore, meeting with regional policy makers, academics, and business leaders. From my conversations, I have gained valuable insights on the impact of the global crisis on Asia, and the implications for the region over the longer term.
We find ourselves at a pivotal moment in history. The last two years have revealed deep fissures in the global economic and financial framework, making it abundantly clear that the world of tomorrow cannot achieve long-term success based on the rules of yesterday. A fundamental reset is needed - across economic sectors, and across economic regions. We now have a historic opportunity to lay the foundations of a safer and more stable economic and financial framework.
In my address today, I wish to explore some of the changes needed to achieve this objective. I will focus on three priorities in particular: achieving a healthier balance of demand across countries; strengthening the international monetary system; and managing better the risks posed by financial institutions. Achieving these will depend in large part on how well countries work together. In this regard, I am greatly encouraged by the emergence of a more inclusive, and thus stronger, global governance framework.
I believe that Asia should play a leadership role in guiding the global economy to a new, more sustainable path for growth. This is not only appropriate, given Asia's economic weight in the world, but also necessary, since Asia is such an important part of the solution. And so I will begin my remarks with some observations on the opportunities and challenges that Asia faces as we move into this new, post-global crisis era.
I. ASIA'S CHALLENGES AND OPPORTUNITIES IN THE POST-GLOBAL CRISIS ERA
Over the last decade, Asia has become an even bigger player on the economic world stage. Thanks to sound macroeconomic management and far-reaching structural reforms, growth over the last ten years has averaged a remarkable 6 percent per year, raising Asia's share in the global economy to about one third. Rapid economic growth has boosted living standards and lifted millions out of poverty.
The strength of Asia's economies has helped them weather the global financial crisis, and today the region is leading the world into economic recovery. Thanks to strong fundamentals and quick and forceful policy responses to the crisis, Asia has performed considerably better than other regions of the world - and has thus played an important role in supporting the global recovery. We expect Asia's GDP growth to pick up to 5Â¾ percent next year, compared to only 3 percent for the global economy.
But to ensure continued success for generations to come, Asia will need to adapt to the new challenges presented by the post-global-crisis economy. This imperative is widely recognized by Asian policy makers, who are moving rapidly to identify the key elements of a new developmental 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.
Long-term success will also depend critically on Asia's active participation 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. At the G-20, Asia is represented by six countries. And at the IMF, Asia's quota is rising as our governance reforms move ahead, bringing the region's economic voice in line with its weight in the global economy. Now is the time for Asia to use its stronger voice to contribute to global efforts to reshape the economic and financial landscape.
What is the global context facing Asia now?
While I am hopeful that the global economy has turned the corner, the recovery remains fragile. Policy makers should therefore keep supportive measures in place until a recovery is firmly established and conditions for unemployment to recede are in place. In some emerging markets, including a few in Asia, the recovery is further along, and crisis support policies may need to be unwound sooner rather than later. But in other regional economies, where the recovery is less firmly established, policy stimulus should be maintained for longer.
Regardless of the extent of economic recovery, it makes sense for policy makers in all countries to start planning their exit strategies now. This applies to monetary policy, fiscal policy, and financial sector support. Such early planning will help the eventual unwinding of exit policies and ease the transition to more normal economic conditions.
In economies that face serious concerns about fiscal sustainability, it will be particularly important to identify the longer-term reforms needed for eventual fiscal consolidation. These concerns are greatest in the advanced G-20 economies, where gross public debt is forecast to reach an average of 118 percent of GDP in 2014. Fiscal reforms that advance consolidation but do not slow the recovery - for example, entitlement reform and strengthening fiscal frameworks - should be implemented now.
The resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges. This resurgence reflects the favorable outlook for the region, but also a renewed appetite for higher-risk assets as financial conditions normalize. While capital inflows are generally beneficial, they can raise risks of rapid and potentially destabilizing movements of currencies and asset prices.
Policy makers have several tools to mitigate the effects of these inflows. They include exchange rate appreciation, tighter fiscal policy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bubbles. Market-based controls on capital inflows can help reduce the volatility of such flows. But these measures are costly and tend to lose effectiveness over time.
A final point here. A particular challenge for all of us, particularly the externally-oriented Asian economies, is the risk of protectionism with unemployment still rising in the advanced economies. As we go forward, we must all work together to contain this threat and its potentially damaging effects on growth.
II. PRIORITIES FOR RESHAPING THE POST-GLOBAL CRISIS WORLD
I would now like to discuss three important priorities for reshaping the post-global crisis economy-and the role for Asia in meeting them.
A. Global Rebalancing
The first priority is to achieve a more stable distribution of demand across the world.
As you all know, global imbalances widened significantly in the run-up to the crisis. By this I mean that current account deficits in some countries, and current account surpluses in others, had become very large.
Now imbalances are not necessarily bad. They may reflect differences across countries in the rate of return on investment, or difference in the degree of risk or liquidity of different assets. But there are several reasons why imbalances can be bad. Large imbalances may reflect domestic problems or distortions, which could lead to potentially painful adjustment problems over time. They could result from problems with the international monetary system and exchange rate regimes, which could cause potentially systemic problems later on.
In the IMF's view, a large part of the imbalances before the recent crisis reflected such problems and distortions. Addressing these remains essential for reducing imbalances. And in fact, while global imbalances have declined during the crisis, they remain large and could widen again as the global economy normalizes. Thus, resolving this issue is essential for securing a sustained global recovery.
I am therefore greatly encouraged by the central importance that the G-20 has given this issue. At their Pittsburgh summit, the leaders of the G-20 adopted a Framework for Strong, Sustainable, and Balanced Growth, which sets out a mutual assessment of policies and their implications for global growth. This shows commitment at the highest political level to ensure that global imbalances are addressed-and also reflects a shared understanding that all nations must do their part to secure strong, sustainable and balanced growth going forward. As requested by the G-20, the IMF will lend analytical support to this effort, contributing our deep experience with cross-country analysis and policy assessment.
Now, what can be done to rebalance global demand in a lasting way?
In economies that have run large current account deficits, national saving needs to increase. In many of these economies, including the United States, fiscal consolidation must take priority. And in those that have experienced asset price busts, financial sector repair will be essential for a lasting recovery.
In economies that have run large current account surpluses, domestic demand needs to be stronger. In euro area economies and Japan, competition in product and labor markets should be increased. What about emerging Asia? Rebalancing in these countries will imply increasing domestic demand-investment in most countries, but in China notably, consumption.
I would like to elaborate on the implications for Asia. But at the outset, let me emphasize that openness must remain an essential element of Asia's growth model. The region's strong outward orientation, as reflected in the high ratio of trade and financial flows to GDP, has been a key factor in its remarkable economic performance.
Singapore is a good example of the benefits of openness. Its economy is extremely open-gross capital flows are roughly the same as GDP, while exports and imports together account for about four time GDP. This openness, combined with pragmatic macroeconomic management, structural reforms, and a business-friendly environment, has been a cornerstone of Singapore's economic success, raising real income per capita five-fold in a generation.
Rebalancing therefore does not mean that Asia should become inward looking and reduce trade. Rather, it means reinvigorating domestic demand and boosting intraregional trade through structural reforms aimed at boosting rates of return for investments in domestically-oriented sectors and removing impediments and bottlenecks to domestic spending. Such a recalibration of Asia's growth model is very much in the region's self-interest. In particular, it would reduce the region's dependence on demand from outside Asia.
With some notable exceptions, including China and India, investment in Asia has shown broad-based weakness during the last ten years. At the same time, however, Asia has significant long-term development needs. Governments in the region should therefore step up their public investment programs, where there is fiscal space to do so. They should also accelerate efforts to create a regulatory environment that provides the right incentives for private investment, including those related to public-private partnerships.
Investing in infrastructure holds tremendous promise. While Asia has some of the most modern infrastructure in the world - as we can see by looking around Singapore - there are still large gaps in transport, energy and communications. Closing these gaps will require a lot of resources - the ADB, for example, estimates that Asia Pacific countries need to invest about $8 trillion over the next decade. Such investment would not only boost productive potential, but would also help in the fight against poverty, by improving access to basic services such as electricity and clean water. Investing in education also remains a priority in many Asian countries, and could help alleviate the shortage of skills that constrains investment in some industries. And finally, investment in low-carbon, or "green" growth would also be worthwhile. Technological innovation is key to managing climate change at a reasonable cost. And innovation in Asia is already making major contributions.
In the case of China, with its large external surplus, the government is committed to boosting private consumption as the way to rebalance its economy. I agree that this is the right way forward. Improving social policies-particularly healthcare, pensions, and education-is needed to make more funds available for consumption. Developing financial markets to ensure a better allocation of capital, providing saving vehicles that raise household income, and expanding the availability of insurance products would also help. To free up resources that have become tied up in rising corporate savings, corporate governance should be strengthened. And to ensure that these structural boosts to consumption do not lead to overheating, policy makers will need to continue keeping a close watch on credit and other asset markets.
Let me make one final observation on rebalancing, which relates to exchange rates.
For the world to succeed in its rebalancing efforts, exchange rates must be allowed to reflect medium-run fundamentals. Based on our analysis, many Asian currencies are still undervalued related to those of their major trading partners, while the euro is somewhat overvalued on this basis. So long as this remains the case, the price signals sent about the returns from tradable goods compared to those from nontradable goods will continue to be skewed-thus delaying the rebalancing across countries, and more specifically the necessary recalibration of Asia's growth model. In my view, the region should not resist a gradual appreciation of its exchange rates, which I consider an important prerequisite for long-term rebalancing.
B. Strengthening the International Monetary System
Moving now to the second priority, I see strengthening the international monetary system as an important complement to demand rebalancing.
The recent experience has demonstrated that fast-paced and hard-hitting financial crises can lead to an extraordinarily large demand for official resources. In some countries, such resources are needed to address underlying balance of payments problems. And in others, such demand may purely result from global liquidity shortages that have no relation at all to domestic conditions. For countries that have been building up precautionary reserves as a form of self-insurance, there have been costs-primarily the missed opportunity to invest in domestic projects with a high social rate of return. For all these reasons, I see a clear need for global financial insurance.
I believe that the IMF has the potential to serve as an effective and reliable provider of such insurance, as long as we are able to reduce-and at the end get rid of-the stigma associated with the IMF in some parts of the world, while dealing with the moral hazard problem. In doing so, we can also provide a framework for harmonizing global and regional safety nets. The international community has already given a strong endorsement of the IMF as the key institution for meeting the financial needs of our members. Our lending resources have been tripled, to $750 billionÂ¬Â¬-including about $172 billion in contributions from our Asian members. This has allowed us to provide critical financing to a broad array of countries hit by the crisis. However, to serve as a truly dependable global lender of last resort, the Fund will need considerably greater resources.
But it is not just the amount of our resources that matters-it is also how we deploy them. This is why we have overhauled our general lending framework to make it better suited to country needs. An important component has been streamlining conditions attached to loans. We have also introduced the Flexible Credit Line, the so-called FCL, through which the IMF now offers a pre-emptive insurance facility-without any conditionality-for members with strong policies.
We continue to seek ways for our resources to better meet our members' needs. One possibility is to build on the success of the FCL and enhance predictability of access to IMF crisis financing. A specific option here would be to make consideration of FCL eligibility an automatic part of regular surveillance. And for members that do not qualify for the FCL, we could consider designing alternative contingent instruments that also have an element of automaticity.
But even more important than our resources and our financing modalities will be the confidence-and the trust-of our member countries. Without these, we will be hard pressed to succeed in our efforts to strengthen the international monetary system. Addressing valid concerns about our governance is a critical priority in this regard.
How can Asia contribute to strengthening the international monetary system?
Asia's regional reserve pool already plays an important role in the provision of global financial insurance. With $120 billion in pledged reserves from its Asian members, the Chiang Mai Initiative provides an important complement to IMF financing. We should think about ways in which such these regional resources-as well as those in other regions-could be combined with our FCL to make this instrument even more effective.
C. Creating a safer and more stable financial system
Let me now address a third priority, namely to make the financial system safer and more stable. The crisis has revealed weaknesses in the regulatory and supervisory frameworks in many countries, failures in risk management systems of large financial institutions, and a breakdown in market discipline. Reforms are needed on many fronts to address these weaknesses, so that we can protect the financial system against future crisis.
While I have been encouraged by the international reform effort, I am very concerned that time is running out to adopt the sweeping changes needed to truly reshape the global financial system. As financial markets recover and banks become profitable again, memories of the crisis have already begun to fade-raising the risk that the political momentum needed to push through significant reforms will dissipate. Markets already seem to be sensing this, and a worrying return to "business as usual" may already be taking place in financial institutions. We must make every effort to ensure that we do not lose our focus or our determination to implement deep and lasting reforms.
What is the relevance of all this for Asia?
Broadly speaking, Asia's financial systems and institutions are facing considerably less pressure for financial restructuring and regulatory reform than those at the epicenter of the crisis. Thanks in part to the significant structural changes made in Asia's financial sectors following the 1997/98 crisis, the region's financial systems proved resilient to the most recent crisis. The fact that corporates were relatively low leveraged was also a major factor.
But Asia must not let down its guard, as new risks will continue to emerge within and across borders. It will be essential to maintain a strong supervisory regime going forward, including by building up risk assessment capabilities and adopting a macro-prudential approach to supervision. Regional policy makers should also ensure that as new global standards emerge, their regulatory and supervisory frameworks are made consistent with new norms. In addition, they should play an active role in international efforts to design a coherent framework for cross-border crisis management.
I also hope that Asia does not draw the wrong lesson from the crisis-namely that financial development inevitably causes crises, and therefore should be put on the back burner. I agree with Minister Tharman, who noted recently that "the basic direction of travel in the emerging world has to be towards continued, gradual opening up and further diversification of their financial systems". Moving ahead with the development of Asia's financial markets, and in particular its capital markets, will be critical for making the best use of the region's significant savings in support of domestic demand.
III. A NEW GLOBAL GOVERNANCE FRAMEWORK
Let me turn now to the importance of strengthening international collaboration.
The emergence of a new global governance framework has lent critical support to international efforts to tackle the crisis and secure a sustainable recovery. With the G-20 taking on a central role in fostering the international policy dialogue and in advancing reform initiatives, we now have a much broader set of countries sitting at the decision-making table. And thanks to Asia's strong representation at the G-20, the region has a solid platform from which to make valuable contributions to reshaping the global financial architecture. Next year, Asia will be hosting the G-20, with a leaders summit planned for November in Korea. The world's attention will be very much focused on Asia - with high expectations for the region to lead the global economy into a new period of sustained and strong growth.
Governance reforms at the IMF are an important part of creating a more inclusive, and hence stronger, global governance framework. Under the quota reforms agreed in 2008, underrepresented countries in Asia stand to gain nearly 3 percentage points in quota share, raising Asia's overall IMF quota to about 19 percent. The region is likely to gain even more under the recent agreement to shift 5 percent of quotas toward dynamic emerging markets and developing countries. I am hopeful that this shift will be completed by early 2011.
We look forward to our Asian members' support as we seek to meet the new responsibilities given to the Fund at our Annual Meetings in Istanbul. We will be reviewing our mandate, such that it is sufficiently broad to encompass the whole range of macroeconomic and financial sector policies that affect global stability. We will also be assessing how the IMF could provide better insurance against volatile capital flows. As I noted earlier, we've been asked to provide support the G-20's mutual assessment of policies. We have also been tasked with assessing options for how the financial sector could help shoulder the costs of government interventions to repair the banking system.
We in turn seek to deepen our engagement with Asia.
We must strengthen our channels for hearing views from the region. This morning, for example, we held the inaugural meeting of a new advisory group of eminent persons from various Asian countries. We look to this group to provide insights into developing issues and priorities in Asia, and how the IMF can best help in meeting those challenges. We also seek ways to strengthen our links with regional groups, such as ASEAN and EMEAP, which have become important fora for discussing near-term challenges and devising longer-term development strategies for Asia.
Finally, as I discussed earlier, the redesign of our lending facilities is allowing us to match the conditions in borrowing countries better. New IMF-supported programs in Sri Lanka and Mongolia are providing critical financing to address balance of payments pressures.
IV. CLOSING THOUGHTS
We are meeting at a truly momentous time in history - with the opportunity to make momentous decisions that will benefit many generations to come.
"A changed world order is upon us" - as Minister Mentor Lee Kuan Yew said a few days ago in Washington. A change most certainly for the better, with a more inclusive - and thus stronger - system of global governance. For Asia, a change that brings tremendous opportunities to contribute to the reshaping of the post-crisis global economy - and indeed, carries a responsibility to help craft the global solutions needed to secure strong and sustainable growth for the long term. And for the IMF, a change that will allow us to become more legitimate in the eyes of our members, and hence more effective.
Let us not waste this opportunity to build a better tomorrow.
Thank you for your kind attention. I look forward to your questions.