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Focus on Jobs and Growth, Says IMFC Chair Tharman

IMF Survey online - April 21, 2013

  • Focus should be on growth and jobs
  • Structural reforms critical in both advanced and emerging economies
  • Calibrate fiscal policy to avoid hurting investor confidence

As the IMF-World Bank Meetings wrap up in Washington D.C., policymakers leave with an added sense of urgency of the need to refocus policies on sustainable growth and job creation.

In an interview, Tharman Shanmugaratnam—Deputy Prime Minister of Singapore and Chair of the IMF’s policy steering committee, the IMFC—called on countries to focus more on medium and long term challenges, including intergenerational equity, when formulating economic policy.

IMF Survey: Minister Tharman, you spoke just now of the need for a stronger focus on jobs and growth. What were the IMFC's main recommendations?

Tharman: The IMFC’s recommendation is to look at the long term, not just the short term. We are not going to get velocity unless we have policies which are long-run focused. And they have to be policies that are focused not on macroeconomic adjustments but, first and foremost, on jobs and growth.

What’s more important than just getting the right size of fiscal deficits or the right size of QE [quantitative easing], is composition. Do we have policies which are growth friendly? Do we have policies which will help create jobs—particularly for the young, who are the ones left all over the world, and especially in advanced economies?

In the first phase of recovery from the crisis, there has been a bit too much of slash and burn—that’s part and parcel of the front-loading of adjustment measures. But at this stage, there was a very strong view from around the table that we do need to focus on adjustments that are likely to create jobs and bring back private investor confidence.

That means not just any fiscal adjustment, but the right type of tax measures—avoiding tax increases if they hurt private confidence, avoiding expenditure cuts if they hurt the wrong people in society. So it’s a more discriminating view now of how we should go about the adjustment and the post-crisis recovery.

IMF Survey: What do you see as the biggest take-away from the Spring Meetings?

Tharman: There are two takeaways. First, we didn’t have big disagreements. We had very good discussions, and converged on the same positions. And if I have to summarize the key position that we converged on, it was about the criticality, going forward, of structural reforms, and the criticality of focusing on medium-term fiscal credibility, more than just the short term. The short term only has meaning if it’s part of a medium-term consolidation package.

There was a very strong view that you can’t over rely on one policy, and especially on easy monetary policy. It’s still needed, but it's not going to work very well if you don’t, at the same time, do the two other things: medium-term fiscal credibility and structural reforms, which need to pick up pace.

And that applies not just to the advanced economies but to the emerging economies as well—a very strong emphasis on the need for structural reforms in the case of the emerging markets, so as to achieve fully their full potential and growth and, in fact, to raise potential growth. And in the case of the advanced economies, structural reforms to get back to normal growth, raise productivity, and find a way of providing jobs, particularly for the young.

IMF Survey: There has been a lot of focus on repairing private and public balance sheets. You introduced a new concept the other day: social balance sheets. Can you explain what you meant?

Tharman: We have two big challenges on the social side, and the social side is woven into economic policy.

First, there is a very serious and growing issue of intergenerational equity. If you look at the nature of the fiscal problem in the advanced economies, its largest component—looking out 8 to 10 years and beyond—is really intergenerational.

It’s about political commitments that have been made for soon-to-retire people, the baby boom generation, as well as those who are already retired, that have to be funded—but the money isn’t there. And you either have to find a way of cutting back on those commitments, but doing it in an equitable way, where you can’t do it for people who are poor or even middle-income, or you have to find a way of raising taxes. And if we don’t think hard about it, we might get a grossly inequitable outcome both within the age cohorts, as well as across generations.

That’s a big challenge. If we had asked ourselves this question 20 years ago, we would have said, “let the young pay for it, the older ones have worked hard, they came out of the war, they deserve it.” But if you ask the question now, it’s not obvious that the younger generation of workers is going to be better off than the people who are retiring soon. In some countries, and at the local level in some of the larger societies, people who are still working, still relatively young, are going to get smaller pensions, smaller health care benefits, and their wages in real terms are not necessarily going to be better than those who are retiring soon.

So we have to be quite forthright about these political choices and these social choices.

IMF Survey: Some people have talked about global governance fraying at the edges with some regions deciding to go it alone, for instance by setting up their own development banks. What is your view, and what does it mean for the IMF?

Tharman: Fundamentally, I don’t see this as a reflection of the existing institutions—although they clearly can do with improvements in governance and representation, as much as a reflection of a changing world.

It is now almost a multipolar world. I know the word has been used for some years, but it’s still not quite a world with equal poles. Rather, it’s one with emerging poles which are significant drivers of growth. They want to have a say, and they also want to have their own means, their own arrangements—regional insurance arrangements, not just relying on global insurance, and development-financing arrangements.

If you think of the complexity of the world, it’s not such a bad idea to have well governed multilateral institutions complementing regional arrangements. You see it in trade, and you see it in financial insurance. The Europeans have to do it because of the crisis, but it’s there for the long term. In Asia, we did it after a crisis, and it’s also there for the long term.

So achieving complementarity between the IMF and regional financial arrangements such as the Chiang Mai Initiative in Asia and the European institutions is, I think, the way to achieve a plus-plus world. It’s not a zero-sum game. It means strengthening the international institutions, and at the same time making sure that there is a sensible role for regional institutions who know their regions well, and that can also call on additional resources.