With the crisis of 2008-09 receding, and following the unprecedented efforts expended in 2010 developing the outlines of a new, post-crisis world, 2011 will be the year in which post-crisis plans will be implemented, tested, and assessed. If they are deemed to be successful, it will not be an exaggeration to claim that a new model for global economic and financial governance will be under way. If unsuccessful, however, the sense of failure likely would undermine confidence while adding to the formidable list of challenges to be overcome.
2010—a year of accomplishments
In fact, last year was one of substantial accomplishments. Global economic growth staged a clear-cut recovery. Indeed, last year’s estimated 5 percent annual global growth was above the 3.6 percent average rate of the previous decade—although the expansion remains uneven and incomplete. Financial sector reform efforts began to bear fruit. Significant reforms were agreed for the international financial institutions (IFIs), including the International Monetary Fund. The Leaders’ process at the Group of Twenty (G-20) leading advanced and emerging market economies began to assume a sustained and sustainable form. At the same time, however, none of the five key challenges that I had described a year ago—securing the recovery; protecting the poor from the impact of the crisis; reforming the financial sector; restructuring and reforming the IFIs; reassessing the theoretical underpinnings of prevailing economic and financial policies—has been met fully. Moreover, new challenges have emerged that will require urgent attention.
Last January, the global outlook justified tempered optimism. The same is true today. Nonetheless, success in meeting the key challenges will require significant—and mutually consistent—policy efforts on the part of major economies. Notably, the IMF has been assigned a substantive role in meeting all of the key challenges. Just as is the case for the major economies and their policymakers, however, the Fund will need to implement important innovations in order to meet the new demands. However, the very real prospect of achieving the basic goals of strong, sustainable, and balanced global growth provides an ample incentive for making the required efforts.
So where do things stand as 2011 begins?
Overall, the 2011 economic outlook is promising. However, as my colleague Olivier Blanchard pointed out in a recent interview, the pattern of rapid emerging economy growth, combined with only trend-like growth in the advanced economies, despite their significant margins of excess capacity, is likely to prevail this year, as it did in 2010.
Although domestic demand growth has quickened in most emerging economies, their aggregate trade surpluses remain substantial. At the same time, high unemployment, weakened household balance sheets, sluggish income gains and a still-healing financial sector are holding back advanced economy recoveries. In fact, as of 2010’s third quarter, only Canada among the G-7 economies had matched its pre-crisis output peak. As a result—assuming that current policies are maintained—no important progress is expected reducing the large current account imbalances that still undermine confidence in the expansion’s sustainability.
The outlook also remains clouded by several downside risks. I’ll mention three.
- Renewed turbulence in sovereign debt markets could spill over to the real economy and across regions. Investor sentiment in Europe is particularly precarious.
- Failure to reduce high unemployment—coupled with downside risks for housing markets in several advanced economies—could undermine consumer confidence, slowing consumer spending and weakening the global growth outlook.
- The emergence of above-trend growth, rising asset prices, and accelerating inflation in several emerging economies is sparking worries about potential overheating, as well as about difficulties in coping with growing capital inflows and strengthening currencies.
In other words, despite the overall global growth rebound, substantial shifts will be needed in order to secure the intended goals of strong, sustainable, and balanced global growth. Moreover, the critical role for enhanced global economic and financial policy cooperation is self-evident. The recent sharpening of the IMF’s role in this area also will place an increased premium on the Fund’s ability to meet its new and expanded responsibilities
The G-20 Leaders’ process has been developed since late 2008 in response to the recognized need for more effective global cooperation on economic and financial policies. Each of the five Leaders’ Summits has produced an agreement to broaden and deepen the mechanism for such cooperation. The recent Seoul Summit was no exception. In the immediate aftermath of the crisis, concerted policy action helped to limit the economic downturn and to set the stage for recovery. At that time, of course, policy prescriptions generally were similar across all economies.
The current state of the recovery makes the process of cooperation more complex, but also correspondingly more important. In this second, post-crisis phase, the demands of policy coherence have become more subtle. The perceived need to act with alacrity and simultaneity is less acute than before. Moreover, with emerged and advanced economies performing differently, coherence demands differing policy prescriptions
The increased incentives for policy cooperation—together with the need to adjust policy programs to fit the disparate circumstances of the G-20 economies—has been anticipated in the decisions made by Leaders at their recent Seoul Summit. The Mutual Assessment Process (or G-20 “MAP”) has been ratified as an ongoing initiative, to be guided by an agreed set of “indicative guidelines,” with progress toward the underlying goals of strong sustainable and balanced global growth to be assessed at an individual economy level and reviewed by the Leaders at their next Summit. The Seoul Leaders’ Declaration contained an extensive—but widely overlooked—list of each G-20 economy’s proposed policy adjustments as part of the MAP.
Of course, the challenges of this novel process are substantial. There is no exact precedent for the ambition of the G-20 MAP. As is made clear in the IMF’s MAP analytical documents published following the Toronto and Seoul Summits, the underlying motivation for the MAP is the shared recognition—heightened by the crisis—that a coherent and cooperative approach to economic and financial policymaking holds out the promise of a superior outcome for all. In this case, the incentive to strive for a cooperative approach is straightforward.
This insight justifies optimism regarding the potential for the MAP’s success. The principal uncertainty is whether such an approach will be adhered to by the entire G-20. The MAP is a G-20-led exercise, but the Leaders have requested significant Fund support for the MAP process. For example, the G-20 Leaders asked the IMF to “provide an assessment as part of the MAP on the progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies.” More broadly, the latest challenges and IMF reforms have both enhanced the Fund’s role and responsibilities and increased the importance of the Fund producing analysis of the highest technical quality.
Therefore, 2011 will be a year in which advancements in IMF economic surveillance come to the fore. The Fund’s Triennial Surveillance Review will take place this year, providing an opportunity for IMF members to assess the progress that has been made in this area, as well as to set priorities for the coming triennial period. In this regard, the Fund has begun to better integrate assessments of financial stability into regular country reviews. In particular, Financial Sector Assessment Programs—conducted jointly by the IMF and the World Bank—henceforth will be mandatory for all Fund members with systemically important financial sectors. Fund support for the G-20 MAP will constitute a challenging but potentially uniquely productive assignment, and it will help to deepen the surveillance dialogue with Fund members.
Already, the IMF is developing on an experimental basis several new tools for multilateral analysis, including spillover reports on the wider impact of systemic economies’ policies, and cross-country reports on common themes. The first such ‘spillover’ assessment is to take place during the coming year.
In particular, the IMF will produce reports for five systemic economies—China, the Euro area, Japan, the United Kingdom, and the United States. These reports will assess the impact of the five economies’ policies on the rest of the world, exploring the powerful economic and financial interlinkages through which they are transmitted.
At the same time, the Fund’s crisis prevention tools have just been strengthened, through reforms of the existing Flexible Credit Line facility, and through the creation of the Precautionary Credit Line. Additional work is underway to explore whether further advances can be made in the Fund’s crisis prevention capabilities. At the same time, the IMF’s important work on financial sector reform will continue unabated, among other things through collaboration with the Financial Stability Board.
I will end by repeating my opening claim: 2011 will be a pivotal year for the global economic recovery, for international policy cooperation, and for the Fund’s role in dealing with both of these challenges. The grounds for cautious optimism are solid. At the same time, the challenges are formidable. The New Year has arrived; it’s time to get to work.