Global interconnection has dark side, says Lagarde
Christine Lagarde, the managing director of the International Monetary Fund, is in Manila for a two-day visit that concludes Friday as part of her tour of Asia.
The chief of the multilateral lender is expected to solicit ideas from emerging markets like the Philippines—which has managed to keep growing despite global economic woes—on how to address the lingering crisis in the eurozone.
In an exclusive e-mail interview with the Inquirer, the first female managing director of the IMF shares her thoughts on the crisis in the eurozone, especially its effects on globalization.
She also gives her views on the lessons learned from the crisis in the West, the role of the IMF at this difficult time for the global economy and her outlook on Asia.
Lagarde, who was recently ranked by Forbes magazine as the eighth-most powerful woman in the world, likewise discusses positive economic developments in the Philippines and the favorable policies implemented in the country that she says other countries may emulate to improve their own macroeconomic environment.
Question: What should be done so that countries will remain committed to globalization while strengthening domestic economies?
Lagarde: We live in a world that is more interconnected than ever before in history. This interconnected world opens up so many opportunities and possibilities—but also has a dark side. This was really the big story of the financial crisis.
The task of securing sustained recovery has become more complex. It involves multiple layers and multiple players, and each and every part of the world has a role to play.
The key is to ensure that good policies are not only designed but also implemented, and for this to happen, countries have to act.
In the euro area—where risks are concentrated—we have seen a welcome strengthening of policies in recent months. Resolving the euro area crisis now requires timely and resolute implementation. Let me add that in the United States, clarity on how to meaningfully avoid the “fiscal cliff” of expiring tax provisions and expenditure cuts is needed. The sooner the better.
In emerging markets, including in Asia, many countries are facing slower growth and mounting external risks, with reduced policy space. Where scope exists, some additional policy support to domestic demand would be warranted, especially if external downside risks materialize.
In low-income countries, the global downturn has been manageable so far, but with external demand now weakening and commodity prices remaining volatile, most countries are facing heightened vulnerabilities. Our advice to them is that, as long as growth remains buoyant, they should give priority to rebuilding their policy buffers.
Question: What can Asian countries learn from the economic troubles in Europe?
Lagarde: First of all, I think one lesson rings clear: we can all learn from each other. The crisis provides many lessons, but there is one that stands out—the global community had too little appreciation for the true extent of economic interconnectedness between regions, between sectors, between peoples. That said, in a world of vast economic interconnections, timely, comprehensive and cooperative solutions are more important than ever.
For Asia, deeper economic cooperation and integration, if well managed, can help Asia not only strengthen its domestic engines of growth, but also set the path for Asia’s economic leadership in the 21st century and sustain growth across the world. While the region has made great progress in trade integration, financial integration lags behind. For example, more than 90 percent of cross-border portfolio investment flows in Asean countries are with advanced economies outside Asia. Put simply, Asia is not yet investing enough of its savings in itself.
Greater financial integration would bring many benefits. It can boost domestic demand, partly by making it easier for small businesses to get credit. It can make economies safer, by allowing more insurance against adverse developments. And it can reduce inequality, by letting more poor people access financial services.
However, as the global financial crisis has taught us, greater financial integration also comes with risks. To address those risks, it is essential that financial regulation and supervision keep up with financial development and integration. The IMF can help in this area by providing expertise and advice to individual countries as part of its regular interaction with them.
Question: The economic outlook in Asia remains patchy as the continent struggles to emerge from a mild downturn sparked by the eurozone debt crisis and the sluggish US recovery. What is your outlook for Asia?
Lagarde: Let me start with some basic observations. The economic center of gravity is shifting to the East. Asia has been, and will remain, a global growth leader. For 2013 we project Asia’s growth to be close to 6 percent-2 percentage points more than the global average. I am very optimistic about Asia’s future.
But emerging Asia still has to overcome a number of potential roadblocks as well:
First, it needs to avoid the hazardous “middle income trap”—the risk that development only can take you so far, but no further. This is like a car stalling out on the highway with its destination in sight!
Second, pressures from rising income inequality and rapidly aging populations. If not managed properly, these pressures could strain the social fabric.
Third, the need to rebalance growth. Asia has achieved phenomenal success with its outward-oriented growth model, relying on demand from advanced economies in the West. But that demand is no longer assured, which means Asia needs to evolve and take a different path—relying on its own people to fuel growth.
Question: What is your view on Asia’s efforts to achieve growth with equity? What is it doing right? What are the threats?
Lagarde: Clearly the global financial crisis has heightened our awareness, including in Asia, of the potential impact of rising inequality on economic and social stability.
In Asia, we have seen a marked decline in poverty over the last two decades, some 500 million people have been lifted out of poverty. But income inequality has increased, and, unfortunately, this has dampened the beneficial impact of rapid growth Asia has enjoyed on poverty reduction.
Some attribute the rise in inequality to technological change, favoring workers with higher levels of education, and the transition from agriculture to industry for lower-income Asian economies. But even as the size of Asia’s middle class has grown in the last two decades, its share of overall income has fallen while that of the richest has increased.
Overall then, we think there is scope for policy measures to ensure growth in Asia is more inclusive going forward. These measures could entail greater outlays for priority social expenditures, such as investments in health and education, improved access to financial services, for example for rural households and small enterprises which are often credit-constrained, and labor market policies that help protect low-earning workers while also providing work incentives.
Question: What is the IMF’s main objective in these troubled times and has it been effective? Are there other programs that the IMF intends to do that are intended towards crisis prevention?
Lagarde: The important principle here is that the IMF needs to be able to stand behind all its members and meet the needs of all its members. The IMF has provided unprecedented financial support to a broad cross-section of members. And I certainly think that we have been effective in helping our members cope with the economic and social costs of the crisis. Fund support has helped members reverse output losses, restore market access, contain banking crisis and advance economic adjustment.
In response to the crisis, the Fund also substantially reformed its lending toolkits and increased its resources to better meet members’ evolving needs. Indeed, Asia has been a major contributor to the global safety net, which has helped to boost IMF resources by $461 billion.
But we do much more than fire-fighting. We need to both represent our membership, and we need to provide the quality of advice, the quality of service, the quality of technical assistance, the quality of surveillance, that will make us constantly relevant. Providing sound policy advice remains our main goal. In that regard, we have strengthened our surveillance for crisis prevention, looking at both sovereign risks and financial risks and the interlinkages between the two, looking at macroprudential risks, and looking at the spill-over effects from one economy to another.
Finally, we are giving new emphasis to capacity building and training. In this regard, we have a new office in Bangkok, Thailand-aimed at supporting our technical assistance for Myanmar and Laos.
Question: How sustainable is the growth of the Philippines? What do you think would be that one policy (whether economic, fiscal, or monetary) implemented by the Philippine government that may serve as a model for other countries?
Lagarde: Let me first say that the Philippines is in the enviable position of having a young population and a fast-growing work force, whereas most advanced countries and even some emerging markets in Asia have populations that are aging rapidly. This provides the potential to maintain or even accelerate growth in the future. However, realizing the potential from this “demographic dividend” requires creating sufficient productive jobs to absorb new labor force entrants.
So for the Philippines, moving to a higher growth path requires a more conducive investment climate, upgraded public infrastructure and a more job-ready labor force.
These reforms would also allow the gain from growth to be spread more widely.
Stepping back, growth in the Philippines has accelerated from 3.5 percent during 1992-2001 to around 5 percent on average during 2002-11. This was achieved by running a more prudent fiscal policy to eliminate the need for monetary financing, recapitalizing the central bank, enshrining its independence into law, and establishing an inflation targeting framework. Oversight and regulation of banks were also strengthened and banks gradually worked down their problem loans, freeing up resources for new lending. Investors have rewarded the Philippines for its improved governance and policies, and the result is record low borrowing costs that are helping government finances and giving a boost to economic growth.
Finally, remittance inflows from Filipino workers abroad-now amounting to 10 percent of GDP per year—have underpinned faster consumption growth and reduced reliance on potentially volatile capital flows, raising average growth and reducing its volatility.
So on the whole, I believe that the future is bright for the Philippines if policymakers can sustain and build on the impressive progress that has been made.
So I would say that the Philippines is an excellent role model for other countries in similar situations. The lesson is that setting up and sticking to a coherent and mutually reinforcing framework of good policies and good governance are essential.