Lagarde: Global action needed for global recovery
Editor's Note: Christine Lagarde is Managing Director of the International Monetary Fund. For more, visit Project Syndicate or follow it on Facebook and Twitter.
By Christine Lagarde, Project Syndicate,from Global Public Square/CNN website, September 26, 2011
The global economy has entered a dangerous new phase. There is a path to sustained recovery, but it is narrowing. To navigate it, we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction.
One of the main problems today is too much debt in the global financial system – among sovereigns, banks, and households, and especially among the advanced economies. This is denting confidence and holding back spending, investment, and job creation. These countries face a weak and bumpy recovery, with unacceptably high unemployment. The eurozone debt crisis has worsened, and financial strains are rising. Political indecision in some quarters is making matters worse. Social tensions bubbling beneath the surface could well add fuel to the crisis of confidence.
In these circumstances, we need collective action for global recovery along four main policy lines: repair, reform, rebalancing, and rebuilding.
First, repair. Before doing anything else, we must relieve some of the balance-sheet pressures – on sovereigns, households, and banks – that risk smothering the recovery. Advanced countries need credible medium-term plans to stabilize and reduce public debt.
But consolidating too quickly can hurt the recovery and worsen job prospects. There is a solution. Credible measures that deliver and anchor savings in the medium term will help create space to accommodate growth today – by allowing a slower pace of consolidation. Of course, the precise path is different for each country, as some are under market pressure and have no choice, while others have more space.
It is also important to relieve pressure on household and banks. With respect to the United States, I welcome President Barack Obama’s recent proposals to address growth and employment; actions like more aggressive principal-reduction programs or helping homeowners to take advantage of low-interest rates would also help. And, in Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation. In addition, to support growth, banks must have sufficient capital buffers.
The second issue is reform, with the financial sector a high priority. On the positive side, we have broad agreement on higher-quality capital and liquidity standards with appropriate phase-in arrangements. But substantial gaps remain and must be addressed through international cooperation in order to avoid regulatory arbitrage.
I would also include the social dimension under the reform banner – particularly the need to identify and nurture sources of growth capable of generating sufficient jobs. This is especially important for the young.
The third target of collective action, rebalancing, has two meanings. First, it means shifting demand back to the private sector when it is strong enough to carry the load. That hasn’t happened yet.
Rebalancing also involves a global demand switch from external-deficit countries to those running large current-account surpluses. With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery. But this rebalancing, too, has not happened sufficiently, and if the advanced economies succumb to recession, nobody will escape.
The fourth policy imperative is rebuilding. Many countries, including those with low income levels, need to rebuild their economic defenses – for example, by strengthening their budget positions – to protect themselves against future storms. This will also help to provide the space for growth-enhancing public investment and important social safety nets.
In these circumstances, the International Monetary Fund – with its 187 member countries – is uniquely positioned to foster collective action. Our policy advice can help shine a light on the pressing issues of the day – growth, core vulnerabilities, and interconnectedness. Our lending can provide breathing space for countries in difficulty. And, looking beyond the crisis horizon, the IMF can also help construct a safer and more stable international financial system.
This is no time for half-measures or muddling through. If we seize the moment, we can navigate our way out of this crisis and restore strong, sustainable, and balanced global growth. But we need to act quickly – and together.
The views expressed in this article are solely those of Christine Lagarde. Copyright: Project Syndicate, 2011.
"we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction."
There is no doubt that Ms Lagarde's prescription is balanced, comprehensive, wise and necessary. What is not certain, in the eyes of many observers, including this one, is the capacity of the world leaders to find, summon, mobilize, (pick your own word) the political will to bring her prescription, or some close variant, into being. We read cynical columns like the one recently by Margaret Wente of the Globe and Mail, in which she complains about the gap between the size of the world's problems an dthe "little men" who are attempting to deal with them. One can expect such derision from a feminist, given the size of the proportion of male global leaders to female leaders. However, there are significant and complex political and economic and historic realities that must be overcome if Ms Lagarde's prescription can have a chance.
First there is innate nationalism everywhere, and much of this is increasingly inward looking, given the level of fear even paranoia that exists in many countries, including the U.S. Clauses like "buy American" in bills that call for rebuilding infrastructure do not engender multi-national co-operation, even between two large trading partners, in normal circumstances.This example is currently being played out between Canada adn the U.S. two traditional trading partners after the U.S.congress passed a law calling for "buy American" in procurement contracts for infrastructure rebuilds. "If our country is facing a cliff, what resources can we spare with other countries to prevent them from falling off a similar cliff?" seems to be a central theme of many.
Second, there is a long history of bilateral agreements in trade, in national security, in reciprocal exchanges of ambassadors, students and even workers, that can often work to the advantage of both parties, but does not necessarily lead to multilateral co-operation. And even when it does, if the needs of the multilateral group appear to trump those of the bilateral agreements, many continue to cling to those bilateral agreements because they feel safer and more confident that both parties will comply with the terms of the agreement.
Third, there are not so insignificant competitive underpinnings to much of the dialogue between and among countries, that would seem to have the potential to undermine the veneer of diplomacy required for co-operative, collegial commitments from all world leaders. For example, when a Chinese construction company is given a sizeable contract to build or rebuild a bridge betwen Oakland and San Francisco, and they bring hundreds of Chinese workers onsite to complete the contract, there is little wonder that when the U.S. media uncovers this kind of contract, there will be even more cocooning, politically speaking, inside the U.S. because jobs that could have been filled by Americans working for an American company were contracted out, based on price primarily. Of course, when the reporters sought American companies and asked if they could have competed, if offered the contract, many companies replied in the affirmative.
Fourth, there is a long history of geopolitical conflict on the front commonly known as "empire building" or developing significant influence among a block of countries by the super-powers Russia, China, the U.S. and formerly Great Britain and France and this theme has not been completley abandoned. China, for example, is pouring considerable investments into Africa for the building of roads, infrastructure projects and technological development, likely for the purpose of enhancing its own economic and politial growth in that continent. They have redefined "foreign aid" by turning it into concrete and steel and digital projects "for the benefit of the indigenous Africans. And in the process, have grown a considerable, positive reputation for their efforts.
Lastly, there is in the corner of the rooms where world leaders meet some growing elephants, like China's superpower status, in terms of holding much of the wealth, and thereby the debt, of the western countries. Naturally, that gives them added leverage in any discussions about finding solutions to these vexing problems.A state-run economy is far more adaptable to emerging exigencies than one that is operated by multiple corporations whose raison d'etre is to provide dividends for their shareholders. And so the pursuit of profit is another subset of the issue of the elephant(s) in the room.
So long as private enterprise is in effect in charge in some countries(U.S.) and state-managed economies operate in others (China), while varying combinations operate in other countries, there will be additional hurdles to both the language needed for the discussions and to the agreements needed to solve the crisis. Currently defined as an economic crisis, it is also a political crisis and merging those two languages, cultures and opinions is not the most teflon-like process.
Also in the subset of "elephants" is the ego-factor linked to the political realities at home, for all political leaders. Just this weekend, while Finance Ministers met in Washington, people took to the streets in Athens, protesting changes to Greece's laws to impose higher taxes, and other austerity measures demanded by the international community, as the price for supporting a bale-out of Greece's debt. A plan agreed to in Washington will be instantly announced in Athens, provinding impetus for instant mass reactions requiring police control of civil disobedience back home.
It is certainly not "little men" and "big problems" that adequately describes the current geopolitical situation. Even big men and big women....meaning people with huge political bank accounts, and large reserves of political will and the highest of both ideals and intentions will still face large mountains to climb with few, if any, sherpas to guide them to the top of those mountains we all need them to conquer.And perhaps the sooner the politicians admit that the are attempting to solve a political crisis first, and an economic crisis second, they will be closer to confronting the need for that political will that Ms Lagarde sees as essential to a solution.