The power of partnership : selected speeches by Christine Lagarde, 2011–2019. 9781513509907, 151350990X

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I N T E R N A T I O N A L

M O N E T A R Y

The Power of Partnership SELECTED SPEECHES BY

Christine Lagarde 2 011– 2019

F U N D

©International Monetary Fund. Not for Redistribution

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©International Monetary Fund. Not for Redistribution

The Power of Partnership SELECTED SPEECHES BY

Christine Lagarde 2 011– 2019

I N T E R N AT I O N A L M O N E TA R Y F U N D Washington, DC

©International Monetary Fund. Not for Redistribution

Cover photo by Karla Chaman. Christine Lagarde met Maximiliana Taco during a visit to Ayacucho, Peru in 2014. Maximiliana Taco is featured in the speech “Brothers and Sisters, There is Much to Do” on page 115.

Copyright © 2011-2019 International Monetary Fund Washington, D.C. 20090, U.S.A. All Rights Reserved

ISBN: 978-151350990-7 (paper)

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Contents Foreword............................................................................................................................................................. v Forging a Stronger Social Contract: The IMF’s Approach to Social Spending........................... 1 The Financial Sector: Defining a Broader Sense of Purpose............................................................ 9 Age of Ingenuity: Reimagining 21st Century International Cooperation................................ 23 Winds of Change: The Case for New Digital Currency................................................................... 37 A Compass to Prosperity: The Next Steps of Euro Area Economic Integration..................... 47 A Time to Repair the Roof.......................................................................................................................... 57 Central Banking and Fintech: A Brave New World?........................................................................ 67 Making Globalization Work for All........................................................................................................ 77 Addressing Corruption Openly................................................................................................................. 87 Demographic Change and Economic Well-Being: The Role of Fiscal Policy......................... 101 Brothers and Sisters, There Is Much to Do......................................................................................... 115 Lifting the Small Boats............................................................................................................................... 125 The IMF at 70: Making the Right Choices—Yesterday, Today, and Tomorrow.. .................. 139 Economic Inclusion and Financial Integrity..................................................................................... 149 Daring the Difference: The Three L’s of Women’s Empowerment................................................ 159 A New Multilateralism for the 21st Century..................................................................................... 169 The Global Calculus of Unconventional Monetary Policies........................................................ 183 Global Risks Are Rising, but There Is a Path to Recovery.. ........................................................... 195 Complete List of Speeches, Blog Posts, and Articles................................................................... 205 About Christine Lagarde......................................................................................................................... 221

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“There are two ways of spreading light: to be the candle or the mirror that reflects it.” EDITH WHARTON

Inside this compilation of selected speeches by Christine Lagarde, Managing Director of the International Monetary Fund from 2011 through 2019, you will find both the breadth and depth of the insights that she brought to the Fund and shared more broadly with the global economic community. Her speeches cover some of the most pressing fiscal, monetary, and financial issues facing the world today: from focusing on excessive inequality to strengthening the global trading system; from showing the enormous growth potential of raising female labor force participation to highlighting the gaps in financial stability. As you read these speeches, you quickly appreciate that this is a leader with a clear sense of the world she wants to help improve and, more importantly, one who provides direction on how to get there. The lodestar through this journey is multilateralism and the need for more international cooperation. Known affectionately inside the Fund as “MD,” we, her current and previous management team— David Lipton, Mitsuhiro Furusawa, Tao Zhang, Carla Grasso, Min Zhu, Naoyuki Shinohara, and Minouche Shafik—and Directors of the departments and offices at the IMF, wish through this volume to pay tribute to her extraordinary ability to inspire. The MD is both the candle and the mirror. She knows when to provide that guiding light of ideas, which can lead us to an effective solution. Yet, as an exceptional leader, she also helped each of us shine bright. We are truly indebted to her leadership, her vision, and her kindness.

IMF Management Team and Heads of Departments and Offices September 2019

FOREWORD

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Forging a Stronger Social Contract

The IMF’s Approach to Social Spending Delivered at the International Labour Conference of the International Labour Organization in Geneva on June 14, 2019

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ood afternoon. It is an immense privilege to address you today in this magnificent Palais des Nations, which stands as an enduring emblem of multilateralism. Let me thank my most gracious host, my dear friend Guy Ryder, who himself stands as a towering pillar of the global common good. To my friends at the International Labour Organization [ILO]: congratulations on your centennial! For a hundred years now, you have served the noble cause of social partnership and social justice. When you think about it, the founding of the ILO has a lot in common with the founding of the IMF. You were founded after the First World War, on the premise that lasting peace is founded on social justice. We were founded after the Second World War, on the premise that lasting peace is founded on economic cooperation between nations. You bring together the social partners in the service of ensuring decent work for all— knowing that decent work is not only about a paycheck, but is also a source of meaning, purpose, and dignity. We bring together the nations of the world—189 of them—in the service of promoting financial stability and sustainable and inclusive economic growth— knowing that this is a precondition for true human flourishing. In this context, my topic this afternoon— social spending—could not be more relevant. Relevant to both of our institutions. Relevant to the challenges facing our global economy.

Social Spending— A Key Policy Lever Let me begin by defining my terms. By social spending, we mean social insurance, social assistance, as well as public spending on health and education. Hence social spending is a broader concept than social protection as it includes spending on health and education—which are especially critical in low-income and developing countries. There is no doubt that these programs are vital to promoting the well-being of citizens and social cohesion. Public pensions can make all the difference between poverty and a dignified life for our elderly loved ones. Health care does not just save lives; it extends them and improves their quality. Primary and secondary education give our youngest citizens the opportunity to reach their full potential and contribute to society. At a deeper level, I would argue that social spending is a core component of the social contract needed to fulfill the missions of our respective institutions. This is not a new insight. The importance of providing financial security to citizens to keep the peace and foster harmonious social relations is a lesson that goes all the way back to the ancient civilizations. It is a lesson learned during the industrial revolution, as politicians responded to new social and political challenges with different forms of social protection—think of the Bismarckian reforms in Germany.

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Social spending must take its rightful place at the center of macroeconomic policy discussions.

It is a lesson learned after the darkest days of the 1930s. Economic historian Barry Eichengreen makes a convincing case that the vastly different political paths taken by Germany and the UK over that decade were at least partly due to the UK’s better-functioning unemployment insurance scheme in the face of crippling unemployment. And it is a lesson learned in the postwar era, when the three decades of strong and shared growth in the advanced economies—les trente glorieuses—were underpinned by an accompanying social contract with broad participation and widespread social and political support. What this tells us is that for economies to be resilient and growth to be sustainable, this growth needs to be inclusive—which calls for social spending. This in turn provides the social and political buy-in for growth-supporting policies—and in doing so, builds trust.

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The bottom line: social spending matters. It matters today as we are bombarded by new challenges. More retirees, fewer workers. The effects of technology on work and wages. Rising inequality and demands for greater fairness. Barriers to women participating in the economy and realizing their full potential. The existential threat of climate change. Diminishing trust, rising discontent, and a turn away from global cooperation. There is no simple policy response to these complex challenges. Yet while social spending is not the only lever in such a response, it is undoubtedly one of the most important. It is no surprise that surveys indicate rising public support for income redistribution policies in many countries. Social spending must take its rightful place at the center of macroeconomic policy discussions.

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The IMF’s Strategy on Social Spending With this in mind, let me now address the IMF’s new strategy on engaging in social spending issues, which is being published today. As social spending issues have become increasingly important for our members over the past decade, we have significantly stepped up our engagement on inclusive growth and social spending. For instance, our analysis has found that high inequality can undermine sustained growth. Research has also found that public investment in health and education boosts productivity and growth, and reduces inequality of opportunity and income. Likewise, social spending programs that redistribute from higher-income to lower-income groups can decrease poverty and inequality. They can also increase the resilience of lower-income households to economic shocks—including from demographics, technology, and climate— which are expected to become more frequent and disruptive. At the country level, we found that four out of five IMF mission chiefs—the people who lead our engagement on the ground—view social spending as “macro-critical” in their countries. This is important, because macro-criticality is the quintessential trigger for IMF engagement on all structural issues. And nearly half view social spending as essential to sociopolitical stability and investing in people. For all these reasons, we have stepped up our engagement on social spending at the country level. For example, we helped Ghana create the fiscal space to increase spending on public education—so that it can achieve its goal of universal secondary education.

We helped Japan develop options for pension reform, so necessary in an aging society. In Cyprus, we helped the government strengthen the social safety net during a time of severe crisis—including with the introduction of a new guaranteed minimum income program. Likewise, in Jamaica we supported the expansion of social assistance programs during a period of belt-tightening. In all of our programs, protecting the poor and vulnerable is now, and will continue to be, a core objective. At the same time, we are providing technical assistance to countries to help them raise more domestic revenue—support in this area nearly doubled between 2010 and 2018. And we estimated the additional spending needed to finance core SDGs—health, education, and priority infrastructure. We found that this requires an extra 15 percentage points of GDP on average for low-income developing countries in 2030. It is clear, then, that social spending is not just an expense, but rather the wisest of investments in the well-being of our societies. Expansion of access to education and health generates broader productivity gains across the population, allowing all citizens to flourish. To reap the rewards of a stronger global economy tomorrow, we must begin by strengthening social programs today. But at the same time, we cannot play the role of Pangloss. In the real world, the best of intentions run up against the firmest budget constraints.

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…social spending is not just an expense, but rather the wisest of investments in the well-being of our societies.

So, how do we move forward? We must start from the premise that social spending needs to be adequate, yet also efficient and financed sustainably. Spending adequacy. Spending efficiency. Fiscal sustainability. These are the yardsticks we will use to assess the macro-criticality of social spending. We expect this new strategy to lead to more effective IMF engagement on social spending issues, and to strengthen the quality and consistency of our policy advice. It collects best practices gleaned from years of engagement on social spending issues and lays out a clear road map for consistently applying these best practices to our engagement. Over the next year and a half, we will flesh out the strategy by providing more specific guidance to our staff underpinned by augmented tools and databases; ongoing analytical work; and background notes on issues such as pensions, social assistance, education, and health.

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Our strategy should ensure that our engagement is more consistent and hopefully more effective—and also better tailored to our members’ specific preferences and circumstances.

A Partnership for Success Doing things better, however, will require a little help from our friends—and this brings me to my final point today: the need for a “partnership for success,” a key pillar of our strategy. That means all of us working together—international organizations, academics, country authorities, civil society, and the private sector. This is why we undertook a broad consultation process when developing the strategy. I believe it has greatly benefited from this engagement—and here, a big “thank you” goes to the ILO.

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This experience has shown clearly that close engagement between the IMF and organizations like the ILO can prove highly valuable. You have significant expertise on social spending that can help IMF teams. And we can help by raising the profile of social spending issues in the broader economic policy discourse surrounding stability and growth. We would also benefit from closer collaboration with other stakeholders. Civil society, academics, think tanks, and labor unions all offer unique perspectives on social spending— and these perspectives can enrich the IMF’s view, help us to resist any temptation toward groupthink, and enable us to better appreciate country-specific circumstances. Of course, there is no one-size-fits-all when it comes to designing social spending programs to reduce poverty, boost inclusion, and protect vulnerable households. Countries have different preferences, face different challenges, and hold different long-term aspirations. But by working together, we can

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ask the right questions and hopefully find the right answers. At the end of the day, we have an obligation to the poor and vulnerable; to those facing financial insecurity and poor health; to those left behind with few opportunities, including women and girls; and to future generations. We have an obligation to help countries achieve the Sustainable Development Goals by 2030. As Franklin D. Roosevelt—a great friend and supporter of the ILO—once wisely noted, “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.” This is not just ethically right; it is economically sound. Let us work together to develop social spending policies that are both smart and compassionate. Thank you very much.

Let us work together to develop social spending policies that are both smart and compassionate.

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The Financial Sector

Defining a Broader Sense of Purpose Delivered at Guildhall as part of the World Traders’ Tacitus Lecture series in London on February 28, 2019

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am honored to have been invited to deliver the Tacitus lecture in this magnificent Guildhall. I am also fortunate to be among so many friends, including former colleagues, who know that I have a weakness for good stories. Let me start with a Hollywood story. As you may know, Disney was recently faced with the challenge of creating a sequel to the original Mary Poppins movie, which has delighted children and adults for more than half a century. The producers of the new film recreated the magical nanny from P.L. Travers’ books, but they also featured a new cast of characters— including a villain who could give everybody a good scare. That villain—yes, you guessed

it—is a slick banker who is cheating his way to fortune. In the end, of course, the villain is defeated with a touch of magic. So here is the question: why is the banker the villain? After all, a healthy economy requires a healthy financial sector that is at the service of people as they pursue better lives for themselves and their children. You might call it the “everyday magic” of finance: helping families buy a home or save for retirement, helping businesses raise capital to support growth and employment, and helping ordinary people manage risks and prepare for a rainy day. That is what most financial professionals do every day, with dedication and a sense of pride.

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A healthy economy requires a healthy financial sector that is at the service of people … helping families buy a home or save for retirement; helping businesses raise capital to support growth and employment …

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And yet, despite these good aspects, the caricature of the “bad banker” has resonated with audiences since the dawn of civilization. And its latest version—seen by millions of children around the world—is telling us something about the deeply felt sense of unease about the role of finance in today’s world. It does not take magic to trace much of this most recent frustration back to the global financial crisis, which has left painful economic and psychological scars on millions of people. We know also that many people are angry about the steady drip-drip of financial scandals and misconduct that have occurred all over the world. Indeed, financial globalization has been one of the key drivers of what Theodore Roosevelt called the “swollen fortunes for the few.”1 It seems we may now be in a new Gilded Age, with high economic inequality and low social mobility. On Wall Street, for example, overall compensation levels have been reaching record highs,2 and there is a similar trend of moving back to precrisis pay levels in other financial centers.

No wonder that growing concerns about finance can be heard across the political spectrum—and not just about the issues of the day, but about the fundamental purpose of this industry. In too many cases, the financial sector has strayed from its original, noble purpose. And too often, it has worked hard to serve itself rather than serve people and the economy at large. Surely, there must be a better way forward— which brings me to my theme: I believe that we can build a better financial sector—one that is safer, more sustainable, and ethically sound. A financial industry with a broader sense of purpose. In this vein, the United Kingdom has launched a national conversation on how to enhance the social impact of investing—furthering the goal of doing good while making a return.

“ ” In too many cases, the financial sector has strayed from its original, noble purpose.

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I believe that we can build a better financial sector—one that is safer, more sustainable, and ethically sound.

This goal is not just morally just; it is economically right. Why? Because a better financial sector is more important than ever to help deliver on what our 21st century so badly needs: higher employment, greener growth, and good living standards for all. The key to achieving this goal is to reshape finance into something that is more aligned with societal values and more connected to the interests of all stakeholders: from customers, to workers, to shareholders, to local communities and future generations. To do this, we will need more than just a touch of Mary’s famous brolly [umbrella]. So let me propose two questions: • First, how can we make the financial system safer—to encourage the good, not the bad, side of finance? • Second, how can the financial sector support long-term growth that is more sustainable and more inclusive?

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How Can We Make the System Safer? Let me begin with a simple observation: if finance is to become safer and more trustworthy, it will need to harness good innovation, better regulation, and a broader sense of responsibility.

GOOD INNOVATION

Students of history will tell us that these issues have resonated through the ages. For one, it is remarkable just how much influence financial innovation has had on human progress. Think of its instrumental role in the development of writing, mathematics, accounting, and probability theory. Consider Chinese paper money introduced in the ninth century, or the thirteenth century Venetians who eagerly bought prestiti, the first true government bonds.3 And think of how we can draw a line from the first stock exchanges—in Antwerp and Amsterdam—to our modern investment apps that put the global financial markets at our fingertips.

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At the same time, history tells us about unsustainable credit booms and speculative bubbles that were driven by bright new financial ideas. In ancient Rome—in the year 33 AD—land prices crashed after noble families took out loans to bet on ever rising land prices. Ultimately the government of Emperor Tiberius bailed out the investors by extending three-year, interest-free budgetary loans. How do we know this? Tacitus himself briefly described this financial crisis in his final works.4 But this is only one of many examples. In the 17th century Tulip Mania, it was a new market for futures contracts. In the 18th century South Sea Bubble, it was the promise of a mythical new land. In the 19th and 20th century, it was often new technology, from the Railway Mania to the dot com bubble.5 And of course, in the run-up to the global financial crisis, it was financial engineering that helped drive a frenzy of reckless risk taking. So, when Lehman Brothers collapsed, policymakers were facing what I once referred to as a “holy cow moment.” The most striking thing for all of us back then was the incredible fragility of so many advanced-economy banks. At their very core, these firms had been weakened by inadequate equity capital, flawed business models, and the blindness of powerful men—a toxic combination that left taxpayers on the hook for massive bank bailouts. Fast-forward to the present, and the question is whether financial systems are safer today. The short answer is that they are safer, but not safe enough.

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BE T TER REGULATION The good news is that, over the past decade, countries have worked together to reform global financial regulations to help rebuild trust and restore financial health. This ambitious effort—in which the IMF, the Financial Stability Board, the G20 and many others have been involved—has made a substantial difference. Banks have much higher capital and liquidity positions. Big banks face tighter regulation, and their leverage is lower. Winding down failing banks has become much easier in all major jurisdictions and in many emerging economies. And a big chunk of the derivatives market has become significantly more transparent. This is all good, but still not good enough. We need further efforts to address the potential dangers of “too big to fail” as banks become even bigger and more complex. In the United States, for example, the top five banks now hold about 45 percent of total banking assets, compared with about 40 percent in 2007.6 Meanwhile, leading economists and industry experts have been calling for further increases in equity funding—beyond the current capital requirements—to ensure that banks can withstand a potential storm.7 Others are not so sure—because further increases in equity funding might come with negative side effects, such as reduced lending. So far, the evidence points to relatively small costs of higher capital.8 Above all, we must be concerned about increasing efforts to roll back some postcrisis regulations. Countries need to resist

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Making finance safer and more trustworthy is not just about good innovation and better regulation. It is also about a broader sense of individual and collective responsibility.

these pressures. Indeed, they need to push on because more work and political will are required to fully implement the existing reforms. And even as policymakers are still internalizing the lessons from the last crisis, they need to be vigilant about new risks. For example, the IMF has recently estimated that cyberattacks could potentially lead to net income losses in the global banking system of up to $350 billion.9 Or think of a sharp adjustment in asset prices that could affect the fast-growing shadow banking sector. That part of the financial world comes with many regulatory blind spots that should be addressed. For instance, we believe that countries need to regulate underwriting standards in high-risk debt markets, including leveraged loans. Of course, making finance safer and more trustworthy is not just about good innovation and better regulation. It is also about a broader sense of individual and collective responsibility.

BROADER RESPONSIBILTIY

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Responsible behavior has a lot to do with incentives, especially monetary incentives. There is no question that remuneration policies in the banking sector were driving reckless risk-taking before the financial crisis.

As one analyst10 put it: “Employ as little equity as one can; promise a high return on equity; link bonuses to the achievement of this return target in the short term; and ensure that as few as possible of those rewards are clawed back in the event of catastrophe.” We know how that story ended. And we know that there is a widely-shared perception that those who caused the crisis did not face the consequences, while ordinary people paid a heavy price. Many people actually saw this as the ultimate breach of public trust. So what has changed since then? For one, postcrisis reforms have significantly moved the needle by better aligning individual pay with the health of the firm.

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If you are a senior banker here in the City, 40 to 60 percent of your variable remuneration is deferred over 3–7 years.11 And it can be reduced, cancelled, or clawed back in case of poor performance and misconduct. In other words, bankers have more skin in the game. In the United Kingdom, senior bankers and traders also have to comply with the so-called Senior Manager and Certification Regime, which has increased accountability and is helping firms to set a better “tone at the top.” Here I would like to commend my former IMF colleague, Minouche Shafik, who in her role as deputy governor of the Bank of England did so much to promote codes of conduct for financial markets. Certainly, more can be done: from making claw-backs more consistent across countries, to enhancing the disclosure of disciplinary actions within firms, to creating a global code of conduct. And let us not forget the power of criminal and civil liability. In major financial centers, we see a more forceful pursuit of individual wrongdoing. But the brunt of legal action— amounting to billions of dollars in fines—is borne by financial firms, where it is too often perceived simply as a cost of doing business.

VALUES AND E THICS The reality is that even the toughest legal sanctions, and the smartest compensation and governance rules, cannot be substitutes for a strong individual responsibility that is grounded in values and ethics. For it is not just the “tone at the top” but the “response

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from the bottom” that creates a better and more trusted corporate culture. That is why the financial industry needs what I call an “ethics upgrade.” What do I mean? For financial professionals, it simply means doing the right thing—even when nobody is watching. It sounds so simple, and yet it is perhaps the hardest thing to do. Remember: the word “credit” comes from the Latin word for “trust,” which is the lifeblood of the financial system. But trust itself cannot be manufactured or mandated. It must be earned through virtuous behavior that is intrinsically motivated—again, done even when nobody is watching. Here one could draw inspiration from Aristotle, who argued that we are all driven by a sense of purpose. We can achieve our purpose by developing virtues, such as justice, courage, self-control, prudence, generosity, and honesty. Aristotle believed that this was the key to genuine happiness. That spirit can also help achieve a purposeful banking career and a safer and more trusted financial system. But this is not the whole story. Aristotle also believed that individual purpose must always be linked to social purpose, to the common good. This applies to all aspects of our life—including corporations and financial firms. The “goal” of a corporation cannot be just about its own narrow financial interest. It must also encompass a broader common responsibility. It is not surprising, therefore, to see growing debates about the nature of modern corporations and the concept of maximizing shareholder value.

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The financial industry needs what I call an ‘ethics upgrade.’ It simply means doing the right thing— even when nobody is watching.

As the British economist Colin Mayer12 put it: “For nearly all of its 2,000-year history, the corporation has combined a public purpose with its commercial activities. It is only over the last 60 years that the idea that profit is the only purpose of business has emerged.” I believe that encouraging a broader common responsibility is now more important than ever—not just for today’s stakeholders, but for future generations. Which brings me to my second question: how can the financial sector support long-term growth that is more sustainable and more inclusive?

How Can Finance Support Sustainable and Inclusive Growth? Let me start with a data point. Over the next 15 years, $24 trillion of wealth will be inherited by millennials—and they are more than twice as likely as other generations to invest

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in companies or funds that target social or environmental outcomes.13

The financial industry has seized this opportunity by offering various forms of impact investing, green bonds, and a panoply of fund products that take account of ESG—environmental, social, and governance issues. Clearly, sustainable investing is booming. But it also points to a deeper issue: whether you are a banker, fund manager, or fintech entrepreneur, you are probably wondering how to take a more sustainable approach that is both economically and ethically right. This offers us a huge opportunity to redefine the magic of finance, to pursue a broader sense of purpose.

FINTECH The immediate priority should be to foster cutting-edge financial technology. This means creating fintech products that are substantially cheaper and more accessible. It means serving

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customers and communities in new and better ways. It also means rethinking the economics of the financial industry itself. In the United States, for example, the unit cost of financial intermediation has remained largely unchanged over the past century, while income from finance has risen and fallen with the value of financial assets.14 That suggests a significant amount of rent extraction. The fintech response is to increase competition, reduce inefficiencies, and provide better value for money to individuals and small businesses. In doing so, fintech can help drive an “inclusion revolution.” In Kenya and China, mobile payment systems have brought millions of previously “unbanked” people into the financial system. In Latvia, Brazil, and elsewhere, peer-to-peer lending has opened up new sources of credit for small businesses. Around the world, blockchain enables faster and cheaper transactions—from trading securities to sending money to relatives abroad. And this is just the beginning. Let us not forget that 1.5 million15 adults in the United Kingdom still have no bank accounts, and about 33 million United States households are under-or unbanked16—and

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those numbers are multiplied in emerging markets and developing countries. So there is a huge opportunity to boost financial inclusion which—as we know—leads to stronger growth and higher employment. This in turn requires vibrant digital ecosystems, such as London—which is home to the biggest cluster of fintech startups in Europe. But fintech cannot do it alone. We also need better regulation and smarter supervision to ensure that fresh sources of credit do not encourage people to overborrow and that personal data is protected against prying eyes and criminals. In other words, banking-type fintech services should be subject to banking regulations, especially when it comes to consumer protection. For new firms, this means working with regulators to unlock the immense potential of fintech, while managing the risks. That is the goal of the Bali Fintech Agenda launched by the IMF and World Bank last October.17 It provides key principles—including on promoting competition and consumer choice, and fighting money laundering— which can help guide our joint endeavors in the period ahead.

Fintech can help drive an inclusion revolution.

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FEMALE LEADERSHIP Of course, the inclusion revolution goes beyond fintech. It also encompasses the need for more diverse leadership in finance. I say this for two reasons. First, greater diversity always sharpens thinking, while reducing the potential for groupthink. And second, diversity also leads to more prudence and better decision-making. Our own research18 bears this out: a higher share of women on the boards of banks and financial supervision agencies is associated with greater financial stability—which underpins stronger and more durable growth. There is a long way to go here. Across the globe, only 2 percent of bank CEOs are women; and less than a fifth of bank board members are women.19 Here in the United Kingdom, the Hampton-Alexander Review has been urging the largest listed companies to increase the proportion of women on boards to at least one-third by 2020.20 Would quotas make a difference? The answer is yes, so long as they are properly designed and implemented. A good example is Norway where, over five years, mandatory quotas supported a fourfold increase in the proportion of women on corporate boards.21 Clearly, more female leadership is critical— and not just at the top, but as consumers of financial services. Women all over the world are making their voices increasingly heard when it comes to investing their own money. For example, recent surveys22 show that women are far more likely to engage in

sustainable investing than men. And they are driving demand for new products, such as funds targeting gender equality in corporations. That spirit is beautifully captured by the Fearless Girl statue on Wall Street—which brings me to my final point.

INVESTING FOR THE GLOBAL PUBLIC GOOD I believe that fearless action and fresh ideas are needed more than ever to invest for the global common good. Think about it: trillions of dollars in private-sector investments will need to be mobilized to tackle climate change and to achieve the Sustainable Development Goals (SDGs)—which are aimed at eliminating poverty by 2030 and, more than this, making the planet a better place for our children and grand-children. These goals—endorsed by the global community—constitute a daunting challenge. But they are also a huge opportunity—especially for the financial sector. Only a few years ago, the financial industry perceived climate risk as a distant threat. Governor Mark Carney famously called it the “tragedy of the horizon.”23 That time horizon has since shifted much closer to the present. Major hurricanes in the Caribbean, wildfires in California, severe flooding in parts of the United Kingdom: these are but a few of the

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powerful reminders of an economic threat that is already affecting the livelihoods of too many individuals and communities. And there are now growing economic debates over the likely effects of climate change on productivity, incomes, financial stability— even monetary policy, not to mention migration pressures. What does it mean for the financial sector? It means shifting to a more sustainable form of finance that is grounded in better risk management and longer-term thinking. It also means mobilizing more finance for investment opportunities in people and infrastructure. For example, the IMF recently estimated that the additional spending needed by lowincome countries to achieve the SDGs—in key sectors such as health, education, and lowcarbon infrastructure—is about $520 billion per year in 2030.24 That gap can only be filled through a combination of public and private resources: from

bank lending, to project finance, to so-called “blended finance”—which brings together grants, concessional financing, and commercial funding. The key is for public and private investments to be complements, not substitutes. They must go hand-in-hand to create the right conditions for investment. This includes sound economic policies, strong legal frameworks, good governance, and zero tolerance for corruption—whether in the public or private sector. And remember: the SDGs are not just about developing economies. They are designed to promote global growth that is stronger, fairer, and environmentally friendly. If the SDGs are to deliver on that promise, we will also need to harness the momentum of the sustainable investing sector—which already accounts for $23 trillion, or 26 percent of global assets under management.25

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Fearless action and fresh ideas are needed more than ever to invest for the global common good.

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Serving others, not yourself— that is the real magic of finance.

How might this be done? Fund managers could, for example, launch new investment products that encourage corporations to align their business model with the SDGs. They could also work with policymakers to create global standards for sustainability accounting and reporting—this would boost transparency and strengthen the credibility of sustainable investing. As I said: this is the moment when fearless action is absolutely critical; when fresh ideas can help us break the mold; when we join hands to foster the global common good.

Conclusion Let me conclude by returning to Mary Poppins. Remember the scene where the “good banker” teaches his children a lesson about purpose. He argues that they should follow in his footsteps, and he sings the following lines:

“A British bank is run with precision. A British home requires nothing less! Tradition, discipline, and rules must be the tools. Without them—disorder! Chaos! Moral disintegration! In short, you have a ghastly mess!”26

Well, that is one way of putting it. But the question is whether young people today should consider joining the financial industry. For many of them, the answer comes down to finding a broader sense of purpose—much like Mary Poppins. The genius of her character is that she is serving others—with dignity, with a kind heart, with honesty, and with a wicked sense of humor. I think this is a good description of what the financial industry should be all about. Serving others, not yourself—that is the real magic of finance. Thank you.

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ENDNOTES 1 Theodore Roosevelt, “The New Nationalism” (speech, Osawatomie, KS, August 31, 1910). Almanac of Theodore Roosevelt. 2 “Wall Street Salaries Reach Average $422,500, Highest in a Decade,” Bloomberg News, September 17, 2018. 3 William Goetzmann, Money Changes Everything: How Finance Made Civilization Possible (Princeton: Princeton University Press, 2016). 4 Cornelius Tacitus, The Annals of Tacitus, Book XIV (London: Methuen & Co. Ltd., 1939). 5 Gillian Tett, “Have We Learnt the Lessons of the Financial Crisis?” Financial Times, August 31, 2018. 6 IMF staff calculations. 7 John Vickers, “Safer, But not Safe Enough,” (speech, Abu Dhabi, November 29, 2018). Bank for International Settlements. 8 The IMF and standard setters are currently assessing the unintended consequences of higher bank capital. 9 Christine Lagarde, “Estimating Cyber Risk for the Financial Sector,” IMF Blog. June 22, 2018. 10 Martin Wolf, “Financial Reform: Call to Arms,” Financial Times, September 3, 2014. 11 United Kingdom Financial Conduct Authority. 12 Colin Mayer, “Why Paying Taxes Can Be Good News for Companies,” OUP Blog. Oxford University Press, December 7, 2018. 13 “Are Millennials Democratizing Sustainable Investing?” Morgan Stanley, 2017 and Val Srinivas and Urval Goradia. “The Future of Wealth in the United States: Mapping trends in generational wealth.” Deloitte, 2015. 14 Andrew Haldane, “Finance Version 2.0?” (speech, London, Bank of England, March 7, 2016). 15 Karen Rowlingson and Stephen McKay, Financial Inclusion: Annual Monitoring Report 2014 (Birmingham, UK: University of Birmingham, 2014). 16 Federal Deposit Insurance Corporation. National Survey of Unbanked and Underbanked Households. 2017. 17 “The Bali Fintech Agenda.” International Monetary Fund, 2018. 18 Ratna Sahay and Martin Cihak, “Women in Finance: A Case for Closing Gaps” (IMF Discussion Paper, International Monetary Fund, Washington, DC, 2018). 19 ibid. 20 Sarah Gordon, “Shareholders Hold the Key to Unlocking Boardrooms for Women,” Financial Times, November 13, 2018. 21 In Norway, the proportion of women on boards was 9 percent in 2003, and nearly 40 percent five years later. 22 “Sustainable Signals: New data from the individual investor.” Morgan Stanley, 2017 and “Investment by Women, and in Them, Is Growing,” The Economist, March 8, 2018. 23 Mark Carney, “Breaking the Tragedy of the Horizon–Climate change and financial stability” (speech, London, Bank of England, September 29, 2015). 24 Christine Lagarde and Vitor Gaspar. “Give Today’s Children a Chance.” IMF Blog. September 24, 2018. 25 Global Sustainable Investment Alliance and “The EU Wants to Make Finance More Environmentally Friendly,” The Economist, March 22, 2018. 26 Mary Poppins, directed by Robert Stevenson (1964; United States: Walt Disney Studios Home Entertainment).

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Age of Ingenuity Reimagining 21st Century International Cooperation Delivered at the Library of Congress as part of the Library’s Henry A. Kissinger Lecture Series in Washington, DC, on December 4, 2018

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t is an honor to be with all of you tonight. Although he cannot be here this evening, I know we are all profoundly grateful to Dr. Kissinger for launching this important lecture series nearly 20 years ago. Also very much in our thoughts this evening is, of course, former President George H.W. Bush and his family. We all mourn his passing, but celebrate the arc of his life: the pilot who bravely fought in World War II; the President who helped heal divisions after the Cold War; and the statesman who believed in the power of international cooperation. I hope to honor his spirit tonight. Tonight, December 4th is actually an important date for another reason. I will not tell you why just yet. You will have to wait until the end of my remarks. When I walked into the Great Hall this evening I immediately thought about two things. The first are my sons, one of whom is an architect. He would love this magnificent space. The second is my native country, France, as well the country I was just in two days ago for the G20 Summit, Argentina. Why? When this structure was completed in 1897, the chief engineer remarked that the Palais Garnier—the Paris Opera House—was the “prime suggestion” for the new Library of Congress. That makes sense, since the Paris Opera House was completed 20 years earlier, in 1875. Now I think the French may have borrowed a bit themselves. Perhaps from the original Teatro Colón, the Opera House in Buenos Aires, which was finished in 1857.

What does this tell us? Well, first of all, that valuable intellectual property was of great interest across borders, even back then, at least among architects who happily borrowed from each other, learned from one another, and became inspired. Second, it reminds us that they understood that building something lasting means linking the solid foundations of the past with a spark of imagination. That kind of creativity and long-term vision, rooted in history and informed by our successes and failures from the past, is my theme this evening. First, where have we been? How has creativity in international economic cooperation helped bring prosperity and peace to the world. And second, where can we travel together? How can creativity and informed visionary thinking help adapt the international system to our current challenges?

Seventy-Five Years of Creativity and Vision in International Economic Cooperation Let me begin with the shared history of the United States and the IMF over the past 75 years. In the first half of the 20th century, the dominant economic and military powers used force to assert their self-interests at enormous cost in terms of human life and physical destruction. The tragic results compelled nations to find a better way. In 1944, they found it.

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The United States emerged as the major global power and did something unprecedented. Informed by the devastating ultimate outcome of the Versailles Treaty at the end of World War I, the United States decided to use its power in the service of cooperation. It was an experiment that would shape our modern world. In his inaugural lecture in 2001, Dr. Kissinger called the innovations of the postwar period, “a great burst of creativity that brought security to the world.” How did the United States do it? With generosity, with consideration for its self-interest, and with a little help from some friends. Let us look at some of the turning points over the last 75 years.

The principal architects, John Maynard Keynes of the United Kingdom and Harry Dexter White of the United States, were deeply influenced by the period between the great wars. They witnessed a moment in history when flawed domestic policies poisoned international relationships, which themselves were built on troubled foundations. The result was protectionism and competitive currency devaluations. Imploding world trade deepened the Great Depression and caused massive economic, financial, and social upheaval. Ultimately, these pressures gave rise to nationalist and populist movements and, eventually, catastrophe.

Think first of the creation of the Bretton Woods system itself.

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The United States decided to use its power in the service of cooperation. It was an experiment that would shape our modern world.

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The genius of this collaborative system was that it was designed to adapt and change.

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Emerging from the Second World War, the United States and some 40 other countries gathered in Bretton Woods, New Hampshire and decided to create the International Monetary Fund and the World Bank. They charged the Fund with three critical missions: promoting international monetary cooperation, supporting the expansion of trade and economic growth, and discouraging policies that would harm prosperity.

The genius of this collaborative system was that it was designed to adapt and change.

It was revolutionary. It was visionary....And it worked.

At the time, some thought that this particular change would mean the end of the IMF. But all our members, including the United States, knew that the goals of stability and prosperity extended well beyond fixed exchange rates. They recognized the benefits of a global financial firefighter that could help countries in times of need.

From the very beginning, the IMF helped countries address major new challenges through collaboration. Complementing the Marshall Plan, we helped Europe rebuild from the rubble of war. Our loans gave countries breathing space to stabilize their economies in difficult times and implement policies to promote growth. It is a mission that we continue to this day—as you may have seen recently in countries as diverse as Argentina, Egypt, and Ukraine.

In the early 1970s that change arrived. In his landmark speech, “The Challenge of Peace,” President Nixon suspended the US dollar’s convertibility into gold. The decision shocked the world and forced a year-long negotiation that led to the modern floating exchange rate structure.

They built on what worked, changed what did not, and adapted.

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“ ” Solidarity is self-interest. That principle endures in our changing world.

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In response to the oil crisis of 1973, the IMF created new tools to help countries facing an energy emergency in line with the Fund’s role to help smooth shocks and prevent harmful spillovers. As a debt crisis hit Latin America in the 1980s, the IMF, with creative ideas and support from the United States, stepped in to calm the waters. After the fall of the Berlin Wall, we took on a new challenge: helping nations in the former Soviet bloc transform themselves from centrally planned to free market economies. In the 1990s, the IMF assisted countries in overcoming, first, the Mexican peso crisis, and then the Asian financial crisis.

Then came 2008 and the global financial crisis. The ensuing great recession reminded us that international cooperation is essential, not optional. As the French Finance Minister, I was part of that international response. G20 nations and the Federal Reserve took extraordinary steps to save the system. The IMF deployed its own firepower, committing over $500 billion to help secure the global economy. In the decade since, we supported economic programs in over 90 countries and adapted our lending instruments, including zero-interest loans to help low-income countries.

Throughout all of these challenges we continued to help countries around the world with their economic fundamentals—their fiscal, monetary, and exchange rate policies—and with steps to build stronger economic institutions. These efforts enabled better policies that opened markets, boosted trade, created jobs, and unleashed economic potential.

But the global economy needed more than liquidity and stimulus. We worked with our membership to craft stronger financial sector regulations so that, together, we could prevent the next crisis. We learned from the past, got creative, and changed for the better.

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None of this would have been possible without the United States. This country challenged the international economic order when it needed challenging. It forged compromise when compromise was necessary. Why? Because a stronger and more stable world paid dividends for the United States. It enabled the United States to enjoy some of the longest runs of sustained economic growth the modern world has ever known. Since that meeting at Bretton Woods nearly 75 years ago, real US GDP increased by a factor of eight. The average American’s real income has quadrupled.1 This success did not come at the expense of other nations. On the contrary. This country’s collaborative leadership paved the way not only for decades of opportunity here in America, but also for growth that spread across the world.

These transformations can bring enormous opportunities, but also unprecedented risks. Why? Because more than ever before, what happens in one nation can impact all nations. Think about it: From weapons of mass destruction, to cyber-security, to the interconnected financial system, many of our current challenges do not recognize borders. So, when support for international cooperation falters, we must remember the lesson the United States and its allies taught the world over the last 75 years: Solidarity is self-interest. That principle endures in our changing world. Our challenge now is to adapt and reform once more.

Today, the landscape has shifted again. Part of this change is driven by geopolitics and the shift in some economic power from west to east. Part of it by the rise of non-state actors, including multi-national companies. And part of it is driven by technology and the rapid acceleration of everything in our lives. As I am sure the curators of this library are well aware, 90 percent of the world’s data was created just over the last two years. As a daughter of two classics professors, I know my parents would find this fact very hard to believe. But the truth is all things—from information, to money, to disease—travel more quickly in our modern world.

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The Next Chapter: How to Reimagine International Cooperation I believe that this next year, 2019, can be another turning point in our journey—a moment when the world delivers a new burst of creativity in solving our shared challenges. We can draw inspiration from our surroundings. Inscribed on the walls above us are the words of the poet Edward Young, “Too low they build, who build beneath the stars.” Imagine what the world might look like if we fail to build and adapt: We could live in an Age of Anger. By 2040, inequality could surpass the levels of the Gilded Age. Strong tech monopolies and weak governments with ineffective domestic policies could make it impossible for startups and entrepreneurs to succeed. Health breakthroughs could allow the richest to live past 120, while millions of others suffer from extreme poverty and disease. Social media

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would bombard the “left-behind” population, underscoring the disparity between their reality and the possibility of a better life. The aspiration gap fuels resentment and anger. Trust between nations breaks down. The world would be more interconnected digitally, but less connected in every other way. International cooperation for mutual benefit would be a concept studied in libraries like this one, but rarely practiced on the world stage, due to the supremacy of national interests and a singular focus on domestic policies. To borrow from Dr. Kissinger in his book World Order, we might be, “facing a period in which forces beyond the restraints of any order determine the future.” That is a very dystopian scenario, isn’t it? But I do not believe it is our destiny. Neither does Dr. Kissinger, by the way. We have overcome existential threats before and can do so again. Think of the world if we make 2019 the start of a different kind of “AI”—an Age of Ingenuity. This would be a future fueled by creativity and cooperation.

This next year, 2019, can be another turning point…a moment when the world delivers a new burst of creativity in solving our shared challenges.

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Think of the world if we make 2019 the start of a different kind of “AI”— an Age of Ingenuity.

By 2040, we would see flourishing economies predominantly running on renewable energy. Women would be fully empowered in the workforce, proving to be an economic and social game-changer. New pension systems and health care portability would reflect the changing nature of work in the digital economy. Corporations would embrace social responsibility as part of their business models. Technological wizardry could save lives and create millions of jobs. We would see an end to mass migration. Trade would expand across the world and peaceful co-existence between nations would prevail. Am I being too optimistic? I have to be optimistic. I am thinking of the world my grandchildren will inherit. But it does present us with a fundamental choice: stand still and watch discord and discontent bubble over into conflict; or move forward, reimagine the way nations work together, and build prosperity and peace.

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What does this mean in practice? It means countries working together to put people at the center of all of our efforts—focusing on real results that improve lives. It also means governments and institutions being more transparent and accountable—which includes listening to more diverse voices. It means ensuring that economic benefits of globalization are shared by the many, not just the few. I have called this the “new multilateralism.” You might call it common sense. Let me be very clear here: Good international cooperation cannot substitute for good domestic policy. Of course, individual countries have a responsibility for the well-being of their citizens. In fact, strong domestic policies can form the foundation for effective international cooperation. And in our modern world, there are some issues that can only be addressed through international cooperation. I want to discuss four such issues in that respect, tonight. To be successful in each, we will need the creativity and vision of the IMF’s 189 member countries, including our founding member—the United States.

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It means ensuring that economic benefits of globalization are shared by the many, not just the few… I have called this the ‘new multilateralism.’ You might call it common sense.

KE YS TO THE AGE OF INGENUIT Y First, trade. I have been saying for some time now that we need to “fix the system.” More recently I have been urging countries to “de-escalate” trade tensions. It was encouraging to see progress on this front at the G20 over the weekend. Now we must continue the de-escalation, while at the same time improving the trading system for the future. This would include eliminating distortionary subsidies, whichever form and color they take. It would also mean protecting intellectual property rights without stifling innovation and getting rid of rents. New trade agreements could unleash the potential of e-commerce and trade in services. I should stress that better macroeconomic policies would reduce the external imbalances—including trade surpluses and deficits—that have been the backdrop for rising trade tensions. All of this is critical because trade lifts productivity and accelerates innovation.

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My second issue where we need more cooperation: international taxation. Companies now have a world-wide presence, but governments have not figured out a world-wide answer on tax. Right now, too many tax dollars are left on the table thanks to tax optimization and the bad kind of creativity. So countries need to work closely together to collect what is owed and avoid a tax race to the bottom. They can close the loopholes that lead to what is called base erosion and profit shifting. The IMF is working with our partners, so our members can share best practices and devise regulations for a digital economy in which many companies have no single established base of operations. Why the need for this revenue? Because all countries should be investing in their future. Public and private funding working together can strengthen infrastructure, improve education, and prepare all of us to adjust to the technological transformation on our doorstep.

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My third issue: our climate. From the recent major hurricanes in the Caribbean to the wildfires in California, the dangerous effects of climate change are becoming more tangible by the day. A new US government study shows that the economic impact from climate change could significantly reduce America’s GDP in the coming decades. The collaborative agreement reached in Paris in 2015 is the best toolbox we have to start fixing this planetary challenge and move toward a zero-carbon economy. It also reflects the ideas that I have highlighted tonight—creativity, visionary thinking, and a global commitment to the common good that serves self-interest. This is a matter of survival for our children and grandchildren. Now each of these issues—trade, tax, climate—is worthy of its own Kissinger Lecture. But there is one issue that I believe is the bedrock for progress nearly everywhere else. That is why the fourth and final area I want to discuss is good governance, free from the shackles of corruption. The simple fact is that without confidence in our institutions, none of the change we seek will be possible. So, let me focus on this briefly.

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FIGHTING CORRUPTION, PROMOTING GOOD GOVERNANCE Why is corruption so corrosive? Because when people start believing the economy no longer works for them, they start disconnecting from society. Corruption saps economic vitality and siphons off desperately needed resources. The money diverted from education or health care perpetuates inequality and limits the possibility of a better life. The annual cost of bribery alone is over 1.5 trillion dollars—roughly two percent of global GDP.2  Millennials feel the problem acutely. A recent survey of global youth revealed that young people identify corruption—not jobs, not lack of education—as the most pressing concern in their own countries.3  There is wisdom in this insight—because corruption is a root cause of many of the economic injustices young men and women feel every day.

Corruption is a cancer that does not recognize borders.

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That is why the IMF, with the support of all our membership, is scrutinizing anew the impact of corruption on a country’s macroeconomic health. So far, we have worked with over 110 countries on improving their efforts to tackle money laundering and terrorist financing.

If we take on the challenge of corruption, it can be a model for cooperation in each of the areas I have raised tonight. It can be the sign that “the brotherhood of man,” as Keynes called it, is ready once again to meet the call of history. Except this time, women will play a starring role!

And this is only a small part of the wider work needed to promote good governance. Investing in institutions is indispensable, as is persistence to verify that institutions actually deliver.

This is how we start restoring trust, the most precious and in-demand commodity in our society.

Here is the fundamental point: Corruption is a cancer that does not recognize borders. Think of how fintech is changing the economic game. New innovations—including cryptocurrency—can be used by cyber-criminals to funnel illicit financial flows and fund illegal activities worldwide. This is not one nation’s problem or within one nation’s power to resolve. It can only be fixed through cross-border collaboration.

This is how we begin to adapt once more and reimagine international cooperation. This is how, by working together, we can create the Age of Ingenuity.

But it is something fixable. The same innovations that create cross-border challenges can also be used to help us fight back. Through biometrics, blockchain, and more we can find creative ways to build a better, safer system for the long-term. Governments can and must work with the world’s best engineers to build stronger cyber security systems that protect people’s bank accounts and their well-being. This is a common good we must choose to support.

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We must build on what worked, change what does not, and continually evolve, improve, and imagine a better future for all people.

Conclusion Now, before I conclude, there is one thing left to do. I began my remarks by mentioning that December 4th was an important date. On December 4th, 1918, one hundred years ago to the day, President Woodrow Wilson set sail for France to help negotiate what he hoped would be a lasting peace. He became the first sitting US President to travel to Europe. In some ways, we can trace the origins of creativity and visionary thinking in US foreign policy to this date.

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It is a humbling reminder that our plans do not always work out as intended. But it is also a signal that we must try and try again to overcome. We must build on what worked, change what does not, and continually evolve, improve, and imagine a better future for all people. It was the vision that inspired the leaders of this country. It must be the mission that will guide all of us in the days ahead. Thank you. 

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ENDNOTES 1

U.S. Bureau of Economic Analysis (BEA). “National Data.”

2

Corruption: Costs and Mitigating Strategies. IMF Staff Discussion Note. (May 2016)

3 World Economic Forum. Global Shapers Survey 2017.

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Winds of Change

The Case for New Digital Currency Delivered at the Singapore Fintech Festival in Singapore on November 14, 2018

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n Singapore, it is often windy. Winds here bring change, and opportunity. Historically, they blew ships to its port. These resupplied while waiting for the monsoon to pass, for the seasons to change. “Change is the only constant,” wrote the ancient Greek philosopher, Heraclitus of Ephesus. Singapore knows this. You know this. It is the true spirit of the Fintech Festival—opening doors to new digital futures; hoisting sails to the winds of change. And yet change can appear daunting, destabilizing, even threatening. This is especially true for technological change, which disrupts our habits, jobs, and social interactions.

When it comes to fintech, Singapore has shown exceptional vision—think of its regulatory sandbox where new ideas can be tested. Think of its Fintech Innovation Lab, and its collaboration with major central banks on cross-border payments. In this context, I would like to do three things: • First, frame the issue in terms of the changing nature of money and the fintech revolution. • Second, evaluate the role for central banks in this new financial landscape—especially in providing digital currency. • Third, look at some downsides, and consider how they can be minimized.

The key is to harness the benefits while managing the risks.

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The key is to harness the benefits [of technological change] while managing the risks.

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The Changing Nature of Money and the Fintech Revolution Let me begin with the big issue on the table today—the changing nature of money. When commerce was local, centered around the town square, money in the form of tokens—metal coins—was sufficient. And it was efficient. The exchange of coins from one hand to another settled transactions. So long as the coins were valid—determined by glancing, scratching, or even biting into them—it did not matter which hands held them. But as commerce moved to ships, like those that passed through Singapore, and covered increasingly greater distances, carrying coins became expensive, risky, and cumbersome. Chinese paper money—introduced in the 9th century—helped, but not enough. Innovation produced bills of exchange—pieces of paper allowing merchants with a bank account in their home city to draw money from a bank at their destination.

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The Arabs called these sakks, the origin of our word “check” today. These checks, and the banks that went along with them, spread around the world, spearheaded by the Italian bankers and merchants of the Renaissance. Other examples are the Chinese shanxi and Indian hundi bills. Suddenly, it mattered whom you dealt with. Was this Persian merchant the rightful owner of that bill? Was the bill trustworthy? Was that shanxi bank going to accept it? Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision. Why is this brief tour of history relevant? Because the fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money. We are at a historic turning point. You— young and bold entrepreneurs gathered here today—are not just inventing services; you are potentially reinventing history. And we are all in the process of adapting.

A new wind is blowing, that of digitalization. In this new world, we meet anywhere, any time.

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Money itself is changing. We expect it to become more convenient and user-friendly.

A new wind is blowing, that of digitalization. In this new world, we meet anywhere, any time. The town square is back—virtually, on our smartphones. We exchange information, services, even emojis, instantly—peer to peer, person to person. We float through a world of information, where data is the “new gold”—despite growing concerns over privacy, and cybersecurity. A world in which millennials are reinventing how our economy works, phone in hand. And this is key: money itself is changing. We expect it to become more convenient and user-friendly, perhaps even less serious-looking. We expect it to be integrated with social media, readily available for online and person-toperson use, including micro-payments. And of course, we expect it to be cheap and safe, protected against criminals and prying eyes.

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What role will remain for cash in this digital world? Already signs in store windows read “cash not accepted.” Not just in Scandinavia, the poster child of a cashless world. In various other countries too, demand for cash is decreasing—as shown in recent IMF work. And in 10, 20, 30 years, who will still be exchanging pieces of paper? Bank deposits too are feeling pressure from new forms of money.

Think of the new specialized payment providers that offer e-money—from Alipay and WeChat in China, to Paytm in India, to M-Pesa in Kenya. These forms of money are designed with the digital economy in mind. They respond to what people demand, and what the economy requires. Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.

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I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.

A Case for Central Bank Digital Currencies Let me now turn to my second issue: the role of the state—of central banks—in this new monetary landscape. Some suggest the state should back down. Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in custodian accounts, and simply settle payments within their networks. For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent—and if you are tech savvy—you might trust their services. Still, I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust. Should we go further? Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash? Let me be more specific: should central banks issue a new digital form of money? A

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state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm. This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF. Today, we are releasing a new paper1 on the pros and cons of central bank digital currency—or “digital currency” for short. It focuses on domestic, not cross-border effects of digital currency. I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy. This currency could satisfy public policy goals such as (1) financial inclusion, and (2) security and consumer protection; and provide what the private sector cannot: (3) privacy in payments.

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FINANCIAL INCLUSION Let me start with financial inclusion, where digital currency offers great promise, through its ability to reach people and businesses in remote and marginalized regions. We know that banks are not exactly rushing to serve poor and rural populations. This is critical, because cash might no longer be an option here. If the majority of people adopt digital forms of money, the infrastructure for cash would degrade, leaving those in the periphery behind. What about subsidizing cash usage in those areas? But that means that economic life in the periphery would become disconnected from the center. Of course, offering a digital currency is not necessarily the only answer. There may be scope for governments to encourage private sector solutions, by providing funding, or improving infrastructure.

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SECURIT Y AND CONSUMER PROTEC TION The second benefit of digital currency relates to security and consumer protection. This is really a David versus Goliath argument. In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms—banks, clearinghouses, and network operators. Simply by offering a low cost and widely available alternative. Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies—the more people you serve, the cheaper and more useful the service. For a start, private firms may under-invest in security to the extent they do not measure the full cost to society of a payment failure. Resilience may also suffer—with only a few links in the payment chain, the system may stop working if one of these links breaks. Think

Digital currency offers great promise through its ability to reach people and businesses in remote and marginalized regions.

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A digital currency could boost competition by offering a low-cost and efficient alternative [means of payment].

about a cyber-attack, a glitch, bankruptcy, or a firm’s withdrawal from the local market. Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative—as did its grandfather, the old reliable paper note.

PRIVAC Y The third benefit of digital currency I would like to highlight lies in the privacy domain. Cash, of course, allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance. Consider a simple example. Imagine that people purchasing beer and frozen pizza have higher mortgage defaults than citizens purchasing organic broccoli and spring water. What can you do if you have a craving for beer and pizza but do not want your credit score to drop? Today, you pull out cash. And tomorrow? Would a privately-owned payment system push you to the broccoli aisle?

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Would central banks jump to the rescue and offer a fully anonymous digital currency? Certainly not. Doing so would be a bonanza for criminals.

Downsides of Bank Digital Currencies

This brings me to my third area—the potential downsides of digital currency. The obvious ones are risks to financial integrity and financial stability. But I would also like to highlight risks of stifling innovation—the last thing you want. My main point will be that we should face these risks creatively. How might we attenuate them by designing digital currency in new and innovative ways? Technology offers a very wide canvas to do so.

RISKS TO FINANCIAL INTEGRIT Y Let’s return to the tradeoff between privacy and financial integrity. Could we find a middle ground?

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Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default. Anti-money laundering and terrorist financing controls would nevertheless run in the background. If a suspicion arose it would be possible to lift the veil of anonymity and investigate. This setup would be good for users, bad for criminals, and better for the state, relative to cash. Of course, challenges remain. My goal, at this point, is to encourage exploration.

RISKS TO FINANCIAL STABILIT Y The second risk relates to financial stability. Digital currencies could exacerbate the pressure on bank deposits we discussed earlier. If digital currencies are sufficiently similar to commercial bank deposits—because they are very safe, can be held without limit, allow for payments of any amount, perhaps even offer interest—then why hold a bank account at all? But banks are not passive bystanders. They can compete with higher interest rates and better services. What about the risk of bank runs? It exists. But consider that people run when they believe that cash withdraws are honored on a first-come-first-serve basis—the early bird gets the worm. Digital currency, instead, because it can be distributed much more easily than cash, could reassure even the person left lying on the couch!

In addition, if depositors are running to foreign assets, they will also shun the digital currency. And in many countries, there are already liquid and safe assets to run toward—think of mutual funds that only hold government bonds. So, the jury is still out on whether digital currencies would really upset financial stability.

RISKS TO INNOVATION If digital currency became too popular, it might ironically stifle innovation. Where is your role if the central bank offers a full-service solution, from digital wallet, to token, to back-end settlement services? What if, instead, central banks entered a partnership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over. This partnership could take various forms. Banks and other financial firms, including startups, could manage the digital currency. Much like banks which currently distribute cash. Or, individuals could hold regular deposits with financial firms, but transactions would ultimately get settled in digital currency between firms. Similar to what happens today, but in a split second. All nearly for free. And anytime. The advantage is clear. Your payment would be immediate, safe, cheap, and potentially semi-anonymous. As you wanted. And central banks would retain a sure footing in payments. In addition, they would offer a more level playing field for competition, and a platform for innovation. Meanwhile your bank, or fellow entrepreneurs, would have ensured a friendly user experience based on the latest technologies.

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In the world of fintech, we need to harness change so it is fair, safe, efficient, and dynamic.

Putting it another way: the central bank focuses on its comparative advantage—backend settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation. This is public-private partnership at its best.

Conclusion Let me conclude. I have tried to evaluate the case this morning for digital currency. The case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively. More fundamentally, the case is about change—being open to change, embracing change, shaping change. Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.

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In the world of fintech, we need to harness change so it is fair, safe, efficient, and dynamic. That was the goal of the Bali Fintech Agenda launched by the IMF and World Bank last October. When the winds of change pick up, what will guide us in our journey? The captains sailing through the Straits of Singapore followed the North Star. And today? Tomorrow?

I suggest we follow a girl. A young girl. A Fearless Girl.2 If you are lucky, you might be able to meet her in person in New York’s financial district. She is bold. She is brave. She is confident. She faces forward, toward the future, with grit and determination—a future she herself is going to shape, with eyes wide open, eagerly, steadily. I hear her say: Let us sail ahead. I am not afraid. I, am not afraid. Thank you.

ENDNOTES 1 IMF Staff Discussion Note “Casting Light on Central Bank Digital Currency,” published November 14, 2018 on www.imf.org. 2 Fearless Girl is a bronze sculpture by Kristen Visbal, originally installed on March 7, 2017 at Bowling Green in the financial district of Manhattan, New York.

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A Compass to Prosperity

The Next Steps of Euro Area Economic Integration Delivered at the German Institute for Economic Research (DIW) as part of the Institute’s Europe Lecture Series in Berlin, Germany, on March 26, 2018

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inen schönen guten Morgen! Good morning! It is a pleasure to be back in Berlin. It seems the harsh winter is giving way to signs of spring. This is a good backdrop for our conversation today, as we are launching new IMF staff research on the euro area architecture. Indeed, we are seeing strong growth in nearly every region, with global growth at 3.9 percent. In the euro area, the IMF is projecting 2.2 percent growth in 2018. This means the expansion is about to enter its fifth year and the recovery has finally turned into a sustained and broadly shared upswing. But there are other, forceful headwinds threatening. Think of the rise of populism and the short-sighted siren call of protectionism. We need to find guides for the choppy waters now facing so many parts of the world. My aspiration is that the euro area be one of those guides going forward.

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The Euro Area Compass A more unified euro area can be a compass to prosperity for the region and a beacon of hope to the world. It can be a source of global economic stability and proof that international cooperation can still deliver. A look at the numbers reveals the potential. Measured by GDP, the euro area has the same economic power as China.1 Measured by population, the euro area is slightly larger than the United States. And while the European project more broadly has come a long way, it is only half-finished. From better migration policies to a common defense system to sustainable energy sharing—the missing pieces are clear to see, but complicated to resolve. This is especially true for the specific topic I want to focus on today—the euro area architecture.

A more unified euro area can be a compass to prosperity for the region and a beacon of hope to the world.

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If the euro area is to be an effective compass, it cannot only be an economic union of convenience in calm waters. It needs to be strong enough to shield the members against storms. So, this morning, I would like to offer our contribution to the conversation about where the euro area might travel next and ways the currency union can fortify itself for the challenges ahead.

Lessons of Success and Crisis To start, we should recognize how much the euro area has achieved in the nearly three decades since its inception. Imagine if you had told someone in the aftermath of the Great Depression or World War II that in the year 2018 a majority of European nations would share a single currency. They would have said it was a fantasy. But through cooperation, it has become a reality. The IMF has been your partner in this project — from our support of the Maastricht Treaty to helping new members with the adoption of the euro. There is no doubt the work has been difficult, even painstaking at times. The system that was created had gaps that were left unaddressed. This became abundantly clear during the back-to-back blows of the global financial crisis and the euro area sovereign debt crisis. On March 16th, 2008—almost exactly ten years ago, Bear Stearns collapsed—a moment I remember well, as I am sure many of you do too. A few months later we experienced the shocking failure of Lehman Brothers.

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In the years that followed, both the capacity and limitations of the euro area were tested. • You created new institutions and capabilities. Think of the establishment of the European Stability Mechanism (ESM) and the unprecedented support delivered by member countries to euro area counterparts. Between 2010 and 2016, the ESM and its predecessor provided over 250 billion euros in loans to five countries hit hardest by the crisis. The European Central Bank showed tremendous leadership when it committed to do “whatever it takes” to preserve the currency union. These actions held the currency union together and helped pave the way for the recovery. • Yet there are still limitations. While actions were taken to address crisis legacies, much remained to be done. From building up resilience, to securing the financial sector, to ensuring that fiscal policy plays its part, we know there are still weaknesses in the system. Now is the time to address them. In the sunlight of our cyclical upswing, we cannot afford to be complacent. As I have said recently, the time to repair the roof is when the sun is shining—and it is also the time to complete the architecture. As a former finance minister, though, I recognize the difficulty of pursuing reforms just when growth is accelerating. It calls to mind what Jean Monnet once said to Willy Brandt, as they debated the creation of a monetary union: “It is not natural for men to unite. It is necessity that pushes them.” 2

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The euro area does have a necessity today: filling in the missing pieces of the architecture so that the region is prepared for the next crisis.

The reality is that the euro area does have a necessity today.

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It is the necessity of filling in the missing pieces of the architecture so that the region is prepared for the next crisis. Sooner or later, the next downturn will come and the need for a good compass will quickly become apparent.

I prefer to think of it as the idea that members’ fates are interconnected. To work well, the euro area needs more mutual trust across countries and increased accountability. Progress in tandem on trust and accountability would enable the union to realize more of its potential and become greater than the sum of its parts.

The Next Steps of Euro Area Economic Integration

Of course, it will take time and a lot of hard work to get there. That is certainly the case when it comes to capital markets and banking union.

There are several areas of reforms that should be considered as European countries review the euro area architecture in the coming months. I want to focus on three of them today—a modernized capital markets union, an improved banking union, and a move toward greater fiscal integration, starting with the creation of a central fiscal capacity. The goal of each of these reforms is not to encourage complacency but to create more resiliency for the euro area. To use the technical terms, the union should strike the right balance between “risk-sharing” and “risk-reduction.”

CAPITAL MARKE TS UNION Here, we already see positive steps in the work to modernize capital markets. The capital markets union (CMU) action plan is designed to provide businesses a wider range of domestic and cross-border finance options. This would reduce private sector firms’ reliance on banks across the European Union. We are already seeing momentum in some areas, including recent legislation to improve access to financing for small and medium-sized enterprises (SMEs) through

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To work well, the euro area needs more mutual trust across countries and increased accountability.

high-quality loan securitizations. These instruments will now operate on a level playing-field with similar types of assets. At the same time, a new “prospectus” regulation has streamlined administrative procedures and made it easier for smaller companies to raise capital. Firms issuing debt or equity must produce standardized information. This will also allow investors across Europe to have a better sense of risks. Now, there is even more urgency for action. One of the consequences of Brexit is that many financial services will likely move to continental Europe in the months ahead. Enhanced regulation and upgraded oversight arrangements will be needed to handle the potential influx of these firms. And efforts can go even further to create a fully integrated EU capital market. More transparent bankruptcy rules could make it easier for investors to at least partially recoup losses in case a business fails. Better harmonized insolvency laws and business continuity plans would promote investments between countries. Implementing all or even some of these proposals would develop capital markets and stimulate growth for the entire region.

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The capital markets union is, of course, complementary to the banking union—where we also see both positive steps as well as significant remaining gaps.

BANKING UNION

One of the goals of the banking union is to prevent another crisis. Euro area policymakers have made significant progress on this front. The creation of a single supervisor for banks, the introduction of a new framework for handling bank failures, and development of new tools to address banking crises are all major achievements. However, the lack of a common deposit insurance scheme and a shared fiscal backstop for the Single Resolution Fund could put these gains in jeopardy. In fact, these are the very instruments that would help stop bank failures from snowballing into financial crises. How so? Typically, if a bank goes bust, a country’s insurance system can at least partly compensate account holders. But in a crisis, when many banks are struggling, the system could be overwhelmed. This makes it impossible to give people their insured deposits back— unless the government steps in.

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If the costs are high enough, a sovereign debt problem arises. Think of Cyprus in 2013. A common deposit insurance scheme would allow the costs of bank failure in one country to be shared by banks across the euro area. It would reduce the risk of banking sector problems being shouldered by taxpayers and turning into another sovereign debt crisis. Here, the size and diversity of the euro area could be key strengths. To make it work, all sides will again need to show both trust and accountability. Significant efforts are already underway. Euro area banks have nearly doubled their capital buffers since 2007. Non-performing loans have been reduced by more than 100 billion euros in the past year alone. Many euro area members have embraced the spirit of the words of former EU Commission President Jacques Delors, who said: “The European model is in danger if we obliterate the principle of personal responsibility.” But in order to prepare properly for the next downturn, more action is required.

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There are a few ideas worth considering.

• In return for a common deposit scheme, banks which have high-levels of non-performing loans should commit to aggressively clean-up balance sheets. We welcome recent suggestions to start using action plans with concrete timetables. • Banks can also use the current upswing to continue building capital and ensure they have the ability to absorb any future losses. The upcoming June European Council meetings provide an excellent opportunity to discuss these issues and take the next steps on the banking union. One encouraging sign is that there appears to be broad support for a common backstop to the Single Resolution Fund. Agreement on a schedule for common deposit insurance, together with a roadmap for reducing vulnerabilities in the banking sector, would be an even bigger move in the right direction. At the same time, we know that accounting for sovereign debt held by banks is controversial. So yes, the path forward is certainly difficult, but the destination is worthwhile: a safer banking system across Europe, one that is

The path forward is certainly difficult, but the destination is worthwhile: a safer banking system across Europe.

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A “rainy-day fund” will be a temporary cushion and not a permanent pillow, with caps on how much countries can contribute and receive.

self-insured and does not rely on sovereign implied guarantees and does not fall back on taxpayers. Just as you are coupling risk-sharing and risk-reduction to generate support for the banking union, the same strategy can be used on the fiscal front.

CENTR AL FISCAL CAPACIT Y During the last crisis, monetary policy had to do much of the heavy lifting. Raising taxes and cutting spending—as many in the euro area did between 2011-2013— exacerbated weaknesses and contributed to a double-dip recession. To avoid a painful repeat of this experience, the euro area needs a central fiscal capacity. This would supplement members’ own fiscal efforts, which will always be the first and main line of defense in any downturn. It is not a matter of some countries altruistically helping others. A central fiscal capacity will reassure investors that the euro area has better tools to stop the next crisis from spreading. This will help prevent the near-panic we saw last time.

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And the benefits go beyond crisis prevention. This capacity can help smooth out the economic cycle and improve the functioning of the currency union—especially when monetary policy proves insufficient.3 This is not a new issue. The IMF has long advocated for a central fiscal capacity.

Today, we are releasing a paper showing how this can work.4 It proposes creating a “rainy-day fund” that countries contribute to each year to build up assets in good times. Then, depending on the depth of a downturn countries would receive transfers to help them offset budget shortfalls. In extreme circumstances, the fund would be allowed to borrow, however any borrowing would be repaid by members’ future contributions. By itself, the capacity may not be enough to solve the next crisis—but it certainly would help. By way of illustration, the paper analyzed the case of a large euro area-wide shock when monetary policy is constrained. It found that for a relatively modest cost—0.35 percent of GDP per year—a central fiscal capacity could reduce the negative effects on output by more than 50 percent.5

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It would similarly shrink the divergent impact of the shock across countries. Country-specific shocks would be cushioned by nearly as much. But let me be clear, it will be a temporary cushion and not a permanent pillow. Our suggested approach requires members to take greater responsibility for putting their own houses in order. Or, as you might say in German, Eigenverantwortung übernehmen. Some countries are understandably worried that by promising to provide support in bad times, other members will pursue less prudent fiscal policies.  There are also legitimate fears about whether a central capacity would generate permanent transfers from one set of countries to another. Our proposal has three innovative approaches to address these concerns. • First, to make sure that all countries meet their obligations, transfers from the fund should be conditional on a member’s compliance with EU fiscal rules. This requirement is critical because it creates incentives

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for all members to play by the same rules, undertake reforms, and build buffers.6 • Second, we recommend that countries pay a premium in good times, based on the benefits they receive from the fund in bad times. It is a bit like raising the cost of insurance after a car accident. This would help avoid the problem of permanent transfers. • Third, there would be a cap on how much countries need to contribute and a cap on how much a country can receive. As with most insurance, coverage is limited to align incentives to drive safely and not have an accident in the first place. We recognize that members’ views differ significantly on such a fiscal capacity. The need is not universally accepted and it will be politically difficult to reach an agreement. But we trust policymakers will use these ideas in their upcoming discussions while keeping in mind the ultimate goal of this proposal: a better mix of fiscal policy and monetary policy working together to enhance the resilience of the euro area and prevent another crisis.

My hope is that countries can use this moment of global growth to improve the euro area architecture and build a stronger economic union.

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Each of the topics I have raised today will take time to refine and implement. But we should not let the perfect become the enemy of the good.  My hope is that even if it is in small ways, countries can use this moment of global growth to improve the euro area architecture and build a stronger economic union in the days ahead.

Conclusion I began my remarks by asking you to think about the euro area as a compass to prosperity. You might have thought, well, we all have GPS on our phones! We do not need a compass. I disagree. We need every tool at our disposal. At a moment when multilateralism is being challenged around the world, many are looking to countries in Europe to show that cooperation can translate into economic security. It is not just Monnet or Delors or any other founding father of economic union who might think so.

It is this generation who recognizes the power of integration. In a recent poll, 74 percent of respondents in the euro area said they support a European economic and monetary union with one single currency—the highest number ever recorded.7 Amongst all European’s surveyed, 71 percent said the region was a place of stability in a troubled world. To show that they are right, we can find ways to improve our ability to navigate. It will not be easy. It will take creativity, compromise, and patience. My message is that the IMF remains optimistic because we know—just as you do—what can be accomplished when Europeans are united. Europeans can achieve a more resilient, more prosperous euro area and deliver opportunities for millions of citizens. We look forward to continuing to be your partner on this journey in the days ahead. Thank you very much.

ENDNOTES 1 International Monetary Fund, 2017, “Global Prospects and Policies,” Chapter 1 in the October World Economic Outlook, Washington, DC. 2 James, Harold, 2014, Making the European Monetary Union, Cambridge, MA: Harvard University Press.  3 Berger, Helge, Giovanni Dell’Ariccia, and Maurice Obstfeld, 2018, “Revisiting the Economic Case for Fiscal Union in the Euro Area,” IMF Departmental Paper 18/03. International Monetary Fund. Washington DC. 4 Arnold, Nathaniel G., Bergljot B. Barkbu, H. Elif Ture, Hou Wang, and Jiaxiong Yao, 2018, “A Central Fiscal Stabilization Capacity for the Euro Area,” IMF Staff Discussion Note 18/03. International Monetary Fund. Washington DC. 5 Arnold and others, 2018. 6 Eyraud, Luc, Xavier Debrun, Andrew Hodge, Victor D. Lledo, Catherine Patillo, and Abdelhak Senhadji, forthcoming, “Second-Generation Fiscal Rules: Time to Get It Right,” IMF Staff Discussion Note. International Monetary Fund. Washington DC. 7 Autumn 2017 Standard Eurobarometer: http://europa.eu/rapid/press-release_IP-17-5312_en.htm

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A Time to Repair the Roof Delivered at the Institute of Politics at Harvard University in Cambridge, Massachusetts, on October 5, 2017

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arry, thank you for that generous introduction. Dean Elmendorf, Nick, thank you for welcoming me back to Harvard.

More importantly, I want to thank all three of you for inviting me to speak in October… instead of January. Coming to Cambridge in the fall during the change of seasons is a true pleasure. Walking around this beautiful campus, I was thinking about cycles. Of course, there are seasonal cycles—like the one we are enjoying right now. Then there are economic cycles. A key challenge in economic cycles is trying to gain perspective on what comes next while you are in the midst of it. If we take a step back, what might we see? Well, we would see that the long-awaited global recovery is taking root. In July, the IMF projected 3.5 percent global growth for 2017 and 3.6 percent for 2018. Next week, we will release an updated forecast ahead of our Annual Meetings—and it will likely be even more optimistic.

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Measured by GDP, nearly 75 percent of the world is experiencing an upswing: the broadest-based acceleration since the start of the decade. This means more jobs and improving standards of living in many places all over the world. But the recovery is not complete. Some countries are growing too slowly, and last year 47 countries experienced negative GDP growth per capita. And far too many people—across all types of economies—are still not feeling the benefits of the recovery. Persistent low growth in the decade since the global financial crisis has put a spotlight on the problem of inequality. It has also exposed long-running weaknesses in our ability to adapt to technological change and global integration. As a result, our social fabric is fraying, and many countries are experiencing increased political polarization. So, here is the question: Can the world seize the opportunity of the upswing to secure the recovery and create a more inclusive economy that works for all?

…the long-awaited global recovery is taking root…But the recovery is not complete.

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Fortunately, I came to the Kennedy School— and have found some inspiration from your namesake. Addressing Congress in 1962, about a year after the United States emerged from a recession, President Kennedy said: “Pleasant as it may be to bask in the warmth of recovery… the time to repair the roof is when the sun is shining.” Let us explore that idea.

Is the Sun Starting to Break Through? We can start by checking whether the sun is breaking through. A cyclical pickup in investment and trade in the advanced economies—especially in Europe and Japan—has led to better-than-expected growth. US forecasts have been fluid in light of the economy’s actual performance and changing prospects for tax reform, but the likelihood for this year and the next is that growth will be above trend. Meanwhile, Asian emerging markets—led by China and India—have remained strong. In other emerging and developing economies, the outlook has become a bit brighter, including among commodity exporters in sub-Saharan Africa and Latin America.

Globally, financial stability is improving, thanks to a more stable banking system and increased market confidence. Financial conditions across economies have given borrowers new opportunities to fund investments and repair balance sheets. But there are threats on the horizon: from high levels of debt in many countries, to rapid credit expansion in China, to excessive risk-taking in financial markets. All of this comes against a backdrop of heightened noneconomic challenges, from weather-related disasters in the Caribbean, the US, and Asia, to heightened geopolitical tensions on the Korean peninsula. So, yes, we are seeing some sun break through—but it is not a clear sky. There are two ways to approach a moment like this. The first is to sit back, enjoy the progress, and wait for the next crisis before making big changes. As a former finance minister, I understand the appeal of this path. Championing change just when things are getting back on track is not easy—especially when the benefits come further down the road and policymakers already feel reform fatigue. But just because something is politically difficult does not mean we can shy away from it. Think of what President Kennedy said during the space race: “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.” The better path is to approach this moment as an opportunity to make changes that will enable prosperity over the long term.

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The better path is to approach this moment as an opportunity to make changes that will enable prosperity over the long term.

Not only is this the right thing to do, now is the right time to do it.

IMF research has shown that reforms are more potent and easier to implement when economies are healthier.1 Intuitively, this makes sense—it is less complicated to change a tax code when incomes are rising or to update labor laws when an economy is near full employment. So, we should not let a good recovery go to waste. We know what can happen if we let the moment pass. Growth will be too weak, and jobs too few. Safety nets will be unable to handle aging populations. Our financial system will be unprepared for future shocks. We only need to think back to the period before the financial crisis to see the peril of missing an opportunity to guard against risks. In the past, we saw countries undertake reforms, through the ups and downs of economic cycles, while others relaxed during periods of growth. In 10 years, we will be able to look back and see which countries made

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use of this moment. Or, to put it in Kennedy’s terms: when the sun is shining, we must repair the roof. How can we get the job done?

The Tools We Need to Repair the Roof

We can start with fundamentals. Inflation is still low and remarkably subdued despite near full employment in many advanced economies. So, monetary policy should continue to support the recovery. At the same time, easy financial conditions can create complacency in markets and a buildup in vulnerabilities, including private sector debt. So, central banks should communicate their plans clearly and execute monetary policy normalization smoothly, as appropriate in each country. This will help avoid market turbulence and a sudden tightening of financial

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…monetary and fiscal tools can only take us so far. We need the whole toolkit, including structural reforms, to fully repair the roof.

First, lifting incomes and creating jobs. Second, investing in people’s futures and fostering inclusive growth.

Countries with healthier public finances, such as Germany and South Korea, can use this moment to invest more in their own economies. In places where public debt is too high, governments should use the opportunity of growth to reduce debt relative to GDP and strengthen their resilience.

LIFTING INCOMES AND CREATING JOBS

Containing public debt is also an imperative in many lower-income countries, where debt levels have risen markedly in recent years. Reducing excessive global imbalances—which includes investing more where fiscal positions are healthy and lowering deficits elsewhere— can support growth and avoid financial and exchange rate instability. At the same time, we know that monetary and fiscal tools can only take us so far. We need the whole toolkit, including structural reforms, to fully repair the roof. I want to focus on two areas in particular.

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conditions that could derail the recovery. Of course, monetary policy is most effective when complemented with sound fiscal policies that promote long-term, sustainable growth.

In the largest economies, overall productivity growth—a measure of how efficient we are— has dropped to 0.3 percent, down from a precrisis average of about 1 percent. This means that, despite technological advances, wages in many places are only inching up. Boosting productivity, a factor in lifting wages, requires, among other things, cutting red tape, increasing spending on research and development, and investing in infrastructure. In some countries, wages are being limited by weak demand, reflected in still-too-high unemployment or involuntary part-time employment. So, increasing demand can help lead to higher wages.2 We also need to look at ways to create new jobs—and this is where labor market reforms come in.

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What policies have worked? • In Spain, both employers and employees have been given more workplace flexibility.

INVESTING IN PEOPLE’S FUTURES AND FOSTERING INCLUSIVE GROW TH

• In Mexico, revised rules allow young people to more easily enter the formal job market and gain access to health care and other benefits.

Over the past three decades, economic inequality between countries has declined sharply, led by the rise of emerging markets such as China and India.

• In Japan, child care leave benefits were expanded from 50 percent to 67 percent of salary—as part of larger efforts to get over 1 million women into the workforce.

However, if we look at inequality within specific countries, especially some advanced economies, we see widening gaps and an increased concentration of wealth among the top earners.4

Empowering women is an economic no-brainer. If women participated in the labor force in the same numbers as men, GDP could increase by as much as 5 percent in the US, 27 percent in India, and 34 percent in Egypt, to name just three examples.3 Of course, each country will tailor policies for its needs, but we know that taking advantage of the current momentum can make these types of reforms more affordable and more effective. Every finance minister and every treasury secretary eventually realizes that all policy changes are made a little easier with growth. And this brings me to my second area of focus—investing in people’s futures.

IMF research has shown that excessive inequality hinders growth and hollows out a country’s economic foundation. It erodes trust within society and fuels political tensions. We know that inequality is often cemented through disparities in schools and access to health care. The good news is that many countries are working to change that narrative. • In India, health care access has been expanded with clear benefits for the poorest citizens. • In South Korea, bonuses are being offered to encourage teachers to work in underperforming schools. • In the US, more is being done to increase the number of women studying science, technology, engineering, and mathematics (STEM). Thirteen years ago, on this campus, a young man invented a social media platform that would connect the world. But the next Mark Zuckerberg need not come from Harvard. With the right investments in education, she

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can come from the South Side of Chicago, or Sri Lanka, or Senegal. Giving priority to education also means supporting lifelong learning, including retraining programs. Germany’s apprenticeship program has served as a model for decades—and a recent Canadian initiative showed that on-the-job skills training can be more effective than classroom learning. This moment also calls on us to prepare for the future of work. The rise of automation could exacerbate inequality—as owners of technology gain efficiency but lower-skilled workers lose jobs. At the IMF, we are looking at the pros and cons of ideas that may help—from unorthodox concepts like universal basic income to mainstream policies such as more progressive taxation. In 1981, the average top marginal tax rate in advanced economies was 62 percent. In 2015, it was 35 percent. New IMF research, which will be released next week, suggests that some advanced economies could raise their top tax rates without slowing growth.5 These are all ideas worth exploring. They can support our efforts to repair the roof. And yet there is one more tool we need to make our project a success. International cooperation.

The Benefits of Cooperation Many of the challenges we face require global solutions. Think about corruption, where the IMF recently committed to do more to help our members.6 Bribery alone costs more than 1.5 trillion dollars per year, nearly 2 percent of global GDP.7 Then there is embezzlement, corporate income tax evasion, money laundering, terrorist financing—all problems with cross-border dimensions. Or consider financial regulation. The Financial Stability Board and other institutions have made significant progress since the crisis to strengthen the safety of the global financial system, especially through higher levels of bank capital and liquidity. While some regulations and their implementation would benefit from review, we should ensure the progress we have made is protected. Cooperating on all these challenges can help rebuild trust with skeptical citizens—especially if we prove that cooperation translates into more jobs and a brighter future. Our global economic framework should reflect the changing economy and ensure a level playing field where everyone has an opportunity for a better life. Look at trade, for example. Over the last 30 years, trade has raised global growth and lifted hundreds of millions of people out of poverty. But some have been negatively impacted. While protectionist policies are counterproductive, steps can certainly be taken to improve the system, increase transparency, and make trade work for all. One final example where cooperation is critical: climate change—a threat to every economy and every citizen.

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Policymakers should use all tools at their disposal to act now and take advantage of this period of global growth. And to truly be successful, they should act together.

Our estimates suggest that a 1 degree Celsius increase in a country with an average annual temperature of 25 degrees—such as Bangladesh—could reduce per capita GDP by nearly 1.5 percent.8 But Bangladesh—and similarly situated countries—cannot meet the challenge by themselves. Only international cooperation can stem the man-made causes of global warming. So, what is the bottom line? Policymakers should use all tools at their disposal to act now and take advantage of this period of global growth. And to truly be successful, they should act together. Cooperation remains the best way to create a more prosperous future for every nation. The IMF can help by serving as a platform for dialogue and a resource for countries seeking to build more resilient economies. Put it another way? The IMF is a critical part of the toolkit.

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That is the message I will underscore next week when representatives from our 189 member nations convene for our Annual Meetings.

Conclusion

I started my remarks by mentioning a walk through your campus and how it sparked my thinking. I am certainly not the first French citizen to find a little wisdom in New England. In fact, I think Alexis de Tocqueville would quite enjoy the town hall forum you have created here at Harvard. He once wrote, “What is not yet done is only what we have not yet attempted to do.” Let us draw inspiration from these words—as well as from the enduring message of President Kennedy—and use this season of transformation to repair the roof while the sun is shining. Thank you very much.

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ENDNOTES 1 IMF, World Economic Outlook (Washington: April 2016), Chapter 3. 2 IMF, World Economic Outlook (Washington: September 2017), Chapter 2. 3 IMF, “Women, Work, and the Economy: Macroeconomic Gains from Gender Equity,” IMF Staff Discussion Note (Washington: September 2013). 4 IMF, Fiscal Monitor (Washington: October 2017). 5 Ibid. 6 IMF, “The Role of the Fund in Governance Issues: Review of the Guidance Note,” IMF Policy Paper (Washington: August 2017). 7 IMF, “Corruption: Costs and Mitigating Strategies,” IMF Staff Discussion Note (Washington: May 2016). 8 IMF, World Economic Outlook (Washington: September 2017), Chapter 3.

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Central Banking and Fintech

A Brave New World? Delivered at the Bank of England conference, “Independence—20 Years On” in London, UK, on September 29, 2017

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overnor, Distinguished Guests, Ladies and Gentlemen—Good morning!

Thank you, Mark Carney, for that kind introduction, and thank you to the Bank of England for inviting me to this wonderful event. This is a moment to celebrate 20 years of independence during which the Bank of England has been a stabilizing force for the U.K. economy, inspiring others in the world of central banking—not least because of your guidance, Mark. This is also a moment to learn from our experiences, build on the progress made so far, and look into the future—to the next 20 years—as our journey continues. This morning, I came up Fleet Street, which always feels like a journey through history. In the Middle Ages, that street was an important center of commerce, much of which has now moved online. By the 19th century, the street was home to ticker machines and reporters racing each other to make the evening papers. That world, too, has largely moved online.

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And much has changed for the bankers and policymakers here in the City of London. But that is only the beginning. Let us spin the hands of Big Ben forward to 2040 to catch a glimpse of their world. We might see that: • Cars have disappeared, because people are moving about in hovering drones, or “pods,” which elegantly avoid each other in the morning rush hour. • One of those pods carries the central bank governor, who recently started her second term. As part of her morning routine, she swipes through a hologram of news videos curated by a digital assistant, before arriving at Threadneedle Street. • The governor disembarks, walks up to the columned façade, opens the door and… Who will she encounter inside the building? Are there economists sitting at desks, debating policy choices around a table? Or is there an intelligent machine making decisions, setting rates, and issuing money? In other words, how will fintech change central banking over the next generation? That is the focus of my remarks today. I would like to consider the possible impact of three innovations—virtual currencies, new

... how will fintech change central banking over the next generation?

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models of financial intermediation, and artificial intelligence. Some of these innovations have already found their way into our wallets, smartphones, and financial systems. But that is only the beginning. Are you ready to jump on my pod and explore the future together? As one of your fellow Londoners—Mary Poppins—might have said: bring along a pinch of imagination!

technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked. But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.

BE T TER VALUE FOR MONE Y? 

Virtual currencies Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.

For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the US dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.

Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.

IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008.

For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying

And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in

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For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order...

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...citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash.

remote regions. And because virtual currencies could actually become more stable. For instance, they could be issued one-for-one for dollars, or a stable basket of currencies. Issuance could be fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a “smart rule” that might reflect changing macroeconomic circumstances. So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.

BE T TER PAYMENT SER VICES? For example, consider the growing demand for new payment services in countries where the shared, decentralized service economy is taking off.

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This is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders. Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders. Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender. So, when the new service economy comes knocking on the Bank of England’s door, will you welcome it inside? Offer it tea—and financial liquidity?

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New models of financial intermediation This brings us to the second leg of our pod journey—new models of financial intermediation. One possibility is the break-up, or unbundling, of banking services. In the future, we might keep minimal balances for payment services on electronic wallets. The remaining balances may be kept in mutual funds, or invested in peer-to-peer lending platforms with an edge in big data and artificial intelligence for automatic credit scoring. This is a world of six-month product development cycles and constant updates, primarily of software, with a huge premium on simple user-interfaces and trusted security. A world where data is king. A world of many new players without imposing branch offices. Some would argue that this puts a question mark on the fractional banking model we know today, if there are fewer bank deposits and money flows into the economy through new channels.

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HOW WOULD MONE TARY POLIC Y BE SE T IN THIS CONTEX T? Today’s central banks typically affect asset prices through primary dealers, or big banks, to which they provide liquidity at fixed prices—so-called open-market operations. But if these banks were to become less relevant in the new financial world, and demand for central bank balances were to diminish, could monetary policy transmission remain as effective? If anything, central banks may well have to increase the number of counterparties to their operations. The Bank of England is already leading the way by including large broker-dealers and central counterparty clearing houses. All this, of course, has regulatory implications. More counterparties imply more firms falling under the central bank’s regulatory umbrella—which is the price to pay for liquidity on a rainy day. Whether the future holds more or less rain is an open question. Still, better regulating shadow banks looks all the more pressing. The Financial Stability Board (FSB) has already made progress in this area under your leadership, Mark.

Independence—at least to set monetary policy—will need further defenses and require even clearer communication.

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The remit of central banks will grow, and with it, perhaps, public scrutiny and political pressures. Independence—at least to set monetary policy—will need further defenses and require even clearer communication.

Reaching across borders will be critical as the focus of regulation widens— from national entities to borderless activities, from your local bank branch to quantum-encrypted global transactions.

We may also see a shift in regulatory practices. Traditionally, regulators have focused on overseeing well-defined entities. But as new service providers come on stream in new shapes and forms, fitting these into buckets may not be so easy. Think of a social media company that is offering payments services without managing an active balance sheet. What label should we stick on that?

Because of our global membership of 189 countries, the IMF is an ideal platform for these discussions. Technology knows no borders: what is home, what is host? How can we avoid regulatory arbitrage and a race to the bottom? This is about the IMF’s mandate for economic and financial stability, and the safety of our global payments and financial infrastructure.

All this is good for lawyers, but not so good for regulators. The regulators will likely have to further expand their focus, from financial entities to financial activities—while possibly also becoming experts in assessing the soundness and security of algorithms. Easier said than done.

The stakes—and gains—from cooperation are high. We want no holes in the global financial safety net, however much it gets stretched and reshaped.

COOPER ATION IS KEY To make things smoother—at least a bit—we need dialogue. Between experienced regulators and those regulators that are just beginning to tackle fintech. Between policymakers, investors, and financial services firms. And between countries.

I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the special drawing right (SDR). In other words, the IMF is in for the pod-ride.

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Could machines really explain their decisions in plain English?

Artificial intelligence Which brings us to the third and final leg—the transformative effect of artificial intelligence. Will our governor in 2040 walk into the Bank to polish a monetary policy-setting machine? Will your prediction, Andy Haldane, of 15 million jobs being automated in the UK, affect the Bank and its world-class staff? One thing is clear: we always have more data. Some estimates suggest that 90 percent of the data available today was generated in the past two years.1 This is not just information on output, unemployment and prices, but also behavioral data on the quirks and irrationalities of the homo economicus. Thanks to smartphones and the internet, this data is now abundant, ubiquitous, and increasingly valuable as we pair it with artificial intelligence. Artificial intelligence is taking immense strides. Over the past year, some of the world’s best players of Go, the ancient board game, have lost to a self-learning computer. For many, that day of reckoning was supposed to be decades away. The machine learned tactics, recognized patterns, and optimized its game— better than we could.

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Clearly, the economy is vastly more complex than a game of Go. But over the next generation, machines will almost certainly play a larger role—in assisting policymakers, offering real-time forecasts, spotting bubbles, and uncovering complex macrofinancial links. But let me reassure you, humans will still be needed.

For one, there is immense uncertainty about the economy. Changes in basic economic relationships need to be spotted, and risks evaluated. Judgment and constant questioning by peers, diversity of opinions, and even a few maverick spirits, will remain essential to good policy. But what if the machine could do that too? Next is the question of communication. Good monetary policy, as we know, is about story telling. Policy is effective if it can be explained clearly so the public can form expectations about future policy. Could machines really explain their decisions in plain English? Even if that hurdle could be overcome, a last one remains. Even with the best algorithms and machines, targets will be missed, crises will occur, mistakes will be made. But can machines really be held accountable—to the young couple unable to buy a house, to the working mother finding herself unemployed?

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Accountability is key. Without it, we cannot have independence; how else to bestow so much power in a technocratic organization? And without independence, policy is bound to go astray, as this conference reminds us loud and clear. So no, I do not see machines taking over monetary policy. In 2040, the governor walking into the Bank will be of flesh and bones, and behind the front door she will find people, at least a few. So there will always be an Old Lady living in Threadneedle Street.2 And I hope you agree that it is often enlightening to speak to a lady of a certain age!

Conclusion As our pod journey comes to an end, some of you may wonder about my upbeat tone. For many, this new world of central banking is less Mary Poppins, and more Aldous Huxley: a “brave new world,” much like the one described in Huxley’s famous novel. I believe that we—as individuals and communities—have the capacity to shape a technological and economic future that works for all. We have a responsibility to make this work. That is why I prefer Shakespeare’s evocation of the brave new world in The Tempest: “O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world.”  Thank you.

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...we—as individuals and communities—have the capacity to shape a technological and economic future that works for all.

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ENDNOTES 1 IBM (2017), “Ten Key Marketing Trends for 2017,” available at https://www-01.ibm.com/common/ssi/ cgi-bin/ssialias?htmlfid=WRL12345USEN 2 Allusion to “the Old Lady of Threadneedle street,” namely the Bank of England.

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Making Globalization Work for All Delivered at the C.D. Howe Institute in Toronto, Canada, on September 13, 2016

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am grateful for the opportunity to deliver a lecture in honor of Sylvia Ostry, the great Canadian economist and policymaker, and above all, the woman pioneer who broke into the closed world of high finance and sherpa-dom that still is largely a man’s world.

Dr. Ostry, who is right here in the audience, succeeded by setting the highest standards, not only for economists but for all those who believe that public service is more than just a job. Sylvia, I would like to start off my remarks today with something important you once said: “We have one asset, and that’s people.” This message not only reflects Canada’s commitment to inclusiveness and openness, but it also captures the essence of policymaking. And as I will argue today, these issues are deeply intertwined.

Openness and international cooperation has always been part of Canada’s DNA. Your country has been one of the IMF’s strongest partners, with an incredibly positive influence on our institution and other member countries. The ability of countries to rise above narrow self-interest has brought unprecedented economic progress over the past 70 years. Conflicts have diminished, diseases have been eradicated, poverty has been reduced, and life expectancy has increased around the world. To paraphrase John Maynard Keynes, one of the IMF’s founding fathers: “The brotherhood of man has become more than a slogan.” But progress has not come for everybody at the same pace. There is no doubt that the transformation of our economies has also brought dislocation and hardship.

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Conflicts have diminished, diseases have been eradicated, poverty has been reduced, and life expectancy has increased around the world.

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Structural change caused by globalization and technological change has deeply affected some sectors and industries—while benefitting society as a whole. Concerns over wages, jobs, and future prospects are real and pressing for those who are not well-equipped to thrive in this new world. This is not the first time we face this challenge. From the days of the bronze age to the industrial revolution and beyond, our ancestors have dealt with the spread of new technologies and the need to adapt. Debates about trade and access to foreign goods are as old as society itself. But history clearly tells us that closing borders or increasing protectionism is not the way to go. Many countries have tried this route, and just as many have failed. Instead, we need to pursue policies that extend the benefits of openness and integration while alleviating their side effects. We need to make globalization work for all. That is the focus of my remarks today.

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Globalization— the Balance Sheet Let me start with the benefits of integration— the bringing together of trade, migration, capital flows, and technology. This integration has delivered tangible—real—benefits for most people and most countries.

REAL BENEFITS Emerging and developing economies have been the prime beneficiaries of economic openness. According to the World Bank, trade has helped reduce by half the proportion of the global population living in extreme poverty (1990–2010). China, for instance, saw a phenomenal drop in its extreme poverty rate—from 36 percent at the end of the 1990s to 6 percent in 2011.1 Another example is Vietnam, which—in a single generation—moved from being one of the world’s poorest nations to middle-income status—which has allowed for increased investments in health and education.

Structural change caused by globalization and technological change has deeply affected some sectors and industries—while benefitting society as a whole.

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History clearly tells us that closing borders or increasing protectionism is not the way to go. Instead, we need to pursue policies that extend the benefits of openness and integration.

Today, Vietnam can be proud of the fact that it ranks well above most of its richer peers in basic science, math, and reading skills. Its overall score in the latest OECD survey of 15-year olds was higher than that of France, Germany, the United Kingdom, and the United States.2

But even in advanced economies, economic integration has lifted living standards— because of a more efficient allocation of capital, productivity increases, and lower prices for consumers. Research on the consumer benefits suggests that trade has roughly doubled the real incomes for a typical household. And for the poorest households, trade has raised real incomes by more than 150 percent.3 Along with higher incomes, millions of new jobs were created that tend to pay relatively higher wages. In the United States, for instance, workers in export-intensive industries earn a premium perhaps as high as 15 percent over other industries.4 In the European Union, more than 30 million jobs—that is, one in every seven—depends on exports to the rest of the world. And in

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Canada, international trade makes up twothirds of GDP.

Canada is also a prime example of the benefits of migration. By welcoming about a quarter million migrants per year—and by opening their homes and hearts to refugees— Canadians are supporting growth, rejuvenating their workforce, and adding to the richness and diversity of their society.

As the economist and Nobel laureate, Amartya Sen, put it: global economic integration “has enriched the world scientifically and culturally, and benefited many people economically as well.” Many people would agree with that—but it is not the whole story.

REAL SIDE EFFEC TS The historic events of the early 1990s, when China, India, and the former communist countries entered into the global trading system, had far-reaching effects. The size of the global workforce effectively doubled, putting downward pressure on wages, especially for lower-skilled workers in advanced economies.

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In the United States, competition from lowwage countries has been one of the factors that have contributed to a decline in manufacturing employment, along with a wave of automation.5 And this has not been spread evenly across the whole economy, but has been concentrated in some local labor markets that have faced deep, long-lasting effects from overseas competition.6 Many have also underestimated the globalization of capital. Between 1980 and 2007, global capital flows increased more than 25-fold, compared with an eight-fold expansion in global trade. This has underpinned investment, especially in emerging economies. But it has also opened the door to financial contagion and concerns about the stability of financial systems. And lastly, growing inequality in wealth, income, and opportunity in many countries has added to a groundswell of discontent, especially in the industrialized world—a growing sense among some citizens that they “lack control,” that the system is somehow against them.

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Financial institutions are being seen as unaccountable to society. Tax systems allow multinational companies and wealthy individuals not to pay what many would consider a fair share. Corruption remains endemic. And there is the challenge from uncontrolled migration flows, contributing to economic and cultural anxieties. These concerns need to be addressed. How can we maintain the benefits from globalization while sharing them more widely? What can governments do?

What Can Governments Do? The first order of business is for governments to establish a positive environment for growth. This provides additional income to be distributed, as well as room for policy initiatives. Unfortunately, growth has been too low for too long: 2016 is set to be the fifth consecutive year with global GDP growth below 3.7 percent, the average for nearly two decades before the 2008 financial crisis.

Growing inequality in wealth, income, and opportunity in many countries has added to a groundswell of discontent, especially in the industrialized world.

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Growth has also been unequal: in major advanced economies, incomes for the top 10 percent increased by 40 percent in the past two decades, while growing only modestly at the bottom.7 If we are to build support for open economies and open societies, we have to do better. How? We know that sound macroeconomic policies and reforms lift productivity and potential growth. We also know that these policies and reforms need to be tailored to achieve the best possible results. For example, when it comes to support for demand, central banks have done the heavy lifting in recent years. Now fiscal policy needs to play a bigger role in countries that have additional spending headroom. Canada is, in fact, leading the way by stepping up its infrastructure investment and by increasing transfers to families with children. When it comes to economic reforms, policymakers need to do the right thing in the right sequence—and do it now. Euro Area countries, for example, can lift productivity by accelerating structural reforms—lowering barriers to entry in the services sector, including professional services, and stepping up research and development. But to maximize the benefits of these structural reforms, they need to be combined with the right fiscal and monetary policies—a threepronged approach. In the mid-1990s, for example, the Netherlands combined labor tax cuts with major reforms in labor and product markets—resulting in a period of strong growth. And right now, of course, the Canadian government is following in the same path of taking bold action on fiscal policy and economic reforms.

I have made the case for this strong threepronged policy approach to our membership and to the leaders at the recent G-20 Summit—and I hope that many countries follow Prime Minister Trudeau’s global leadership. The more countries adopt it, the greater the mutual benefits for growth.

MORE SUPPORT AND GREATER FAIRNESS But how to make growth more inclusive and benefit workers across all economic sectors is a question that does not lend itself to the same clear-cut policy message. It is a challenge of a different order, because it has to do with economic incentives, but also with social, regional, and often ethnic and cultural factors that are hard to overcome—and require country-specific solutions. Let me speak to the economic policies involved, without having any illusions about the difficulties of the task at hand. The IMF has recommended combinations of the following policy tools to its member countries over the past years: First—step up direct support for lower-skilled workers. This means greater public investment in education, re-training, and facilitating occupational and geographic mobility. • For example, the German apprenticeship system is often cited as a model that has provided generations of German youth a successful path into skilled work without a college education. • Similarly, expanding vocational training partnerships between industry and educational institutions would help retool the labor force and boost employment in countries such as Canada, France, and the United Kingdom.

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Second—strengthen social safety nets by providing appropriate unemployment insurance, health benefits, and portable pensions—and by stepping up tax and income policies.

situation, they need to be accompanied by steps to facilitate equal access to opportunity through education and health care, reduce ethnic and gender discrimination, and foster greater mobility, just to name a few.

• The US, for instance, could cushion labor market dislocations by increasing the federal minimum wage and expanding the earned income tax credit.

Step Up Global Cooperation

• Another example is the Nordic countries, where workers have only limited job protection, but they benefit from generous unemployment insurance that requires jobseekers to find new positions. This model makes the labor market more flexible—which is good for growth—while safeguarding the interests of workers.8 Third—boost economic fairness to rebuild trust and bolster support for reforms. • This means, for example, addressing the lack of vigorous competition in key areas. Think of major industries—from banking to pharmaceuticals to social media—where some advanced economies are facing large increases in market concentration.9 • Boosting fairness also means clamping down on tax evasion and preventing the artificial shifting of business profits to lowtax locations. The IMF is working on this issue intensively, often in close collaboration with the OECD, the United Nations, and the World Bank. These measures can help create a positive feedback loop: stronger, more inclusive growth reduces economic inequality and increases support for further reforms and openness. But as I said earlier, these policies are not sufficient—depending on each country’s

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Let me come to my last point. Perhaps the most important policy insight from the past 70 years is that countries and governments can do a lot to boost economic welfare, but they cannot do it alone. As Martin Luther King once said, “We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.”

REINVIGORATE TRADE Nowhere are the issues of economic interdependency greater than in the area of trade. For two decades before the 2000’s, global trade regularly grew by 7 percent, or twice the rate of the world economy. Today, however, trade growth is below that of the global economy—at about 2 percent.10 Moreover, there is a growing risk of politicians seeking office by promising to “get tough” with foreign trade partners through punitive tariffs or other restrictions on trade. I am deeply concerned about this—not only because I was a Minister of Trade, but because trade has been at the heart of the IMF’s mandate for more than 70 years.

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Today’s generation of leaders and policymakers will be measured by their ability to create a global village on a human scale—a place where people can find a safe and prosperous home for themselves and their children.

And for good reason. A stronger trade engine means more competitive industries that have greater incentives for innovation. It means technological innovation gets transmitted in ways that lower prices for consumers and companies. To illustrate the consumer benefits, one analyst recently compared products listed in the 1971 edition of the Sears-Roebuck catalogue with comparable modern-day items. He found that almost everything in its pages was made in US and that, after adjusting for inflation, products are significantly cheaper today. For example, a three-speed air conditioner was advertised for $139.95, which would come to more than $820 adjusted for inflation. Today Frigidaire11 offers a model with the same features for $139.99.12 As a result, the average American worker today works only about 17 weeks to live at the annual income level of the average worker in 1915. We have seen similar progress in all

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countries in recent decades, and this is what trade is about: spreading and sharing economic welfare gains from better technology across the global population.13

NE W DEALS

Against this background, recent news about multilateral trade negotiations have been quite discouraging. But I strongly believe that we can rebuild momentum for trade reforms if the benefits are properly explained, and if we engage in the policies to achieve stronger and more equitable growth that I outlined earlier. There are also new 21st-century issues to explore—such as trade in services. This trade is already worth $5 trillion a year, or twothirds of global GDP.14 However, the barriers to trade in services are extremely high—equivalent to tariffs of some 30 to 50 percent.15 One way forward would be to push for so-called “plurilateral” trade agreements—

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that is, deals among a limited numbers of like-minded countries that agree to work within the framework of the World Trade Organization. Such deals would be open—on the same terms—to all WTO members.

Today’s generation of leaders and policymakers will be measured by their ability to create a global village on a human scale—a place where people can find a safe and prosperous home for themselves and their children.

Similarly, there is room to boost trade in digital products, for example, by establishing freedom of data flows that could help realize the full potential of global e-commerce.

The IMF—with its analytical and financial resources—will continue to push for and help in this endeavor.

Conclusion Some 50 years ago, the Canadian philosopher Marshall McLuhan described how technology had shrunk the world into a “global village.”

Economic openness and collaboration is in our DNA, too. It is the very reason for which the IMF was founded. Thank you very much.

ENDNOTES 1 World Bank figures: World Development Indicators. 2 OECD Program for International Student Assessment: Report: PISA 2012 Results in Focus. 3 Pablo Fagjelbaum and Amit Khandelwal, 2016, Measuring the Unequal Gains from Trade, Quarterly Journal of Economics, 2016. 4 U.S. President’s Council of Economic Advisers (CEA): Report: The Economic Benefits of Trade, May 2015. 5 Justin R. Pierce and Peter K. Schott: The Surprisingly Swift Decline of U.S. Manufacturing Employment, NBER Working Paper, December 2012. 6 David Autor, David Dorn, and Gordon Hanson: The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade, NBER Working Paper, February 2016. 7 Countries: Canada, Germany, Italy, United Kingdom, United States. IMF Note: Global Prospects and Policy Challenges, G20 Leaders’ Summit, September 4–5, 2016. 8 For more information on the Nordic model: IMF note on Labor Market Policies, IMF paper on Jobs and Growth. 9 Jason Furman: Benefits of Competition and Indicators of Market Power, U.S. President’s Council of Economic Advisers Issue Brief, April 2016. 10 IMF, World Economic Outlook database. 11 Frigidaire is the American consumer and commercial home appliances brand subsidiary of European parent company Electrolux. 12 Rob Cox: Cuts like a knife, Reuters, Breaking Views Column. 13 David Autor, 2014, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation,” Journal of Economic Perspectives, Vol. 29, No. 3, pp. 3–30. 14 World Trade Organization figure. 15 Lionel Fontagné and others, Estimations of Tariff Equivalents for the Services Sectors, Paper, Centre d’Études Prospectives et d’Informations Internationales (CEPII), December 2011.

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Addressing Corruption Openly This essay appeared in Against Corruption: A Collection of Essays published on May 12, 2016, by the Office of the British Prime Minister

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raditionally, public officials have been somewhat nervous about discussing corruption openly. Over the past several years, however, I have been struck by the extent to which world leaders are now willing to talk candidly about this problem. It is not just that the economic costs have become self-evident. It is also because there is an increasing demand for change.

I would like to make three main points.

In a recent global survey, corruption was regarded as the “topic most frequently discussed by the public,” ahead of poverty and unemployment (survey cited by Klitgaard 2015, p. 15). Given that both poverty and unemployment can be symptoms of chronic corruption, my view is that the priority given to this problem by the public is entirely justified.

Second, although corruption is an extraordinarily complex phenomenon, I do not accept the proposition—or the myth—that it is primarily a “cultural” problem that will always take generations to address. There are examples of countries that have managed to make significant progress in addressing it in a relatively short time.

In this essay, I would like to share the IMF’s perspective on the economic impact of corruption and our experience in helping countries design and implement strategies to address it. I recognize that there are many possible definitions of corruption, both broad and narrow. For the purposes of this essay, which is focused on the public sector, corruption includes any abuse of public office—whether it arises from financial incentives or political interference.

First, while the direct economic costs of corruption are well known, the indirect costs may be even more substantial and debilitating, leading to low growth and greater income inequality. Corruption also has a broader corrosive impact on society. It undermines trust in government and erodes the ethical standards of private citizens.

Third, experience demonstrates that a holistic, multi-faceted approach is needed—one that establishes appropriate incentives and the rule of law, promotes transparency, and introduces economic reforms that reduce opportunities for illicit behavior. Perhaps the most important ingredient for a successful anti-corruption approach is the development of strong institutions, centered on a professional civil service that is sufficiently independent from both private influence and political interference.

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The Economic and Social Costs Corruption afflicts countries at all stages of development. Indeed, some developing countries score better on corruption indices than many advanced countries. While there are no recent studies that quantify the overall global scale of corruption, a sense of how big a problem it is can be gauged from an estimate of the amount paid in bribes every year. A recently updated estimate points to $1.5 trillion to $2 trillion (or around 2% of global gross domestic product) in bribes paid annually in both developing and developed countries.1 Given that bribes are just a subset of all of the possible forms of corruption, the overall cost of corruption—in terms both of tangible losses and of lost opportunities—is a very high amount. The direct economic costs of corruption are easily recognized by the general public. Two very clear examples are bribes given in order to evade taxes or to bypass public tender procurement. The first example results in a direct loss of public revenues; the second may result in both higher public expenditure and lower-quality public investment.

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Corruption has a pernicious effect on the economy. Pervasive corruption makes it harder to conduct sound fiscal policy. For example, in data covering a range of countries, we find that low tax compliance is positively associated with corruption. By delegitimizing the tax system and its administration, corruption increases tax evasion: if the granting of a tax exemption is perceived to be the product of a bribe, it is not surprising that the public are far less willing to comply with the tax laws.2 Corruption also undermines certain types of public expenditure to the detriment of economic performance. For example, it is associated with lower outlays on education and skewed public investment, driven by the capacity to generate “commissions” rather than by economic justification (Mauro 1998).3 The distortion in public investment spending is particularly harmful given the importance of promoting efficient public investment as a means of reducing infrastructure gaps and promoting growth. The indirect economic costs of corruption may be even more consequential.4 Clearly, causation is difficult to establish and, in quantitative analysis, a significant effect of corruption on growth has not been found (Svensson 2005).

Pervasive corruption makes it harder to conduct sound fiscal policy.

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The higher costs associated with corruption are a form of tax on investment that, in turn, translates into less investment in business research and development and product innovation.

Nevertheless, in comparative studies of national data, corruption is associated with a number of key indicators. Countries with low per capita income tend to have higher corruption, and countries with higher corruption tend to have lower growth. Studies have identified different ways in which corruption could affect growth. First, corruption tends to impede both foreign and domestic investment. The higher costs associated with corruption are a form of tax on investment that, in turn, translates into less investment in business research and development and product innovation. Moreover, by creating uncertainty as to how the regulatory framework will be applied, it increases the “country risk” associated with a particular investment project.5 More generally, corruption generates an unfavorable business climate in which the creation of new enterprises is stifled, reducing the economy’s dynamism.6

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Second, corruption undercuts savings. The illegal use of public funds to acquire assets abroad shrinks the economy’s pool of savings that could otherwise be used for investment. Finally, corruption can perpetuate inefficiency. Because an over-regulated economy provides opportunities for regulators to demand bribes, corruption creates a strong incentive to delay economic liberalization and innovation. The impact of corruption on social outcomes is also consequential. Social spending on education and health is typically lower in corrupt systems. This, in turn, leads to higher child and infant mortality rates, lower birth-weights, less access to education, and higher school dropout rates (Gupta, Davoodi, and Tiongson 2002). These outcomes disproportionately affect the poor, since they rely more heavily on government services, which become costlier due to corruption. Moreover, corruption reduces the

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Where powerful business elites collude to control public institutions, corruption results in state capture and ‘the privatization of public policy.’

income-earning potential of the poor as they are less well-positioned to take advantage of it. For all these reasons, corruption exacerbates income inequality and poverty (Gupta, Davoodi, and Alonso-Terme 2002). Corruption also breeds public distrust in government. It undermines the state’s capacity to raise revenue and to perform its functions as a supplier of public goods and services, a regulator of markets, and an agent for society’s redistributive goals. Where powerful business elites collude to control public institutions, corruption results in state capture and “the privatization of public policy.” The fallouts are all too clear: higher inequality in political influence, deterioration of public values, and ultimately a diminution in the overall quality of life. These non-economic costs create a vicious cycle of underperformance in the public sector that is harmful to the economy in the long term. The moral fabric of society is also put at risk. It is not just that bribery becomes part of one’s everyday life. In a society where success is more likely to depend on who you know rather than on personal merit, the incentives for young people to pursue higher education are undermined.

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Strategies for Addressing Corruption

Given the potential impact of corruption on macroeconomic stability and sustainable economic growth, the IMF has been actively engaged in helping our members design and implement anti-corruption strategies. In 1997, the Fund adopted a policy on governance that provides guidance on the nature of its involvement in circumstances where issues of governance, including corruption, are judged to have a significant macroeconomic impact. Since that time, we have gained considerable experience in helping members design and implement anti-corruption strategies. This is particularly important in the context of economic crises, where effective anti-corruption measures are critical to restore confidence. In some cases, the problem has been so severe that the Fund had no choice but to withhold support until a credible reform strategy was in place.

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Clearly, any anti-corruption strategy must be tailored to the circumstances of the particular country. Yet we have found that success requires the existence of a number of mutually supporting features, which are briefly summarized here.

Creating the Right Incentives As has been noted by one expert in this area, “Corruption is an economic crime, not a crime of passion. Givers and takers of bribes respond to incentives and punishments” (Klitgaard 2015, p. 37). A number of instruments—broadly characterized as disciplinary in nature (sticks)—can enhance individual accountability. Other instruments provide positive reinforcement (carrots). The Fund’s experience is that an effective anti-corruption approach needs both positive and deterrent measures. Strengthening the rule of law is critical to increasing individual accountability. The

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Fund has taken an active role—including through its conditionality—to strengthen legal frameworks that are designed to increase such accountability. For example, Ukraine’s current Fund-supported programme provides for the enhancement of legislation in a number of areas, including, in particular, the law on corruption. However, unless legislation is effectively enforced, it will not be credible in deterring corruption. Without effective law enforcement institutions—the police and other investigatory services, the public prosecutor’s office, and, ultimately, the courts—even the most robust legal framework will be ineffective. So, the greatest challenge arises when corruption has permeated society to the point that these institutions themselves have become compromised. In these cases, it may be necessary to create specialized “bridging” institutions in the hope that they can more effectively fight corruption, including in the traditional law enforcement institutions, while broader institutional reform is implemented. These “bridging” institutions include independent anti-corruption commissions and specialized

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anti-corruption courts, such as those currently being established in Ukraine and the earlier ones in Indonesia (IMF 2015b; IMF 2004). In this context, the Fund has found that the establishment of Anti-Money Laundering Frameworks is central to the fight against corruption. Requiring banks to report on suspicious transactions provides a very effective means of deterring criminal activities. The fact that these laws generally require even closer scrutiny of transactions conducted by “politically exposed persons” makes them particularly relevant to an anti-corruption strategy. Beyond the enforcement measures discussed above, an effective anti-corruption policy must also rely on transparency. Transparency shines a spotlight on government decisions and transactions, enabling citizens to monitor the actions of their governments which, in turn, deters corrupt behavior. Publicizing instances of corruption and the efforts taken to address them also serves as a disincentive to engage in corrupt activities and shores up public trust in government. For these reasons, the Fund has been actively engaged in promoting greater transparency in the overall economic and regulatory environment.

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We have developed standards and codes of best practices in areas such as data dissemination, fiscal transparency, and monetary and financial policies (IMF 1997).7 Promoting transparency in the extractive industries is another area that the Fund has actively pursued in its technical assistance work. Under the aegis of the Extractive Industry Transparency Initiative (EITI), a template is now available for reporting and monitoring government revenues from natural resources. Transparency can only go so far. It needs accountability for it to become a powerful deterrent against corruption. It is critical that public officials and institutions be assigned with specific mandates and tasks upon which they are expected to deliver. Moreover, oversight mechanisms are needed to ensure that officials and institutions are delivering as expected. This is why the Fund has actively supported its members in strengthening those institutions that exercise oversight powers in the management of public funds and in enhancing the financial accountability of state-owned enterprises. It has also provided technical assistance to help members monitor the use of public resources and consolidate extra-budgetary funds into the budget.

Even well-meaning public officials will be tempted by corruption if they cannot earn a living wage.

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The challenge...is to design regulatory frameworks that balance the benefits of regulation while minimizing opportunities for abuse of discretion.

Even well-meaning public officials will be tempted by corruption if they cannot earn a living wage. Research shows a correlation between increases in wages and improvements in a country’s ranking on the Corruption Perceptions Index (CPI) (Van Rijckeghem and Weder 2002). This is why Fund-supported programmes have sometimes included increases in public salaries as part of an anticorruption approach (IMF 2006). That said, there are two critical considerations. First, the remuneration of the public sector needs to be transparent and meritocratic; otherwise, it will be perceived as merely an instrument of political patronage. Second, studies show that an increase in remuneration will have little effect unless accompanied by clear signals that public officials will lose their jobs if they are caught engaging in corrupt acts.

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Economic Liberalization and Effective Regulation As I have indicated, one of the costs of corruption is that regulators seeking bribes through approval processes have an incentive to delay the type of economic liberalization that fosters sustainable growth. Wherever discretion is granted to an official regarding the approval of an economic activity, there is a risk that this discretion will be abused. Appropriately designed liberalization can therefore be a powerful anti-corruption instrument. As part of its core mandate, the Fund has been actively engaged in encouraging liberalization of trade, price, and financial systems. We have also advocated free and fair market-entry regulations, as well as good statistics and transparency. Importantly, where liberalization involves privatization, it is critical that safeguards—such as adequate and transparent procedures—are in place so that the sale of assets is not compromised by corruption.

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... experience shows that the private sector can become effective partners in combating corruption.

Of course, experience demonstrates that regulation in a market economy is essential for both sustained growth and financial stability. The challenge, however, is to design regulatory frameworks that balance the benefits of regulation while minimizing opportunities for abuse of discretion.8 For this reason, in its core areas of expertise, the Fund has promoted the adoption of rules, procedures, and criteria that are as targeted, clear, simple, and transparent as possible. These areas include public expenditure management, tax policy and administration, banking and foreign exchange systems, and data management (IMF 1997).

The Role of the Private Sector When people complain about corruption, they sometimes forget—perhaps conveniently—that for every bribe taken by a public official, one is given by a member of the private sector. Clearly, then, addressing the behavior of the private sector needs to be a key component of any effective anti-corruption strategy. How can this be done?

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In some cases, this means using enforcement measures. For example, in those countries where bribery is a common way of facilitating foreign investment, it is critical that the country of the foreign investor enforces laws that prohibit foreign corrupt practices. The Organisation for Economic Co-operation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions can be invoked in this effort (OECD 1997). However, experience also shows that the private sector can become effective partners in combating corruption. It is sometimes said that business might benefit from corruption by virtue of the fact that it can “grease the wheels” of a rigid and inefficient bureaucracy. I disagree with that proposition. Based on my own experience, investors actually seek out countries that can give them the assurance that, once an investment is made, they will not be blackmailed into providing bribes. Because corruption creates an enormous amount of unpredictability for businesses, anti-corruption strategies can be designed to solicit their support.

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I find Indonesia’s experience of implementing that partnership particularly illuminating. At a recent seminar hosted by the IMF on the topic, Sri Mulyani Indrawati, Indonesia’s former Minister of Finance (and currently Chief of Operations at the World Bank), described how she successfully partnered with businesses to provide a streamlined customs approval process in exchange for their commitment not to offer any bribes to officials—“new rules of the game.”9 The “new rules of the game” concept has underpinned several technical assistance activities by the Fund and the World Bank. In reforming tax agencies in Bolivia, Bulgaria, Indonesia, Myanmar, Peru, Poland, and Senegal, Large or Medium Taxpayers’ Offices were established to deal with a select group of taxpayers under streamlined conditions. Beyond the business community, civil society also has a role to play. Through the use of social media, civil society can become a powerful force in combating corruption. In addition to being a very effective means of monitoring government activities, social media can also greatly enhance the credibility of an anti-corruption campaign by linking new institutions that have a specific mandate in this area.10

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Building Values and Institutions When dealing with corruption, a robust framework of incentives and a well-calibrated economic liberalization cannot be substitutes for strong values and effective institutions. Of course, developing values at a personal and institutional level may seem beyond the control of any government. It is clearly not something that can be legislated. Yet unless public officials take pride in their work—and their independence from both political and private influence—all other efforts will fail. Building values among public officials requires sustained public education. Formal training can help but, ultimately, values are most effectively instilled through the education framework, societal pressure, and—as I will discuss further below—the example of leaders. The key objective is to develop a cadre of public officials who are—and are perceived to be—independent from both private influence and political interference. This is the single most important feature of a strong institution. Indeed, it has been noted that one way to assess the strength of an institution is to assess the extent to which key employees are replaced at the time of elections.

Building values among public officials requires sustained public education.

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There are other factors that lend support to effective operation, some of which—such as rules that establish transparency and clear accountability—have already been mentioned. An area in which the Fund has been particularly active is the establishment of legislative and institutional frameworks that strengthen the independence, integrity, and governance of central banks, including through the Fund’s “safeguards assessments.” A recent example has been work in Tunisia in support of the Central Bank, which strengthened its independence, internal control mechanisms, and powers. Of course, enhancing the overall technical competence of officials who work in these institutions is also critical. For this reason, the Fund has invested considerable resources in capacity-building in a broad range of areas, from public finance management to the strengthening of the financial intelligence units, that are responsible for applying anti-money laundering laws.

Political Will Developing professional institutions that do not become excessively politicized is critical. Yet the irony is that in circumstances where institutions have been completely compromised by corruption, active and sustained political will is essential. Powerful vested interests can only be effectively challenged when a country’s top leadership sends a clear signal that they are committed to do so.

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In some cases, this may require wholesale dismissals within an agency that has a reputation for corrupt practices. Prosecuting the powerful “big fish,” which is necessary in order to send a clear signal of commitment and change, can only be achieved if a country’s leaders visibly support the process. Moreover, political leaders play a unique role in setting an example of professional integrity. Lee Kuan Yew is a leader who was very effective in both signaling a zero-tolerance policy towards corruption and building competent institutions at a time when corruption was pervasive in Singapore.

Avoiding Pitfalls Although active and sustained political leadership is critical to the success of any anti-corruption campaign, it is important that reforms in this area are not hijacked to implement a political agenda. One way of assessing whether anti-corruption efforts are credible is to note whether enforcement is limited to the prosecution of political rivals, or instead also extends to the government’s political supporters. In addition, care should be taken to ensure that an anti-corruption campaign does not create such fear that public officials are reluctant to perform their duties. For example, in circumstances where state-owned banks have extended a loan to a company that has become insolvent, it is often in the interest of the bank, the debtor, and the economy more generally to restructure the loan (which might include principal write-downs) in a manner that enables the company to return to viability.

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Yet the Fund’s experience has been that, in some countries, the managers of state-owned banks are simply afraid to engage in such negotiations. They fear that, if they agree to any debt write-down, they will be prosecuted under the country’s corruption law for having wasted state assets—even though a restructuring might actually enhance the value of the bank’s claim relative to the alternative, the liquidation of the company. Finally, although regulatory reform can promote simplicity and automaticity, there are certain functions, such as bank supervision, where discretion will always be essential. For these reasons, regulatory reform cannot be a substitute for the development of effective institutions.

Concluding Observations As the head of an intergovernmental organization, I recognize that there may be considerable sensitivity about the IMF shining a spotlight on corruption. At the same time, the alternative—turning a blind eye to the problem—is not a viable option. As is recognized under its existing policies, it is not tenable for the IMF to assess a member’s economic prospects exclusively through the lens of monetary, fiscal, or financial sector policies, when the problem of corruption is endemic and has a major impact on economic performance. In such cases, the Fund will continue to engage constructively with its members in designing and implementing anti-corruption strategies, drawing upon its cross-country experience, while partnering with other international organizations that have proven expertise in this area.

ENDNOTES 1 This 2015 estimate is an extrapolation by Daniel Kaufmann based on his work in Myths and Realities of Governance and Corruption (2005). 2 In addition, non-compliance with tax obligations distorts competition. See IMF. 2015a. Current Challenges in Revenue Mobilization. Washington, D.C.: IMF. 3 See also, for example, Tanzi, V. and Davoodi, H. 2002. “Corruption, Public Investment, and Growth.” In G. T. Abed and S. Gupta, eds., Governance, Corruption & Economic Performance. Washington DC: IMF, pp. 280–299. Military spending is, in addition, prone to corruption, because of secrecy and a lack of transparency (see Gupta, S., de Mello, L. and Sharan, R. 2002. “Corruption and Military Spending.” In G. T. Abed and S. Gupta, eds., Governance, Corruption & Economic Performance. Washington, D.C.: IMF, pp. 300–332). 4 While the analysis of the association between corruption and growth remains controversial, a meta-analysis of 52 cross-country studies found that a one-unit increase in the perceived corruption index is associated with a nearly 1 percentage-point decrease in the growth rate of per capita GDP (see Ugur, M. and Dasgupta, N. 2011. Evidence on the Economic Growth Impacts of Corruption in Low-Income Countries and Beyond: A Systematic Review. London: EPPI-Centre, Social Research Unit, Institute of Education, University of London). 5 Over the past decade, risk-rating agencies have realized that their previous models, driven by economic variables alone, were unsatisfactory and have incorporated governance and corruption factors, such as the Worldwide Governance Indicators. 6 There are cases where corruption has caused some donors to interrupt foreign aid flows.

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7 For example, the Fiscal Transparency Evaluation conducted by the Fund in Mozambique (the first in SubSaharan Africa) identified a need for greater transparency in public procurement and state-owned enterprises (see IMF. 2015c. Republic of Mozambique – Fiscal Transparency Evaluation). In Tunisia, the Fund has supported the development of a more transparent budget law that would strengthen budget preparation and execution procedures and introduce performance-based budgeting. 8 Many countries are taking the positive step of automating public services, which not only allows for simplification and efficiency, but also eliminates the potential for abuse of discretion. 9 2015 IMF Annual Meetings Flagship Seminar – Individual Integrity in Public Sector Governance, Lima, Peru. 10 A good example is the “I paid a bribe” website in India (www.ipaidabribe. com). For other examples in Bhutan, Pakistan, and Kenya, see Strom, S. 2012. Websites shine light on petty bribery worldwide. New York Times. 6 March 2012. Available from: http://www.nytimes.com/2012/03/07/ business/web-sites-shine-light-on-pettybribery-worldwide.html?_r=0).

REFERENCES Gupta, S., H. Davoodi, and R. Alonso-Terme. 2002. “Does Corruption Affect Income Inequality and Poverty?” Economics of Governance (3): 23–45. Gupta, S., H. Davoodi, and E. Tiongson., 2002. “Corruption and the Provision of Health Care and Education Services,” In Governance, Corruption, and Economic Performance, eds. G.T. Abed and S. Gupta (Washington, D.C.: IMF): 245–79. IMF. 1997. “The Role of the Fund in Governance Issues—Guidance Note.” IMF News Brief No. 97/15. Washington, D.C.: International Monetary Fund. ———. 2004. “Legal, Judicial, and Governance Reforms in Indonesia.” Indonesia: Selected Issues, IMF Country Report No. 04/189. Washington, D.C.: International Monetary Fund. ———. 2006. Islamic Republic of Mauritania: 2006 Article IV Consultation—Staff Report, Washington, D.C.: International Monetary Fund. ———. 2015a. Current Challenges in Revenue Mobilization. Washington, D.C.: International Monetary Fund. ———. 2015b. Ukraine—Request for Extended Arrangement. IMF Country Report No. 15/69. Washington, D.C.: International Monetary Fund. ———. 2015c. Republic of Mozambique—Fiscal Transparency Evaluation. Country Report No. 15/32. Washington, D.C.: International Monetary Fund. Kaufmann, D. 2005. Myths and Realities of Governance and Corruption. Washington, D.C.: World Bank: 81–98. Klitgaard, R. 2015. Addressing Corruption Together. Paris: Organisation for Economic Co-operation and Development. Mauro, P. 1998. “Corruption and the Composition of Government Expenditure.” Journal of Public Economics (69): 263–79. OECD. 1997. “Convention on Combating Bribery of Foreign Public Officials in International Business Transactions” [online] Paris: OECD Publishing. Svensson, J. 2005. “Eight Questions about Corruption.” Journal of Economic Perspectives 19 (3): 19–42. Van Rijckeghem, C. and B. Weder. 2002. “Bureaucratic Corruption and the Rate of Temptation: Do Wages in the Civil Service Affect Corruption and by How Much?” In Governance, Corruption, and Economic Performance, eds. G.T. Abed and S. Gupta (Washington, D.C.: International Monetary Fund): 59–88.

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Demographic Change and Economic Well-Being

The Role of Fiscal Policy Delivered at the Massachusetts Institute of Technology, Cambridge, Massachusetts, on March 4, 2016

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resident Reif, thank you for the kind introduction, and thank you to the students and faculty for your warm welcome.

It is a tremendous honor to have the opportunity to deliver the Compton Lecture—and to be the first French woman doing so: Quel honneur et quelle responsabilité! In many ways, this marks a visit to “our” alma mater—and by “our,” I mean the IMF’s alma mater. It is quite remarkable that our last five chief economists received their doctoral training here at MIT. Kenneth Rogoff, Raghuram Rajan, Simon Johnson, my compatriot Olivier Blanchard, and, of course, Maurice Obstfeld, who took the helm of our Research Department last year. These economists are not only leaders in their fields, but they also embody the MIT spirit of intellectual honesty and openness and relentless curiosity.

Through their work at the IMF, these MIT alumni have played a crucial role in promoting the global public good of economic and financial stability—which has been the Fund’s raison d’être for more than 70 years. Indeed, if the IMF had a motto it could be the image of the MIT motto—“Mens et Manus,” “mind and hand.” Both institutions are keenly aware that the best research—the grandest ideas—are those that can change our lives, our economies, our nations for the better. Both institutions are keenly aware that this requires rolling up one’s sleeves and tackling problems hands-on—in the lab, in the start-up venture, in the offices of policymakers who are looking to us for advice. In short, both our institutions are deeply committed to serving the world in the 21st century.

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...the world’s population is at about 7½ billion people today. Forty years from now, it will be an estimated 10 billion inhabitants.

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THE ROLE OF DEMOGRAPHICS When I look at our 21st century, demographic change is one of the first features that come to my mind. Think about it—the world’s population is at about 7½ billion people today. Forty years from now, it will be an estimated 10 billion inhabitants.1

Without action, public pension and health systems will not be sustainable over the long term. Our grandchildren would face unsustainable public debt and sharp tax increases that could stifle growth and reduce their economic well-being. As Albert Einstein once said,

In some parts of the world—especially in South Asia and sub-Saharan Africa—populations will continue to grow rapidly.

“The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

Other parts of the world—including most advanced and emerging market economies— will face a momentous transition toward aging and shrinking populations. Indeed, by the end of this century, about two-thirds of all countries are expected to have declining populations.

So we need to reframe the debate about demographics.

This will have profound implications for economics, financial markets, social stability, and geopolitics.

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I believe that this challenge can be met. But it requires the right policies, political resolve, and strong leadership. I will argue that fiscal policy responses and technological innovation are especially important parts of the solution.

By the end of this century, about two-thirds of all countries are expected to have declining populations.

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Without action, public pension and health systems will not be sustainable over the long term.

The Two Sides of Demographics So let us start by looking at the sunny side of demographics. Picture yourself getting together with your grandchildren! You may be in your 70s, but you are physically active and not afraid to impress the kids with your new Instagram account, or knowledge about gravitational waves. Well, maybe you have a different vision of the golden years, but surely we can agree on one thing: being able to lead long and healthy lives is a demographic dream come true. By any standard, this is one of our most astonishing achievements.

LIFE EXPEC TANC Y IS UP John Maynard Keynes, one of the two founding fathers of the IMF, coined the phrase “In the long run, we are all dead.” Happily, the long run is now expected to be even longer! Average life expectancy around the world has jumped from 47 years in 1950 to 71 years2 today. Of course, life expectancy varies greatly across regions—from a low of 61 years in Africa to a high beyond 80 years in North America, Japan, and many European countries.

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Few people today would want to swap their modern lives for an earlier existence. In the late 19th century, for example, the typical American household could expect to see almost one in four of its children die in infancy, and people suffered from diseases that would be easily curable today. The difference between then and now lies in a powerful combination of factors: improved sanitation, the introduction of antibiotics and vaccines, expanded education, and better infrastructure and health care, to name just a few.

FERTILIT Y RATES ARE DOWN The increase in life expectancy and economic welfare that came with the industrial revolution brought with it the seeds of demographic change. In what we call today the advanced economies, it started with a pronounced drop in fertility rates in the second half of the 19th century that has continued today. At the risk of oversimplifying Gary Becker— from the University of Chicago, I am afraid— the decline in fertility rates was related to changes in economic circumstances that increased the financial returns to education.

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To put it simply, it became rational for families to invest in their children’s education, and families increasingly opted for raising fewer better-educated children instead of a larger number of children. There is also ample evidence that children of better-educated mothers do better in terms of health and education. Educated women tend to have fewer children and devote more time to each child—while they enjoy broader opportunities in their own lives. This virtuous circle that started in Europe and the United States more than a hundred years ago is now widely seen across the world. The economic, social, and political implications are momentous. Fertility rates have come down—in 1950 the average woman bore 5 children; today she has 2.5 children (these are global averages). Over the same period, the global literacy rate jumped from 36 percent to 83 percent today.

GLOBAL PER CAPITA INCOME IS UP For one thing, increased investment in human capital has had a large positive effect on economic well-being. Average incomes in emerging market economies, such as China and India, have risen much faster than those in richer countries. Since the 1990s, the growth momentum has spread to more than 70 developing countries. As a result, global inequality—that is, income inequality between countries—has fallen steadily over the past decades. And global income per capita has nearly quadrupled since the end of the Second World War.

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Global poverty has also come down sharply. People living at or below the poverty line of $1.90 per day account for 13 percent of the world’s population, down from 44 percent in 1981.3 China alone has lifted more than 750 million people out of poverty over the past three decades. The bottom line: emerging and developing countries have been catching up with advanced economies in facilitating longer and more prosperous lives for their citizens.

THE DARKER SIDE OF DEMOGRAPHICS So what’s not to like? What is the darker side of demographics? Well, with declining fertility rates, populations in some advanced economies did not just grow more slowly; they stagnated, or began to shrink. The same will eventually become true for emerging and developing countries. Japan’s and Germany’s populations, for example, started to decline some time ago. Even the world’s most populous country—China—has been facing a declining working-age population since 2012. In most cases, shrinking and rapid aging go hand in hand. This is a demographic double whammy that will have major implications for economic growth, financial stability, and the public purse. First—the impact on growth. For obvious reasons, older workers participate less in the labor market, and a country with an aging and shrinking population will therefore see lower growth over the medium term.

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With declining fertility rates, populations in some advanced economies did not just grow more slowly; they stagnated, or began to shrink.

Fewer workers also means less need to equip them with capital. And countries may become reluctant to upgrade their capital stock. Why build more infrastructure for fewer people? Our research suggests that the combination of aging and shrinking will reduce potential growth in advanced economies by about 0.2 percentage points in the medium term—and by twice as much in emerging economies.4 This may not look so bad, but it would be a severe blow to those countries that are already facing very low growth and high debt. Second—the impact on financial markets. Many see population aging as a significant drag on asset prices. Some even hypothesize that retiring baby boomers may trigger stock market disruptions because they may liquidate their equity holdings to finance their retirement. This may or may not be true, but what we definitely know is that governments, pension funds, and individuals seriously underestimate the prospect of people living much longer than anticipated.

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IMF analysis suggests that, if everyone lived three years longer than expected, pensionrelated costs could increase by 50 percent in both advanced and emerging economies.5 This would heavily affect private and public sector balance sheets and could also undermine financial stability. Third—the impact on fiscal health. Again, IMF staff research shows that, in advanced economies alone, age-related spending is projected to jump from 16½ percent of GDP to 25 percent by the end of this century— unless policy action is taken.6 How can this challenge be met? Through borrowing? If governments were to finance the entire increase in age-related expenditure that way, public debt would explode from an average of 100 percent of GDP now to 400 percent by the end of the century. Through higher taxes? In our hypothetical example, this would mean lifting valueadded tax rates by roughly 20 percentage points, or increasing social security taxes by about 25 percentage points.

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“ ” Bribing people to have children does not seem to work—at least in the aggregate.

Through drastic entitlement reforms? By our calculations, this would mean slashing pensions and health benefits on average by about a third.

Of course, we do not need a comedian to remind us that voters and politicians rarely look beyond the next election, let alone the next 85 years.

There is a wide variety of country experiences, but broadly speaking, emerging markets and advanced economies face similar challenges. Without action, China’s spending on pensions and health care is projected to increase by 13 percentage points of GDP by the end of this century, compared with 15 percentage points in the United States.

The question is—is there a quick fix, a silver bullet? The answer is—yes…and no.

So what can policymakers do to tackle these daunting fiscal challenges?

Fiscal Policy— The First Line Of Defense This is the point in the lecture where Groucho Marx would jump up and ask: “Why should I care about future generations? What have they ever done for me?”

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Common sense tells us that simply increasing the fertility rate could help. Many countries have tried to do just that—with baby bonuses, family allowances, tax incentives, parental leave, subsidized child care, and flexible work schedules. What is the result? Well, these measures have boosted the labor force participation of mothers—which is great news in and of itself—but they seem to have little or no effect on the number of births. So, bribing people to have children does not seem to work—at least in the aggregate.

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GAME CHANGERS That is why we need a multipronged policy response. In other words, it is not enough to focus on just one aspect, such as pushing through a pension reform. We need game changers. The first game changer is entitlement reforms. Start with health care—which accounts for the lion’s share of age-related expenditure increases. Increasing competition among insurers and service providers will help. But it also requires more targeted spending, paying more attention to primary and preventive health care, promoting healthier lifestyles, and making more effective use of information technology. For instance, costs can be reduced by making greater use of heath data history or using unique health identifiers for individuals. If these efforts can be sustained over many years, it would help governments to bend the cost curve.

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Another priority is lifting retirement ages to match longevity gains. This would bolster the pension system and extend the productive life of individuals. At the same time, however, policymakers need to put in place a proper safety net for those who might not be healthy enough to work longer. Pension systems also need to be flexible enough to respond to demographic shifts. The Japanese system, for instance, automatically slows the growth of benefits to offset increases in life expectancy and changes in the labor force. Other countries—such as Germany, Finland, and Portugal—also link benefits to life expectancy. Again, the sooner the reform, the fairer the adjustment. More broadly, in the current environment of already depressed aggregate demand, we need savvy fiscal policy—one that supports demand while ensuring sufficient savings in pensions and health care. The second game changer is better tax systems and more efficient public expenditure.

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On the tax side, this means broadening the base for value-added taxes, improving taxation of multinational corporations, and strengthening tax compliance—to ensure that everybody pays their fair share.

IMF research indicates that raising female labor participation rates to those of men could increase GDP by 5 percent in the United States—and the numbers are even higher for many other countries.

On the spending side, there must be better management of public investment. Our research shows that the most efficient public investors get twice the growth “bang” for their “buck” than the least efficient.

Another source of additional labor is immigration. Of course, the associated political and social issues are not to be underestimated. But from a purely economic perspective, immigration can boost a country’s labor force, encourage investment, and lift growth—provided that migrants are well integrated into the workforce.

And, of course, energy pricing is key—not only for the public purse, but for the planet. This means more emphasis on energy taxation and less reliance on energy subsidies. We estimate that global energy subsidies amounted to $5.3 trillion last year, or 6.5 percent of GDP. This staggering number needs to come down so these resources can be better used. Doing it now, when energy prices are low, makes it that much easier. The third game changer is a broad-based push to lift potential growth—to increase the size of the pie. In the end, there is only so much that tax measures and efficient public services can achieve.

Why is growing the economic pie so important? Not just so there is more to share now. Higher growth means a fuller public purse and a more potent fiscal policy response to this demographic challenge. There is, of course, an essential ingredient for growth—and that is raising labor productivity by using ever smarter technology. People here at MIT know a thing or two about that.

One way to grow the economic pie is to add more workers. An obvious group is women. Scandinavian countries and, more recently, Japan have sought to raise female labor participation by offering affordable child care, making tax and legal systems fairer for women, and promoting equal pay for equal work.

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Artificial intelligence, robotics, genetic engineering, 3-D printing, and quantum computing: these are only a few of the technologies that could profoundly affect our economic well-being in the 21st century.

Technological Innovation—A MustHave for Methuselah Indeed, MIT’s business is technological innovation, which is essential to raising living standards over the long term—so we can all “live long and prosper.” Artificial intelligence, robotics, genetic engineering, 3-D printing, and quantum computing: these are only a few of the technologies that could profoundly affect our economic well-being in the 21st century. Could these innovations revolutionize the allocation of labor and capital? “Yes!” say the optimists. I am thinking of Erik Brynjolfsson and Andrew McAfee from the Sloan School here at MIT, who argue that technical advances will have transformational consequences leading to accelerating productivity and increasing

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prosperity. In other words, the pie grows a good deal by itself and everybody enjoys more leisure. Please sign me up!

Well, not so fast perhaps. There are also pessimists in this debate! First among these is perhaps Robert Gordon, who also got his PhD from MIT, under the supervision of Robert Solow, almost 50 years ago. Professor Gordon argues that the century between 1870 and 1970 was unique in inventing electricity, gas, the internal combustion engine, running water, sewers, the telephone, antibiotics, and much else. In his view, the technical progress achieved since then—admirable as it has been—is simply not visible in productivity growth. Which of these views is correct? The short answer is, “Nobody knows.” What we do know, however, is that we need more innovation, not less.

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We should encourage greater sharing of technology between the advanced economies and their emerging peers— including through foreign direct investment, trade reforms, investment in education, and better enforcement of intellectual property rights.

INNOVATION IS KEY Powerhouses like MIT have been leading the way for decades, including through partnerships with major corporations. Governments also need to play their part—by removing barriers to competition, cutting red tape, and investing more in education and research and development (R&D). This would unleash entrepreneurial energy and help attract private investment in ideas that are new, surprising, and useful. In addition to supporting universities and research networks, governments typically provide subsidies for private sector R&D. More investment in R&D means bigger benefits for the wider economy. New IMF research shows that, if advanced economies were able to ramp up private R&D by 40 percent, on average, they could increase their GDP by 5 percent in the long term.7

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Innovation is also critical outside the advanced economies. For example, China is today’s number one in the world in terms of patent applications. And more and more multinationals outsource parts of their R&D to countries like Brazil and India. To be fair, most developing countries still rely considerably on the imitation and absorption of technologies from advanced economies. This is why we should encourage greater sharing of technology between the advanced economies and their emerging peers—including through foreign direct investment, trade reforms, investment in education, and better enforcement of intellectual property rights. If this were to happen, it would be another global game changer.

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Conclusion So let me conclude with this idea of sharing. The life motto of Karl Taylor Compton, MIT’s ninth president, was, “Leave every campground better than you found it.”

I am confident that we can meet this challenge. We all have a stake in this campground. Thank you.

We all know that we must address a huge demographic challenge, so we can leave our economies and societies better than we found them. We owe this to our children and grandchildren.

ENDNOTES 1 United Nations estimates. 2 United Nations estimates. 3 World Bank estimates. 4 April 2015 World Economic Outlook. Chapter 3: “Where Are We Headed? Perspectives on Potential Output.” 5 April 2012 Global Financial Stability Report. Chapter 4: “The Financial Impact of Longevity Risk.” 6 IMF Staff Discussion Note: “The Fiscal Consequences of Shrinking Populations.” 7 April 2016 Fiscal Monitor (forthcoming).

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Brothers and Sisters, There Is Much to Do Delivered at the 2015 IMF–World Bank Annual Meetings in Lima, Peru, on October 9, 2015

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residente Humala, Presidente Bedoumra, Presidente Kim, gobernadores, invitados de honor: Estoy encantada de estar aquí hoy y doy mi bienvenida a las Reuniones Anuales del Fondo Monetario Internacional y del Banco Mundial. ¡Bienvenidos!   Hablo en nombre de todos cuando agradezco al Gobierno y al pueblo del Perú por su gran hospitalidad. ¡Muchas gracias! Hoy, Lima es la primera ciudad de América Latina sede de las Reuniones Anuales en casi cincuenta años. Esto confirma el dicho “las cosas buenas vienen a aquellos que esperan.” 1

So, Lima is the first Latin American city to host the Annual Meetings in almost 50 years. It has been a long time, but it also means that Peru is no longer the proverbial “country of the future”—it is the “country of the present.” As one of the fastest-growing economies in Latin America in the last few years, Peru has the chance to unlock its immense potential and create greater prosperity for all Peruvians. Of course, nothing can be taken for granted. Being in the present means addressing the big new challenges and constraints. Uncertainty over the global economy is on the minds of policymakers in all countries, including here in Peru.

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We are no longer in an economic crisis, but this is a time of change. Old paradigms no longer hold; new economic relationships emerge. This means it is also a time of opportunity and action. Someone who captured this spirit is the great Peruvian poet César Vallejo. I love how he concludes one of his best-known poems with a confident “Can do!” message: “Hay, hermanos, muchísimo que hacer.” “Brothers, there is still so much to do.” Indeed, brothers and sisters—hermanas— there is much to do! We are all here in this wonderful new convention center to demonstrate to the world that we are ready for this change—that we can do it! The raison d’être for the IMF and the World Bank—for our membership—is to work together in addressing these new challenges— as we have done many times before! Let us examine how, in this changing global landscape, both Latin America and the IMF are transitioning and adjusting to these new challenges.

…this is a time of change. Old paradigms no longer hold; new economic relationships emerge. BROTHERS AND SISTERS, THERE IS MUCH TO DO

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The Changing Global Landscape

agreement—we can restart the stalling engine of global trade.

First, the global landscape—where currently we see uncertainty, transition, and balancing acts.

These upgrades will make the global economy more resilient against the increased uncertainty that we face now. But even as we focus on the short-term policy measures, we need to be mindful of broader changes in the global landscape.

Uncertainty—because global growth will likely be weaker this year than last—at 3.1 percent, compared to 3.4 percent last year—with only a modest acceleration to 3.6 percent in 2016—much lower than what is needed to make deep inroads into unemployment and poverty. Transition—including China’s shift to a new growth model and the expected shift in US monetary policy. Both of these transitions are necessary and healthy, but they are impacting other countries across the globe through trade, exchange rates, asset markets, and capital flows—what we call spillovers. Emerging market and low-income countries that are heavily dependent on commodity revenues will be particularly affected. While these uncertainties and transitions may look daunting, I believe they can be managed—with the right mix of policies to support demand, strengthen financial stability, and implement structural reforms. All these are necessary balancing acts. At the same time, they may not be enough. That is why, during these meetings, I have been calling for specific policy upgrades. For instance, central banks in advanced economies should give due consideration to the risks of spillovers from their policy decisions; emerging economies should firmly address the buildup of corporate leverage and foreign debt. And I am hopeful that—building on the recent TPP [Trans-Pacific Partnership]

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Let me use an analogy. When seen on foot, the ancient Nazca Lines in southern Peru resemble a series of shallow trenches. Only when viewed from the air can one see the shape of a figure. The picture of the hummingbird—which you see on the screen—is deeply ingrained in the Peruvian culture, and it is also the symbol of our Annual Meetings. Likewise, we must take a wide perspective to understand the global Nazca Lines that will shape our economic future, and thus the destiny of billions of people worldwide. Some are obvious. One is climate change, where all countries need to integrate its implications into their macroeconomic frameworks. Energy pricing is key: the IMF has projected global energy subsidies at $5.3 trillion for 2015, or 6.5 percent of GDP—a staggering number that needs to come down in the years to come. To get it right, we need to price it right—and now is the time to eliminate subsidies, because energy prices are low. Another Nazca Line is innovative technology. As part of the agreement on Sustainable Development Goals (SDGs), the international community has committed to make the internet available to all by 2020. Imagine what can be achieved by everyone having access to online education, health care information, a bank account, and so on. There are endless possibilities. The challenge is to make it happen.

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“ ” Closing the gender gap will be a global economic game changer.

Of course, a Nazca Line on all our minds today is migration. We need action now to resolve the heartbreaking plight of refugees from war-torn countries. I applaud those who are demonstrating leadership on this issue and those on the ground who are working day and night to help. We at the IMF will play our part—through our economic analysis of the issues, both in originating and receiving nations, as well as through fiscal support for member countries facing these pressures—as we have already done, for instance, in Iraq and Jordan.

Another Nazca Line—closely related to migration—is demographic change. Think of the Middle East, where a third of the population is aged between 15 and 29. No wonder that many of these young people feel they have no choice but to leave in search of work. Or the shrinking working-age populations in advanced economies—especially in Europe— which may need to attract more foreign talent to replenish the reservoir of qualified workers.

Regardless of whether populations are aging or rapidly growing, one thing is clear: economies will need to adapt. A major factor that can help—as research from the IMF has recently affirmed—is empowering women to participate more in the economy. Whether to mitigate the effects of shrinking workforces or to create jobs by starting small or midsized enterprises, no country can afford to disregard the contributions women make to their economies. Closing the gender gap will be a global economic game changer. A further major issue shaping the future is personified by many of you here—the dynamic role of emerging economies. These countries helped pull the global economy back from the brink of another Great Depression a few years ago. They have accounted for almost 80 percent of global growth over the past five years. They now generate more than half of global output.

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Only the grumpiest pessimist would bet against the long-term success of emerging markets. And yet—as emerging markets themselves recognize—braving the winds of uncertainty and spillovers that are currently swirling will not be an easy task. The changing Latin American landscape helps to tell that story.

The Changing Latin America From Tijuana to Tierra del Fuego, we see a region that is incredibly diverse—economically, politically, and culturally. Indeed, it embodies the diversity of the emerging market universe that has, in many ways, outgrown the one-size-fits-all label. Latin America is also symbolic of the shifts that we have seen in so many emerging markets over the past two decades. One was the adoption of more robust policy frameworks. This allowed many countries to fully benefit from rising commodity prices, booming international trade, and favorable global financial conditions. A second shift came during the global financial crisis. Policymakers responded with bold, countercyclical measures. Latin America showed that it can do the right thing at the right time. As a result, most countries saw strong growth and low inflation and also tangible social progress—with income inequality and poverty levels declining sharply for more than a decade.

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The result? This is no longer your abuelo’s Latin America. It is a new region—but it now faces new challenges. The good news is that, like other emerging markets, Latin America is generally better prepared for the changing winds than in the past. The not-so-good news, again as in other countries, is that there are concerns about the region’s capacity to buffer shocks—falling commodity prices, the anticipated rise in US interest rates, and volatile capital flows. That is why confidence in policies and policymakers is vital. For most countries, the priority is to strengthen their policy frameworks— which we know will be put to the test. That means using fiscal policy responsibly and putting rising public debt back on a sustainable path. It means using monetary policy wisely and shrinking large current account deficits. But again, this may not be enough. I spoke earlier of “policy upgrades” by addressing the buildup of leverage and foreign debt in major companies. Monitoring these foreign currency exposures is key, as is bolstering the resilience of banks. This will reduce downside risks and strengthen financial stability. Most countries in the region also need to press ahead with structural reforms to diversify their economies, boost growth, and unlock the full potential of all their people. How can it be done?

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First, greater inclusion. Latin America— despite recent progress—remains the world’s most unequal region. The IMF has argued that reducing excessive inequality is not just sound social policy but sound economic policy as well. Our research shows that a 1 percentage point increase in the income share of the poorest 20 percent can lift growth by about 0.4 percentage point. Let me emphasize, in particular, the immense potential of Latin America’s indigenous people. When last in Peru, I met Maximiliana Taco. Living in a small village in Ayacucho, hers has been a difficult life. Yet she told me how today she is farming her land and making a living, how she is financially savvy, and how she has educated herself thanks to a government program called “Haku Wiñay—My Enterprising Small Farm.” There are millions more Maximilianas out there—their potential just waiting to be unleashed. Natural resources are another major asset, which, if properly managed, could transform the region for future generations. Too often, however, the needs of affected communities—their culture and dignity—have been neglected. Too often the rule of law has been ignored. And too often transparency and governance have been too weak. This must change. The last area with massive potential that I want to mention is infrastructure investment. Here, I cannot describe it better than Mauricio Tong—a 23-year-old student at the Universidad del Pacifico here in Peru—and winner of the IMF’s Peruvian Student Essay Competition.

What Mauricio wrote about his country resonates for the entire region: “In 2025, I see my country interconnected by an outstanding ground transport system, a system that is convenient, competitive, and held in high regard internationally, as our Inca roads once were. I see our fish, caught in the ocean, on the tables of homes in the mountain region. I see qualified teachers in schools, as well as medical specialists in hospitals in remote communities. And through all of this, I see development, I see a growing Peru, and I see the country unified and connected.” As Latin America faces a pivotal moment, Mauricio challenges us to deliver on his dream, to realize the region’s full potential. Hay, hermanos y hermanas, muchísimo que hacer.2

The Changing IMF I have talked about a new global landscape and the changing winds felt across the world, including in Latin America. One thing is clear: such is the nature of the challenges we face—from economic spillovers to climate change—no country can go it alone, and cooperation is key. I have called for a “new multilateralism”—for a stronger, more dynamic fabric that combines new strands, such as civil society groups, think tanks, and unions—alongside reinvigorated international institutions. The Fund is at the heart of this new multilateralism. Which brings me to my final topic: the changing IMF.

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Yes, it is no longer your abuelo’s—your grandfather’s—Latin America. Well, it is no longer your abuela’s IMF either. The Fund has changed in dynamic ways in recent years. My management team and I deeply appreciate the support that you have given us in this effort. Looking ahead, I envision an even stronger Fund that can even better address the needs of our 188 member countries. This vision rests on three objectives: agility, integration, and member focus. Together, conveniently, they spell the word “AIM.” First, more agility. Earlier this year, the Fund moved swiftly to provide the Ebola-affected countries with debt relief and financial support worth more than $400 million. Thanks to an innovative approach, we were able to

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provide “cash in the bank” quickly to help those countries fight this devastating disease. Another example of this agility is our support for the SDGs. Not only are we increasing access to all our concessional loan facilities by 50 percent, but we are also maintaining zero interest rate for countries facing major shocks and disasters. We are taking steps to ingrain this new agility in the Fund. I promise you that we will be ready for future challenges. You will not hear, “This is not how we used to do it,” but instead, “How can we explore it with you?” Second, a more integrated IMF. What does that mean? Connecting the dots on macro-financial linkages and cross-border spillovers. We will increase the macro-financial focus in a number of our upcoming Article IV reports— for example, for Mexico, Brazil, and Canada. And this is only the beginning.

Yes, it is no longer your abuelo’s—your grandfather’s— Latin America. Well, it is no longer your abuela’s IMF either.

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I envision an even stronger Fund that can even better address the needs of our 188 member countries. This vision rests on three objectives: agility, integration, and member focus.

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We will also do more work on the Nazca Lines that shape our global destiny. That is why I am committed to a stronger emphasis on financial inclusion, inequality, gender, and climate change—where we will focus on the macro-critical aspects of these issues. This will allow us to complement the work of our partner institutions, like the World Bank.

And we will strengthen our knowledge management to make best practices more easily available to all our members.

Third, I want to see an IMF that is even more member-focused. A good example here is capacity building. In the past six months alone, we have provided support to 125 countries. To deliver our training and technical assistance even more efficiently, we are increasing the scope and reach of our online tools.

Why am I so confident about that? Because we have fantastic staff, the best we could possibly have, who have risen to countless challenges in the past. They are ready to do it again, and do it even better!

We will also be placing increased emphasis on servicing our low-income members—including to better mobilize the domestic revenues that are so important to tackle poverty and drive sustainable growth.

Our “AIM”—to become more agile, more integrated, and more member-focused—is no easy task. Working together, I know that we can—and will—deliver.

Governors, let me also pay tribute to your representatives at the Fund, the Executive Directors who—together—bring to bear the collective wisdom of all our member countries in the running of this institution. Together, we have work to do; together, we are ready; together, we can do it.

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Conclusion Let me conclude by shining a light on some of the young people that are with us today.

Brothers and sisters, hermanos y hermanas— yes, together we can do it!

Earlier, we heard about Mauricio, who inspired us with his dream for Peru. Behind me, you can see two evocative photos— Smiling at Dawn by Ramon Martinez and Smiling at Life by Juan Pablo Troncos. They are the winners of our photo contest.

I would like to end by thanking you—and by thanking them: All the finalists—would you please stand up? Muchas gracias.

Through their words and their art, these young people express a confidence in the future—for Peru, for Latin America, and for the world. They inspire us.

ENDNOTES 1 President Humala, Chairman Bedoumra, President Kim, governors, honored guests: I am delighted to be here today and would like to add my welcome to the IMF and World Bank Annual Meetings. Welcome!

I know that I speak for all in thanking the government and the people of Peru for their incredible hospitality. Thank you very much!



Lima is the first Latin American city to host the Annual Meetings in almost 50 years. This confirms the saying that “good things come to those who wait.”

2 Brothers and sisters, there is still so much to do.

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Lifting the Small Boats Delivered at the Grandes Conférences Catholiques in Brussels on June 17, 2015

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ood evening! I am absolutely delighted to participate again in this prestigious conference, and I would like to thank Vice Premier Reynders for his kind introduction. Last month, on May 6th, I almost choked on my morning yogurt when I saw the front page of a leading business newspaper. There it was—a league table of the world’s best-paid hedge fund managers. It showed that the highest earner was able to pocket $1.3 billion in 2014. One man, $1.3 billion! Together, the 25 best-paid hedge fund managers earned a combined $12 billion last year, even as their industry suffered from largely mediocre investment performance. This reminded me of a famous Wall Street joke—about a visitor to New York who admired the gorgeous yachts of the richest bankers and brokers. After gazing long and thoughtfully at these beautiful boats, the visitor asked wryly: “Where are their customers’ yachts?”

Why is this relevant right now? Because the theme of growing and excessive inequality is not only back in the headlines, it has also become a problem for economic growth and development. I would like to take an economic perspective on this with you tonight. I will not focus on the gorgeous yachts of the super-rich, who have become the face of a new Gilded Age. It is not immoral to enjoy one’s financial success. But I would like to bring into the discussion what I would call the “small boats”—the livelihoods and economic aspirations of the poor and the middle class. In too many countries, economic growth has failed to lift these small boats—while the gorgeous yachts have been riding the waves and enjoying the wind in their sails. In too many cases, poor and middle-class households have come to realize that hard work and determination alone may not be enough to keep them afloat.

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In too many cases, poor and middle-class households have come to realize that hard work and determination alone may not be enough to keep them afloat.

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Too many of them are now convinced that the system is somehow rigged, that the odds are stacked against them. No wonder that politicians, business leaders, top-notch economists, and even central bankers are talking about excessive inequality of wealth and income. And these concerns can be heard across the political spectrum. In the United States, for example, President Obama and Republican leaders in the Congress agree that this is a defining issue of our time—one that needs not only a diagnosis but a cure. My key message tonight is this: reducing excessive inequality—by lifting the small boats—is not just morally and politically correct, it is good economics. You do not have to be an altruist to support policies that lift the incomes of the poor and the middle class. Everybody will benefit from these policies, because they are essential to generate higher, more inclusive, and more sustainable growth.

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In other words, if you want to see more durable growth, you need to generate more equitable growth. With this in mind, I would like to focus on three issues: 1. The global economic outlook 2. The causes and consequences of excessive inequality 3. The policies needed for stronger, more inclusive, and more sustainable growth

The Global Economic Weather Is Not Helping Much Let me start by describing the global economic weather map, as we see it. According to the IMF’s spring forecast, the global economy will grow 3.5 percent this year—about the same as last year—and 3.8 percent in 2016.

My key message tonight is this: reducing excessive inequality— by lifting the small boats—is not just morally and politically correct, it is good economics.

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In other words, if you want to see more durable growth, you need to generate more equitable growth.

Advanced economies are doing slightly better than last year. In the United States, the outlook holds for a strong expansion—the weak first quarter was just a temporary setback. Prospects in the euro area are improving, partly because of monetary easing by the European Central Bank. And Japan seems to finally be reaping the first rewards of its “three arrows” recovery strategy (monetary, fiscal, and structural). Forecasts for most emerging and developing economies are slightly worse than last year, mainly because commodity exporters are affected by price declines, especially for oil. And recent data releases have reinforced this picture. But there is a tremendous diversity of national trends—from still strong growth in India to recession in Brazil and Russia. So the good news remains that the global recovery continues. But growth remains moderate overall and uneven across countries.

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What about the years beyond 2016, the second half of this decade? Well, here is where I have to share some not-so-good news with you. Our view at the IMF is that the growth potential of both advanced and emerging economies is likely to be lower in the years to come. This is partly because of changing demographics and lower productivity. Our concern is that this will bring more challenges in the labor markets, less-solid public finances, and slower improvements in living standards. This is the “new mediocre” about which I have been warning. For the small boats it means that the wind is picking up, but it is not strong enough to reduce high unemployment. It is not strong enough to bolster middle-class incomes and drive poverty reduction. It is simply not strong enough to lift the small boats—even as the yachts are enjoying the breeze out on the high seas. So, what is going on? Are we to resign in the face of unfavorable weather? Is there no hope for the captains of the small boats, whether they are here in Belgium or anywhere in the world?

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Causes and Consequences of Excessive Inequality The short answer is: there is hope, but to see it, we need to step back and look at the global picture before we zoom in on the country level. Imagine lining up the world’s population from the poorest to the richest, each standing behind a pile of money that represents his or her annual income. You will see that the world is a very unequal place. There is obviously a vast gulf between the richest and the poorest. But if you look at the changes in this lineup over time, you will notice that global income inequality—that is, inequality between countries—has actually fallen steadily over the past few decades. Why? Because average incomes in emerging market economies, such as China and India, have risen much faster than those in richer countries. This shows the transformative power of international trade and investment. The massive global flows of products, services, people, knowledge, and ideas have been good for global equality of income—and we need more of that. So we can further reduce the gap between countries. But—and this is a big “but”—we have also seen growing income inequality within countries. Over the past two decades, inequality of income has risen substantially in most advanced economies and major emerging market economies, especially in Asia and Eastern Europe.

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In advanced economies, for example, the top 1 percent of the population now account for about 10 percent of total income. And the gap between rich and poor is even wider when it comes to wealth. Oxfam estimates that, in 2016, the combined wealth of the world’s richest 1 percent will overtake that of the other 99 percent of people. In the United States, a third of total wealth is held by 1 percent of the population. Latin America has been a bright spot with declining inequality levels—although it remains the world’s most unequal region. If you put all this together, you see a striking divergence between a positive global trend and mostly negative trends within countries. China, for example, has been at the sharp end of both trends. By lifting more than 600 million people out of poverty over the past three decades, China has made a remarkable contribution to greater global equality of income. But in the process, it has become one of the world’s most unequal societies—because many rural areas remain poor and because income and wealth have risen sharply in the cities and at the top levels of Chinese society. In fact, economies like China and India seem to fit neatly into a traditional narrative that says that extreme inequality is an acceptable price to pay for economic growth. Much like air pollution, some may be tempted to say that inequality is simply part of the deal—get over it!

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NE W CONSENSUS But there is a growing new consensus that countries should not accept this Faustian tradeoff. For example, analysis1 by my colleagues at the IMF has shown that excessive income inequality actually drags down the economic growth rate and makes growth less sustainable over time. Earlier this week, we released our latest IMF analysis2 that provides the hard numbers for my key message—that you need to lift the small boats to generate stronger and more durable growth. Our research shows that, if you lift the income share of the poor and middle class by 1 percentage point, then GDP growth increases by as much as 0.38 percentage point in a country over five years. By contrast, if you lift the income share of the rich by 1 percentage point, then GDP growth decreases by 0.08 percentage point. One possible explanation is that the rich spend a lower fraction of their incomes, which could reduce aggregate demand and undermine growth. In other words, our findings suggest that— contrary to conventional wisdom—the benefits of higher income are trickling up, not down. This, of course, shows that the poor and the middle class are the main engines of growth. Unfortunately, these engines have been stalling. A recent OECD study, for example, shows that the living standards of the poor and lower middle class in advanced economies have been falling relative to the rest of the population. This kind of inequality holds back growth because it discourages investment in skills and human capital—which leads to lower productivity in a large part of the economy.

DRIVERS OF EXCESSIVE INEQUALIT Y So, the consequences of excessive income inequality are increasingly clear—but what about its causes? The most important drivers of extreme inequality are well-known—technological progress and financial globalization.3 These two factors have tended to widen the earnings gap between higher- and lower-skilled individuals, especially in advanced economies. Another factor is the overreliance on finance in major economies such as the United States and Japan. Of course, finance—especially credit—is essential to any prosperous society. But there is growing evidence, including from IMF staff,4 that too much finance can distort the distribution of income, corrode the political process, and undermine economic stability and growth. In emerging and developing economies, extreme income inequality is largely driven by an inequality of access—to education, health care, and financial services. Let me give you some examples: • Almost 60 percent of the poorest youth population in sub-Saharan Africa has fewer than four years of schooling. • Nearly 70 percent of the poor in developing economies give birth without access to doctors or nurses. • More than 80 percent of the poor in developing economies do not have bank accounts.

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Of course, another major factor is low social mobility. Recent studies have shown that advanced economies with lower levels of mobility across generations tend to have higher levels of income inequality. In these countries, parents’ income is a major determinant of children’s income. It suggests that, if you want to move up in society, you need to grow up on the right side of the tracks. This doesn’t sound fair. With these kinds of disadvantages—with this kind of inequality of opportunity—millions of people have little or no chance of earning higher incomes and building up wealth. This is—in the words of Pope Francis—an “economy of exclusion.”5

Policies for Stronger, More Inclusive, More Sustainable Growth Policymakers can, in our view, generate a swell under the bow of the small boats. There are recipes for stronger, more inclusive, and more sustainable growth in all countries. The first priority—the number one item on the list—should be macroeconomic stability. If you do not apply good monetary policies, if you indulge in fiscal indiscipline, if you allow your public debt to balloon, you are bound to see slower growth, rising inequality, and greater economic and financial instability. Sound macroeconomic policies are the poor’s best friend—as is good governance. Endemic corruption, for example, can be a strong indicator of profound social and economic inequality.

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The second priority should be prudence. We all know that actions need to be taken to reduce excessive inequality. But we also know that a certain level of inequality is healthy and helpful. It provides incentives for people to compete, innovate, invest, and seize opportunities—to upgrade their skills, start new businesses, and make things happen. At their best, entrepreneurs have what economist John Maynard Keynes called “animal spirits”—a sometimes boundless confidence in their own unique ability to shape the future. In other words, standing out from the crowd is an essential driver of prosperity. The next priority should be to adjust policies to country-specific drivers of inequality, including political, cultural, and institutional settings. No more one-size-fits-all, but smart policies—potential game changers—that could help reverse the trend toward greater inequality.

SMART FISCAL POLIC Y One potential game changer is smart fiscal policy. The challenge here is to design tax and spending measures that have minimal adverse effects on incentives to work, save, and invest. The objective must be to promote both greater equality and greater efficiency. This means widening the tax revenue base by—for example—clamping down on tax evasion; reducing tax relief on mortgage payments from which the rich benefit most;6 and reducing or removing tax relief on capital gains, stock options, and the profits of private equity investments funds, known as “carried interest.”

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No more one-size-fits-all, but smart policies—potential game changers— that could help reverse the trend toward greater inequality.

In many European countries, it also means reducing high labor taxes, including through cuts to employer social security contributions. This would provide a strong incentive to create more jobs and more full-time positions— which would help stem the tide of part-time and temporary jobs that have contributed to rising income inequality. On the expenditure side, it means expanding access to education and health care. In many emerging and developing economies, it means reducing energy subsidies—which are costly and inefficient—and using the freed-up resources for better education, training, and stronger safety nets. According to a recent IMF study, governments around the world will subsidize the cost of oil, gas, and coal to the tune of $5.3 trillion this year. This is the equivalent of what they spend on public health each year.

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Promoting greater equality and efficiency also means relying more on so-called conditional cash transfers. These are immensely successful anti-poverty tools that have contributed significantly to the reduction in income inequality in countries such as Brazil, Chile, and Mexico.

During my recent visit to Brazil, I had the opportunity to visit a favela and witness firsthand the so-called Bolsa Familia program. This program provides aid to poor families—in the form of pre-paid debit cards—on condition that their children go to school and take part in government vaccination programs. Bolsa Familia has proven to be both efficient and cost-effective: for expenditure of 0.5 percent of GDP per year, 50 million people are being supported—that’s one in every four Brazilians.

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STRUC TUR AL REFORMS In addition to these smart fiscal policies, there is another potential game changer—smart reforms in vital areas such as education, health care, labor markets, infrastructure, and financial inclusion. These structural reforms are essential to lift potential economic growth and boost income and living standards over the medium term. If I had to pick the three most important structural tools to reduce excessive income inequality, it would be education, education, education. Whether you live in Lima or Lagos, in Shanghai or Chicago, in Brussels or Buenos Aires, your income potential depends on your skills, your ability to harness technological change in a globalized world.

Higher incomes require higher human capital and policies that bring together more teachers and students in 21st century class rooms, with better books and access to online resources. Emerging and developing economies need to promote more equal access to basic education, while advanced economies need to focus more on the quality and affordability of university education. Even those countries with the highest educational standards should do more. Another important tool is labor market reform. Think of well-calibrated minimum wages and policies to support job search and skill matching. Think of reforms to protect workers rather than jobs. In the Nordic countries, for example, workers have only limited job protection, but they benefit from generous unemployment insurance that requires jobseekers to find new positions. This model7 makes the labor market more flexible—which is good for growth—while safeguarding the interests of workers.

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If I had to pick the three most important structural tools to reduce excessive income inequality, it would be education, education, education.

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If you want to reduce excessive income inequality in developing economies, you need to increase financial equality.

Labor market reforms also have an important gender dimension. Across the globe, women have been facing a triple disadvantage. They are less likely than men to have a paid job, especially in the Middle East and North Africa. If they do find paid employment, it is more likely to be in the informal sector. And if they eventually get a job in the formal sector, they earn only three-quarters as much as men—even with the same level of education, and in the same occupation. Countries like Chile and the Netherlands have shown that you can sharply increase female labor force participation through smart policies that emphasize affordable child care, maternity leave, and workplace flexibility. You also need to remove legal barriers and tax discrimination that continue to hold women back in many countries.

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Worldwide, there are about 865 million women who have the potential to contribute more fully to the economy. So the message is clear: if you care about greater shared prosperity, you need to unleash the economic power of women. You also need to foster greater financial inclusion, especially in developing economies. Think of microcredit initiatives that turn poor people—mostly women—into successful micro-entrepreneurs—as I could recently see in Peru. Think of initiatives to build credit histories for people without bank accounts. Think of the transformative impact of cell-phone-based banking, especially in sub-Saharan Africa. By improving their access to basic financial services, poor families in developing economies can invest more in health and education, which leads to higher productivity and higher income potential. If you want to reduce excessive income inequality in developing economies, you need to increase financial equality.

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I sincerely hope that, by the end of this year, we will be able to look back and say, ‘We did it: we re-energized global economic growth. We reached a historic agreement on climate change. And we launched a brand new development agenda with ambitious goals and solid financing.’

Conclusion All these policies and reforms require leadership, courage, and collaboration. This is why I am calling on politicians, policymakers, business leaders, and all of us here to translate good intentions into bold and lasting actions. In particular, policymakers need to take advantage of what I think is a once-in-a-generation opportunity for development. In September, the United Nations will host a major summit that will seek to replace the Millennium Development Goals with a new set of Sustainable Development Goals. And a UN conference next month will try to finance this ambitious new development agenda.

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In December, leaders from 196 countries will meet in Paris to seek agreement on a comprehensive deal to cut carbon emissions. This deal would go a long way toward protecting the interests of the poorest members of society who are the first victims of climate change. There are many cynical voices out there, questioning the need for action in these areas and declaring defeat well before the battle has begun. We must be able to prove these cynics wrong—by focusing minds, by forging partnerships, and by setting the right goals. I sincerely hope that, by the end of this year, we will be able to look back and say, “We did it: we re-energized global economic growth. We reached a historic agreement on climate change. And we launched a brand new development agenda with ambitious goals and solid financing.”

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On all these issues, I see an important role for the IMF. Our key mandate is to promote global economic and financial stability. This is why we have been deeply involved in development—by helping our 188 member countries to design and implement policies and by lending to countries in times of distress, so they can get back on their feet. In sub-Saharan Africa, for example, many countries have applied sound macroeconomic policies over the past decade, and they are now reaping the benefits in the form of stronger growth and higher living standards. The IMF has supported these efforts through new instruments, such as zero-interest loans, as well as increased financing and capacity building. We are also stepping up our research on inequality, gender, and climate-related issues because they are—as we say—macro-critical.

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In addition, we are looking into how we might increase access to our loans for developing economies to help them buffer external shocks. In particular, we will increase our focus on helping the poorest and most fragile countries. Consider the latest migrant tragedies in the Mediterranean and on Southeast Asian shores. These cramped migrant boats represent the most fragile states and communities. They are the smallest of the small boats—a powerful reminder of the most extreme inequality of wealth and income. The economy of exclusion is staring us right in the face. It is often said that we should measure the health of our society not at its apex, but at its base. By lifting the small boats of the poor and the middle class, we can build a fairer society and a stronger economy. Together, we can create greater shared prosperity—for all.

By lifting the small boats of the poor and the middle class, we can build a fairer society and a stronger economy.

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ENDNOTES 1 Berg, Andrew G., and Jonathan D. Ostry. 2011. “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Staff Discussion Note 11/08, International Monetary Fund, Washington. 2. Dabla-Norris, Era, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta. 2015. “Causes and Consequences of Income Inequality: A Global Perspective.” IMF Staff Discussion Note 15/13, International Monetary Fund, Washington. 3 These two factors feature prominently in the academic literature and public discussions about inequality. The results of our latest Staff Discussion Note on the Causes and Consequences of Income Inequality confirm the findings in the literature. 4 A recent IMF Staff Discussion Note on Rethinking Financial Deepening (a) shows that, after a point, financial development damages growth. An IMF Working Paper (b) and a recent Bank for International Settlements paper (c) argue that it is possible to have too much finance. (a) Sahay, Ratna, Martin Čihák, Papa N’Diaye, Adolfo Barajas, Ran Bi, Diana Ayala, Yuan Gao, Annette Kyobe, Lam Nguyen, Christian Saborowski, Katsiaryna Svirydzenka, and Seyed Reza Yousefi. 2015. “Rethinking Financial Deepening: Stability and Growth in Emerging Markets.” IMF Staff Discussion Note 15/08, International Monetary Fund, Washington. (b) Arcand, Jean-Louis, Enrico Berkes, and Ugo Panizza. 2012. “Too Much Finance?” IMF Working Paper 2/161, International Monetary Fund, Washington. (c) Cecchetti, Stephen, and Enisse Kharroubi. 2015. “Why Does Financial Sector Growth Crowd Out Real Economic Growth?” BIS Working Paper 490, Bank for International Settlements, Basel. 5 Apostolic Exhortation by Pope Francis: “Just as the commandment ‘Thou shalt not kill’ sets a clear limit in order to safeguard the value of human life, today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality.” Francis. 2014. Apostolic Exhortation Vatican—Evangelii Gaudium. November 24. 6 Half the rich world’s governments allow their citizens to deduct the interest payments on mortgages from their taxable income 7 For more information on the Nordic model: IMF Staff Discussion Note on Labor Market Policies (a), IMF Working Paper on Jobs and Growth (b). (a) Blanchard, Olivier, Florence Jaumotte, and Prakash Loungani. 2013. “Labor Market Policies and IMF Advice in Advanced Economies During the Great Recession.” IMF Staff Discussion Note 13/02, International Monetary Fund, Washington. (b) International Monetary Fund. 2013. “Jobs and Growth: Analytical and Operational Considerations for the Fund.” IMF Board Paper, Washington.

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The IMF at 70

Making the Right Choices— Yesterday, Today, and Tomorrow Delivered at the World Bank–IMF Annual Meetings in Washington, DC, on October 10, 2014

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r. Chairman, Governors, Honored Guests: On behalf of the IMF, let me warmly welcome you to these Annual Meetings. And on the occasion of our 70th anniversary, let me wish you, and all of our 188 member countries, a very happy birthday! I would like to recognize my good friend and excellent colleague, President Jim Kim, and his great teams who are doing such good work at the World Bank. Happy birthday to you, too! This is a moment to reflect on the 70-year journey that we have all taken together. Even more importantly, it is a moment to look ahead. The choices we make today will shape our future. So let me begin with a story:

In Lewis Carroll’s classic, Alice in Wonderland, there is a scene in which young Alice comes to a fork in the road, where she meets the Cheshire Cat. Alice asks the cat which way she should go: “That depends a good deal on where you want to get to,” says the cat. “I don’t really care where,” says Alice. “Then it doesn’t matter which way you go,” says the Cheshire Cat. Why do I begin with this story? For a simple reason: the path we choose at a critical fork in the road has crucial consequences. It matters where we want to go in order to decide which way we go.

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Forks in the Road Almost exactly a hundred years ago, the world took a dramatically wrong turn. This was a period of great technological advances, a time of optimism and openness. And yet, instead of using these technological wonders for the betterment of humanity, they were turned toward massive destruction. The gates of cooperation were bolted shut. Because of this wrong turn, the world went through three decades of carnage, chaos, and calamity. But then something changed. Seventy years ago, in 1944, the world faced another fork in the road. This time, it chose the right path. It was the original “multilateral moment,” which gave birth to institutions of cooperation like the Fund and the Bank. John Maynard Keynes called it “that bigger thing we are bringing to birth.” This choice has paid off over the decades— with rising prosperity, greater stability, and lower poverty. The IMF has played an essential role: helping to fight crisis after crisis; helping low-income and transition countries gain a foothold in the global economy; and helping to build capacity, strength, and resilience across our entire membership.

Today, the Fund continues to respond to conditions on the ground, forcefully and flexibly. Since 2008, we have committed almost US$700 billion to countries in need and provided training to all of our members and technical assistance to 90 percent of them. Over the last several months alone, we provided fresh financial assistance to Ukraine, the Arab transition countries, and the African nations hit by Ebola. Seventy years after Bretton Woods, the international community stands at another fork in the road. The tried-and-true modes of cooperation seem to be fraying around the edges. The sustainability of the global economic engine itself is increasingly being questioned. Can it really deliver the jobs, the incomes, the better living standards that people aspire to? There are three key collective choices to be made: • First, how do we achieve the growth and jobs needed to advance prosperity and ensure social harmony? I would call this the choice between acceleration and stagnation. • Second, how do we make this interconnected world a more inclusive, safer place for all of us to thrive? This is the choice between stability and fragility. • Third, how do we strengthen cooperation and multilateralism, instead of isolationism and insularity? This is the choice between solidarity and seclusion. Our future hinges on our choices.

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Acceleration or Stagnation Let me start with the first and most basic choice of all—acceleration or stagnation— the prospects for growth and jobs. When we look down the road, we all know that there are huge obstacles in our path. We experience unprecedented demographic change, as the workforce in many of the world’s most dynamic economies—both advanced and emerging—enters their twilight years. In less than a decade, the over65s will outnumber the under-5s—for the first time ever. There has been a staggering rise in inequality—7 out of 10 people in the world today live in countries where inequality has increased over the last three decades. Yet we know that excessive inequality saps growth, inhibits inclusion, and undermines trust and social capital. And again, we live in a period of dramatic innovation, with all its potential. But the digital revolution is not job-intensive, and it could contribute to further inequalities. If we are not careful, the ghosts of the 19th century will haunt the 21st century.

Think also of the ecological carnage that comes with a rapidly warming planet. We all know the stark facts—the 12 warmest years on record have occurred in the last 17 years. The incidence of weather-related disasters has increased threefold since the 1960s. By 2030, almost half of the world’s population will live in regions of high water stress or shortage. But the threats to growth do not just come from the future, they assail us from the past. What do I mean? I mean that it is taking a very long time for the global economy to climb out of the hole dug by the Great Recession. We expect growth of only 3.3 percent this year, and still under 4 percent next year. Of even more concern: we are stuck in a painful jobs crisis. Two hundred million people around the world are looking for work today—if the unemployed formed their own country, it would be the fifth largest in the world. In some regions—southern Europe and North Africa—youth unemployment is now a chronic social problem, leading to widespread disenchantment and disengagement. As the Russian novelist Dostoyevsky once put it, “deprived of meaningful work, men and women lose their reason for existence.”

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All told, we risk getting stuck in a “new mediocre” of poor growth and paltry job creation. To overcome it, we need “new momentum” on the policy front. On the demand side, monetary policy should certainly continue to support the recovery—and with careful attention to potential spillovers and spillbacks. Fiscal policy must be customized to country circumstances— and we must not give up the gains that have accrued in recent years. At the same time, fiscal policy must be as growth- and job-friendly as possible. On the supply side, we need movement across many dimensions. Opening up cozy monopolies in service industries; boosting infrastructure investment; improving educational opportunities, financial inclusion, and the business environment—especially in many emerging markets and low-income countries. Using fiscal instruments—like carbon pricing—both to help make energy use more efficient and to encourage people to make green choices.

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These are not new insights, but action in the past has often lacked. This time the challenge is for real. We must aim higher, try harder, and work better together to achieve highergrowth outcomes. We also need to make the job market more inclusive. This means active labor market policies and training programs to help young people. It means more family-friendly policies like affordable child care and flexible working arrangements to entice more women into the workforce. Remember, an estimated 865 million women around the world are being held back. Yet we know that enabling women to participate on an equal footing with men is an economic game changer. The IMF stands ready to help our members with this agenda—offering country-specific advice on the reforms needed to make growth more sustainable, job-rich, and inclusive. That’s what we are here for.

All told, we risk getting stuck in a ‘new mediocre’ of poor growth and paltry job creation. To overcome it, we need ‘new momentum’ on the policy front.

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Stability or Fragility What about the second big choice—between stability and fragility? Just as there are present and future threats to growth, there are similar threats to financial stability. While the real economy might suffer from too little investment, the financial sector might be flying too close to the sun. Putting it another way, there is too little economic risk taking, and too much financial risk taking. Again, monetary policy needs to stay accommodative, to get the growth we need. Yet one side effect is the danger, once again, of a rush toward reckless risk taking. While there are a number of warning signs, the risks are particularly acute in the nonbank sector. One example: mutual funds now account for 27 percent of global high-yield debt, twice as much as in 2007. At the same time, risks are more concentrated—the top 10 global asset management firms now control a whopping US$19 trillion. This is larger than the world’s largest economy—the United States. History teaches us a clear lesson—the bigger the boom, the bigger the bust. A sudden shift in sentiment could easily cascade across the entire globe.

This interconnectedness offers great benefits— allowing more people to access global financial networks. But it also comes with a dark side: it makes financial crises more likely to occur, and more virulent when they do occur— 2008 was a stark reminder of this. Ultimately, we need to be able to garner the good and banish the bad. We need to be proactive, not passive. As the Bengali poet Tagore once said, “You can’t cross the sea merely by standing and staring at the water.” That means we need the right tools and policies. If financial markets are more challenging, then policies must be more powerful, and regulators and supervisors must be better equipped. The bottom line? We must complete the financial sector reform agenda, and we must continue to update it, as financial minds are getting creative and fertile in seeking out new loopholes. We have made good progress, especially on banking regulation. Yet we still need to overcome the too-important-to-fail problem. We need better rules for nonbanks, better monitoring of shadow banks, and better safety and transparency over derivatives. We need to strengthen macroprudential safeguards.

This feeds into the longer-term issue that affects financial stability—the increasing interconnectedness of the world economy. As you know, financial flows can zap and zoom across the world at lightning speed. The degree of financial integration has jumped tenfold since the IMF was founded. In the two decades before the crisis, international bank lending—as a share of world GDP— rose by 250 percent.

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We need to move away from the myopic mentality that led to the crisis—the tendency to prize profit over prudence, self-interest over service, excess over ethics.

And let’s be candid: we need to see a change in culture and behavior. We need to move away from the myopic mentality that led to the crisis—the tendency to prize profit over prudence, self-interest over service, excess over ethics. The IMF has a key role to play in coping with this new world of interconnections. A world of large capital flows means that we need a large global safety net. Regional arrangements—including the new BRICS Contingent Reserve Arrangement—certainly have an important role to play. But the IMF, as the only truly global institution focused on financial stability, must have adequate instruments and resources. It is a lesson that has been learned many times over the past 70 years: a strong global economy requires a strong IMF.

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Solidarity or Seclusion

Let me now turn to the third and final big choice facing us—solidarity versus seclusion. Do we lift high the banner of cooperation or do we sink low into the mud of provincialism? You all know the answer. You know that the most fertile ground is common ground; the best form of self-help is mutual help; the best kind of knowledge is shared knowledge. This is why we are all here today. It is why you are members of the IMF! Yet you also know that the global economy is undergoing radical shifts. Fifty years ago, the emerging markets and developing economies accounted for about a quarter of world GDP. Today, it is half, and rising rapidly. During the global crisis, it was the emerging markets that contributed most to global growth.

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This diffusion of power is not restricted to nation-states. Aided by technology, we also see the rapid rise of a more diverse network of global stakeholders: NGOs, cities, and even citizen activists. Powered by social media, they have proven their ability to force policy change. This new reality demands a new response— but not a new philosophy. It requires us to update, adapt, and deepen our modes of global cooperation. It requires using the wonders of technology for the betterment of humanity. It requires what I have a called a “new multilateralism.” In the words of the late Maya Angelou: “to give birth again to the dream.” What does this mean in practical terms? For a start, it means a recommitment to the values of open trade and investment. It means resisting the lure of “beggar-thy-neighbor” economics. It means placing the global good above individual self-interest.

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There are three areas where progress is vital: • First, in the financial sector: we need cooperation to come to an agreement on the cross-border resolution of megabanks. • Second, we know that tax competition especially hurts low-income countries as they strive to mobilize badly needed revenue. The international community needs to go further in making it more difficult to shift taxes from one country to another simply for profit. • Third, on external imbalances: we know that behind every current account deficit lies a current account surplus. Countries on both sides must take responsibility for balance and stability. Renewed solidarity also calls for global action to turn the tide of climate change: 2015 is shaping up to be a make-or-break year. If we miss this chance, then we are failing the world’s poorest people, the generations to come, and the planet.

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At this key fork in the road, let us choose acceleration over stagnation, stability over fragility, solidarity over seclusion.

So we must not fail. The new multilateralism must prevail. And the IMF has a pivotal role to play. Every day—and often nights as well—our magnificent staff and Executive Board are working hard for you. They are a uniquely talented group of people—dedicated to the ideals of international public service, steadfast in their zeal to make the world a better place. I am immensely proud of them—and all of those who have served the Fund so well over these 70 years. I know you are proud, too. Here, let me pay special tribute to a dear member of our family, Wabel Abdallah. Wabel was our resident representative in Afghanistan, and he was brutally killed by a terrorist attack in Kabul earlier this year. He represented the Fund at its very best. Wabel devoted his life to helping the people of Afghanistan, and he died doing his duty. We miss him dearly. As they say in Arabic, “lel fakeed al rahma”— mercy to the departed. At the Fund, we have mourned Wabel’s loss together. But we are honoring him day by day through our continued commitment to global cooperation. This includes our work with higher-risk countries, where it is more important than ever to work toward sound institutions, so that people will one day face a better and more stable future.

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We will continue to adapt to changing realities on the ground. And we must strive to be even more representative of our dynamic global membership.

That makes completing the 2010 governance reforms so crucial. Our membership knows what needs to be done. The right choice must be made.

Conclusion: Our Choices

Mr. Chairman, Governors, let me conclude: At this key fork in the road, let us choose acceleration over stagnation, stability over fragility, and solidarity over seclusion. Let us choose the path of 1944, not 1914. I began with a popular children’s story; let me end with another. In J.K. Rowling’s Harry Potter, the protagonist is given this key piece of advice: “It is our choices, Harry, that show what we truly are, far more than our abilities.” Our choices. Thank you.

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Economic Inclusion and Financial Integrity Delivered at the Conference on Inclusive Capitalism in London, on May 27, 2014

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ood morning. What a great privilege to be here among such illustrious guests to discuss such an important topic.

Let me thank Lady Lynn de Rothschild and the Inclusive Capitalism Initiative for convening today’s event. I would also like to recognize the great civic leaders here today— His Royal Highness, the Prince of Wales; President Clinton, and Fiona Woolf, Lord Mayor of the City of London. We are all here to discuss “inclusive capitalism”—which must be Lynn’s idea! But what does it mean? As I struggled with the answer to that, I turned to etymology and to history. Capitalism originates from the Latin “caput,” cattle heads, and refers to possessions. Capital is used in the 12th century and designates the use of funds. The term “capitalism” is only used for the first time in 1854 by an Englishman, the novelist William Thackeray—and he simply meant private ownership of money. The consecration of capitalism comes during the 19th century. With the industrial revolution came Karl Marx, who focused on the appropriation of the means of

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production—and who predicted that capitalism, in its excesses, carried the seeds of its own destruction, the accumulation of capital in the hands of a few, mostly focused on the accumulation of profits, leading to major conflicts and cyclical crises. So is “inclusive capitalism” an oxymoron? Or is it the response to Marx’s dire prediction that will lead to capitalism’s survival and regeneration—to make it truly the engine for shared prosperity? If so, what would the attributes of inclusive capitalism be? Trust, opportunity, rewards for all within a market economy—allowing everyone’s talents to flourish. Certainly, that is the vision. Most recently, however, capitalism has been characterized by “excess”—in risk taking, leverage, opacity, complexity, and compensation. It led to massive destruction of value. It has also been associated with high unemployment, rising social tensions, and growing political disillusion­—all of this happening in the wake of the Great Recession. One of the main casualties has been trust—in leaders, in institutions, in the free-market system itself. The most recent poll conducted

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by the Edelman Trust Barometer, for example, showed that less than a fifth of those surveyed believed that governments or business leaders would tell the truth on an important issue. This is a wake-up call. Trust is the lifeblood of the modern business economy. Yet, in a world that is more networked than ever, trust is harder to earn and easier to lose. Or as the Belgians say, “la confiance part à cheval et revient à pied” (“confidence leaves on a horse and comes back on foot”). So the big question is: how can we restore and sustain trust? First and foremost, by making sure that growth is more inclusive and that the rules of the game lead to a level playing field—favoring the many, not just the few; prizing broad participation over narrow patronage.

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By making capitalism more inclusive, we make capitalism more effective, and possibly more sustainable. But if inclusive capitalism is not an oxymoron, it is not intuitive either, and it is more of a constant quest than a definitive destination. I will talk about two dimensions of this quest—more inclusion in economic growth, and more integrity in the financial system.

Inclusion in Economic Growth Let me begin with economic inclusion. One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy. The facts are familiar. Since 1980, the richest 1 percent increased their share of income in 24 out of 26 countries for which we have data.

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The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population.

In the US, the share of income taken home by the top 1 percent more than doubled since the 1980s, returning to where it was on the eve of the Great Depression. In the UK, France, and Germany, the share of private capital in national income is now back to levels last seen almost a century ago.

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Fundamentally, excessive inequality makes capitalism less inclusive. It hinders people from participating fully and developing their potential.

The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population—that is 3.5 billion people.

Disparity also brings division. The principles of solidarity and reciprocity that bind societies together are more likely to erode in excessively unequal societies. History also teaches us that democracy begins to fray at the edges once political battles separate the haves against the have-nots.

With facts like these, it is no wonder that rising inequality has risen to the top of the agenda— not only among groups normally focused on social justice, but also increasingly among politicians, central bankers, and business leaders.

A greater concentration of wealth could—if unchecked—even undermine the principles of meritocracy and democracy. It could undermine the principle of equal rights proclaimed in the 1948 Universal Declaration of Human Rights.

Many would argue, however, that we should ultimately care about equality of opportunity, not equality of outcome. The problem is that opportunities are not equal. Money will always buy better-quality education and health care, for example. But due to current levels of inequality, too many people in too many countries have only the most basic access to these services, if at all. The evidence also shows that social mobility is more stunted in less equal societies.

Pope Francis recently put this in stark terms when he called increasing inequality “the root of social evil.” It is therefore not surprising that IMF research—which looked at 173 countries over the last 50 years—found that more unequal countries tend to have lower and less durable economic growth.

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So much for the diagnosis—what can be done about it? We have done some recent work on this as well. We focused on the fiscal policy dimension—which is part of the IMF’s core business. We found that, in general, fiscal policies have a good record of reducing social disparities—for example, transfers and income taxes have been able to reduce inequality by about a third, on average, among the advanced economies. But it is a complex issue, and policy choices need to be made carefully. Fiscal discipline is often the first victim on the political battlefield, and we obviously want to choose measures that do the most good and the least harm. Some potentially beneficial options can include making income tax systems more progressive without being excessive, making greater use of property taxes, expanding access to education and health, and relying more on active labor market programs and in-work social benefits.

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But we must recognize that reducing inequality is not easy. Redistributive policies always produce winners and losers. Yet if we want capitalism to do its job—enabling as many people as possible to participate and benefit from the economy—then it needs to be more inclusive. That means addressing extreme income disparity.

Integrity in the Financial System Let me now turn to the second dimension of inclusive capitalism that I have chosen to address—integrity in the financial system. In this age of diminished trust, it is the financial sector that takes last place in opinion surveys. This might not be surprising in light of some of the behavior that triggered the global financial crisis. But it is nevertheless disturbing. As many have pointed out, the very word credit derives from the Latin word for trust.

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We are all familiar with the factors behind the crisis—a financial sector that nearly collapsed because of excess. A sector that, like Icarus, in its hubris flew too close to the sun, and then fell back to earth—taking the global economy down with it. We can trace the problems to the evolution of the financial sector before the crisis. Financial actors were allowed to take excessive risks, leading to a situation whereby the profits on the upside went to the industry—and the losses on the downside were picked up by the public. Some of the greatest problems, still outstanding today, lay with the so-called too-big-to-fail firms. In the decade prior to the crisis, the balance sheets of the world’s largest banks increased by two- to fourfold. With rising size came rising risk—in the form of lower capital, less stable funding, greater complexity, and more trading. This kind of capitalism was more extractive than inclusive. The size and complexity of the megabanks meant that, in some ways, they could hold policymakers to ransom. The implicit subsidy they derived from being too big to fail came from their ability to borrow more cheaply than smaller banks—magnifying risk and undercutting competition.

COMPLE TING THE FINANCIAL REFORM AGENDA Thankfully, the crisis has prompted a major course correction—with the understanding that the true role of the financial sector is to serve, not to rule, the economy. Its real job is to benefit people, especially by financing investment and thus helping with the creation of jobs and growth.

As Winston Churchill once remarked, “I would rather see finance less proud and industry more content.” The good news is that the international community has made progress on the reform agenda. This is especially true for banking regulation under the auspices of the Basel Committee, where we are moving forward with stronger capital and liquidity requirements. This should make the system safer, sounder, and more service oriented. The bad news is that progress is still too slow, and the finish line is still too far off. Some of this arises from the sheer complexity of the task at hand. Yet we must acknowledge that it also stems from fierce industry pushback, and from the fatigue that is bound to set in at this point in a long race. A big gap is that the too-big-to-fail problem has not yet been solved. A recent study by IMF staff shows that these banks are still major sources of systemic risk. Their implicit subsidy is still going strongly—amounting to about $70 billion in the US, and up to $300 billion in the euro area. So clearly, ending too-big-to-fail must be a priority. That means tougher regulation and tighter supervision. Here, I believe that the new capital surcharges for systemic banks can work. We estimated that increasing the capital ratio on these banks by 2½ percent, beyond the Basel III standard, can reduce the systemic risk of a trillion dollar bank by a quarter. This is a big deal.

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Yet the problem will not go away without steps to reduce the potential for contagion. First on the agenda should be an agreement on cross-border resolution of megabanks—providing a framework to unwind them in an orderly way in case of failure. This is a gaping hole in the financial architecture right now, and it calls for countries to put the global good of financial stability ahead of their parochial concerns. And we should not give up just because it is hard. Let me quote John Fitzgerald Kennedy here, who famously said that “we choose to go to the moon not because it is easy, but because it is hard.” We also need more vigor across the rest of the reform agenda—better rules for nonbanks, better monitoring of shadow banks, and better safety and transparency over derivatives, an area that is still today excessively obscure and complex. To reduce the scope for contagion, I would like to see much more progress on cross-border issues, for example, in the mutual recognition of rules for derivatives markets. Again, this is complex, and we need to be mindful of the risks of fragmenting the global financial system and hampering the flow of credit to finance investment. But complexity is not an excuse for complacency and delay.

CHANGING BEHAVIOR AND CULTURE As well as regulation, we need stronger supervision. Rules are only as good as their implementation. This calls for greater resources, and independence, for the supervisors who perform such a vital public duty, day in and day out.

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Yet regulation and supervision by themselves are still not enough. Rules can certainly affect behavior—think of compensation practices, for example. But people who want to skirt the rules will always find creative ways of doing so. So we also need to turn our attention to the culture of financial institutions, and to the individual behavior that lies beneath. Incentives must be aligned with expected behavior and be made transparent. Here, the work of the FSB on Principles for Sound Compensation Practices, commissioned by the G20, is instrumental to realign incentives with actual performance. We must push on with implementation. Why is this so important? Because the behavior of the financial sector has not changed fundamentally in a number of dimensions since the crisis. While some changes in behavior are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship. Some prominent firms have even been mired in scandals that violate the most basic ethical norms—LIBOR and foreign exchange rigging, money laundering, illegal foreclosure. To restore trust, we need a shift toward greater integrity and accountability. We need a stronger and systematic ethical dimension. In grappling with this, it helps to go back to the ancient philosophers. They would have raised the most basic question—what is the social purpose of the financial sector? Or, as Aristotle would have asked: “what is its telos?”

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The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.

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He answered his own question: “Wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else.” Or as Oscar Wilde put it, “the true perfection of man lies not in what man has, but in what man is.”

We know that regaining virtues like prudence will not happen overnight. Aristotle teaches us that virtue is molded from habit, from developing and nurturing good behavior over time. As with anything worth doing, practice makes perfect.

From this perspective, we can identify the true purpose of finance. Its goal is to put resources to productive use, to transform maturity, thereby contributing to the good of economic stability and full employment—and ultimately, to the well-being of people. In other words—to enrich society.

Getting back on the right path requires education and leadership that is sustained over many years. It requires alert watchdogs, including from civil society.

In Aristotle’s framework, once we know the purpose, we can identify the virtues needed to fulfill it. It becomes a matter of every person doing the right thing. When we think about finance, surely one of these core virtues is prudence—which is about stewardship, sustainability, and safeguarding the future. Prudence has long been a byword of banking, and yet has been sorely missing in action in recent times.

Most importantly of all, it requires investors and financial leaders taking values as seriously as valuation, culture as seriously as capital. As Mark Carney pointed out in an admirable speech in Canada last year, the financial sector needs to be grounded in strong connections to clients and to communities—to the people served by the financial industry. Ultimately, we need to ingrain a greater social consciousness—one that will seep into the financial world and forever change the way it does business.

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The good news is that we are seeing some positive signs. The Inclusive Capitalism Initiative is one such example—pursuing practical ways to make capitalism an engine of economic opportunity for all. We can draw some parallels here with our expanding environmental consciousness. Not so long ago, we had much higher levels of pollution, and littering was commonplace. Today, we are more educated about these issues, and more in the habit of respecting the planet. By comparison, the equivalent kind of awareness in the financial sector—the idea that private misbehavior can have a broader social cost—is only in its early stages. It is akin to the initial period of environmental consciousness, which focused on the banning of lead from petroleum products. Just as we have a long way to go to reduce our carbon footprint, we have an even longer way to go to reduce our “financial footprint.”

Conclusion Let me conclude. The topic of inclusive capitalism is obviously a vast one. I could have talked about many different aspects: women’s exclusion, disregard for the environment, corporate social responsibility. Yet I wanted to focus my remarks today on the behavior that continues to deplete the treasury of trust and could again destabilize the global economy. This is why the work of your Initiative is so important. It needs to infuse the consciousness of all economic leaders, across all sectors and countries. At the end of the day, when the global economy is more inclusive, the gains are less elusive. The market is more effective, and a better future—for everyone—is more likely.

Yet we must take those steps. I realize that these are deeper questions than economists and policymakers are normally comfortable talking about. Yet I also believe the link is clear—ethical behavior is a major dimension of financial stability.

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Daring the Difference

The Three L’s of Women’s Empowerment Delivered at the National Democratic Institute’s “Madeleine K. Albright Award Luncheon” in Washington, DC, on May 19, 2014

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t is great to be here today among friends and kindred spirits. The National Democratic Institute is a passionate advocate for the full participation of women in the life of nations. I admire you… I salute you…I am with you.

In the bustle and chaos of the hospital environment, the surgeon strides into the operating room. Think of a quintessential surgeon—brimming with confidence and authority, a true type-A personality, one who knows instinctively how to take charge.

Let me begin by thanking Madeleine Albright, a great public servant, a great inspiration to us all, and to me personally. I would also like to thank Kenneth Wollack, the president of the National Democratic Institute, and the talented Claire Shipman.

Yet this distinguished surgeon looks down at the boy and gasps, saying: “I can’t operate on this boy… he’s my son.”

Let me also recognize the wonderful organization being honored today, Aswat Nisaa, and its president, Ikram Ben Saïd. This group is doing remarkable work in Tunisia in furthering gender equality and women’s leadership— and will set standards, I hope, in neighboring countries and around the world. The world needs more people who do what you do. I want to begin today with a story—a wellknown puzzle. A young boy is involved in a traffic accident, and is immediately rushed to the hospital for urgent surgery.

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Indeed, the boy is the surgeon’s son. Yet the surgeon is not the boy’s father. Who is the surgeon then? I know that everyone in this room can see the answer immediately. It is simple—the surgeon is a she…she is the boy’s mother. Yet I also know that plenty of educated and erudite people—even educated and erudite women—do not see this at first blush. They puzzle over it and circle around it; suggesting uncle, grandfather, stepfather—answers that really make little sense.

Ultimately, daring the difference means wedging open the door to the contribution of women—their learning, their labor, and their leadership.

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Unfortunately, this is the rub. When it comes to thinking about women in powerful positions, we are too often blinded by the daggers of the mind, infected by the malignant mind bugs that mire us in the prejudices of the past. You know this. It is what you fight on a daily basis all over the world. And because we know it hurts the global economy, it is on the radar of the IMF. My message is simple: We need a 21st century mentality for women’s economic participation. We need to flush away the flotsam of ingrained gender inequality. We need to, as I like to say, “dare the difference.” To dare means to take risks, to step out of our cozy comfort zones, to let hope extinguish fear and courage conquer timidity. Ultimately, daring the difference means wedging open the door to the contribution of women—their learning, their labor, and their leadership. The “Three L’s” of women’s empowerment. Let me talk briefly about each of them.

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Learning Let me begin with learning. By this I mean the over-riding importance of women’s education, the foundation upon which everything else must be built. Education is both an elevator and a springboard. It allows people to raise themselves up and to break down the divides that keep them apart. At its best, education is a breaker of shackles—the shackles of exclusion and insularity. If we think of life as a long race, it is education that provides the training, the nourishment, and the support. Without good quality education, you walk up to the starting line with a severe disadvantage. Education has always been the wide avenue of opportunity. It was the United States’ trailblazing education policy that helped drive its economic leadership across the 20th century—and gender equality was a crucial component of that strategy. Now, as we face up to the great challenges of the 21st century, we must continue to bet on education, especially for women. We still have some ground to make up here. For example, while women account for 41 percent of science and engineering doctorates here in the

My message is simple: We need a 21st century mentality for women’s economic participation.

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...investment in education is especially crucial in the developing countries, where girls and women can make a huge difference.

United States, they form less than a quarter of the workforce in science, technology, engineering, and mathematics. We can do better, and we must do better. But investment in education is especially crucial in the developing countries, where girls and women can make a huge difference. The gains for girls are substantial. One study suggests that an extra year of primary school boosts earning potential by 10 to 20 percent—and by 25 percent for an extra year of secondary school. Ultimately, when women do well, society does better. A study of 60 developing countries estimated that the economic loss from not educating girls at the same level as boys amounted to $90 billion a year. Women are more likely to spend their resources on health and education, creating a powerful ripple effect across society and across generations. One study suggests that women invest up to 90 percent of their earnings this way, as opposed to just 30 to 40 percent for men. As the old African adage goes: “If you educate a boy, then you train a man. If you educate a girl, then you train a village.”

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So we must carry the banner for women’s education. Women’s education is not a threat, it is a blessing. We must make it a global priority, because it is one of the leading causes of our day. This is why girls like Malala Yousafzai from Pakistan—who faced down Taliban assassins to demand the right to an education—are admirable. This is why groups like Boko Haram in Nigeria—who kidnap and sell into slavery young girls who simply want to go to school—are despicable. Such groups should be found and forced to go to school for life.

In a deep sense, the actions of Boko Haram represent the complete antithesis of the values inherent in education. For their action degrades the dignity of the human being, while education uplifts, enflames, and ennobles the human spirit. So let us join our voices to the voices of the world, and let loose an impassioned plea: bring back our girls, bring back our girls. Respect our girls.

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Labor Let me now turn to my second “L,” to that which comes after learning—labor. Letting women flourish and achieve their true potential in the world of work. Women represent half of the world’s population. Yet they represent far less than half of measured economic activity. Today, there are about 865 million women around the world who have the potential to contribute more fully—almost a “blocked billion.” Everywhere around the world, men participate more than women. These gender gaps range from 12 percent in the OECD economies to 50 percent in the Middle East and North Africa. When women do participate, they tend to be stuck in low-paying, low-status jobs. Globally, women earn only three-quarters as much as men—this is true even with the same level of education, and in the same occupation. Surely one of the most basic norms of justice is “equal pay for equal work?” Women are also over-represented in the informal sector of the economy—unprotected, in unskilled work, with unstable earnings. Too often, they carry the burden of work that is unpaid, unseen, unreported—and underappreciated. Globally, women spend twice as much time on household chores as men, and four times as much time on child care.

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With this stark reality, it is not surprising that girls and women are the main victims of extreme poverty in the world today. They make up 70 percent of the billion people trying to eke out an existence on less than a dollar a day. They are the first to be submerged by economic crisis. We must do better than this. Too many women are unaccounted for, underutilized, and overexploited. It is a moral imperative, but it is also an economic imperative. The evidence is plain—when women contribute more, the economy does better. We have done research on this at the IMF. We know that eliminating gender gaps in economic participation can lead to big jumps in income per capita, our crucial measure of economic wellbeing. These gains are visible everywhere, but they are especially large in regions like the Middle East and North Africa—27 percent—and South Asia—23 percent. Remember, women control the purse strings. They account for over 70 percent of global consumer spending. So if we want more spending and more economic growth, then we need to empower more women as agents of aggregate demand. How can we get women to participate more? Sometimes it is about changing laws—for example, to make sure that property and inheritance laws do not discriminate against women. Economic policy can also be a forceful agent of change. In developing countries, the uplifting of women begins with better access to health care—and yes—to education and training. It means getting women greater access to credit, so that they can free themselves from dependency, and sow and harvest the seeds of a brighter future.

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The evidence is plain— when women contribute more, the economy does better.

We take this seriously at the IMF. In our programs today, all across the world, we emphasize protecting social safety nets—even in tough times. We have evidence showing that, among developing countries, spending on health and education rises faster in countries with programs we support. We are also doing work on the economics of inequality and exclusion—and it is usually women who are left out. I have just come from a conference in Amman on the Arab transition countries, where a big takeaway was that the region needs more of an inclusive economy. Again, I want to commend the great work that Aswat Nisaa—our award winner today—is doing to empower women across this region. Richer countries also have work to do to level the playing field of labor. They need more pro-women and pro-family policies. Policies like publicly funded parental leave schemes; affordable, high-quality child care; individual instead of family income taxation; tax credits or benefits for low-wage workers. For its part, the IMF has recommended policies to increase female labor participation in countries like Japan and Korea, where women could be more visible in the workplace.

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We know that these kinds of policies can work. Just look at Brazil: thanks to pro-family and pro-poor policies, it managed to boost women’s participation from 45 percent to 60 percent in two decades. Just look at Sweden: it has one of the highest female participation rates in the world, in large part because it invests heavily in child care and early education, and puts a premium on flexible work arrangements and parental leave policies. It is not just about policies, of course. It is also about culture, changing the way we work, and sweeping aside the macho mentality that still pervades the workplace. In what she calls the “last chapter” of gender convergence, Claudia Goldin argues that the gender pay gap might go away if firms stopped insisting on people working excessively long hours. In other words, if they value creative time more than face time. This is already happening in areas like science and technology, but fields like law and finance— two professions I have seen firsthand—are still too wedded to old habits. It is time to complete that last chapter. We must not rest until we have achieved gender equality in the workplace. It is within our grasp, if we reach out to all men and women of good will.

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Leadership This brings me to my third “L” today. I have talked about learning and labor—the final link in the chain is leadership, letting women rise to the top on their strength of their innate abilities and talents. We all know the problem—across all fields of work, the higher you climb, the fewer women you see. The evidence is painfully obvious. Look at the world of business—only 4 percent of CEOs in the Standard and Poor’s 500 company list are women. Plus, as this Institute has documented, only a fifth of parliamentary seats across the world are held by women. Less than 10 percent of countries have female leaders. Here is the irony, though: when women get the chance to lead, they actually lead better. We have ample evidence of this. For example, one study shows that the Fortune 500 firms with the best track record in raising women to prominent positions are 18 to 69 percent more profitable than median firms in their area.

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Women are also far less likely to engage in the kind of reckless risk-taking behavior that sparked the global financial crisis. For example, an experiment from the investment community in the 1990s shows that men trade 45 percent more than women, and are more likely to lose big. Is it really any coincidence that, while the men were cheerleading, it was the women who were worrying most about financial sector excess and misbehavior before the crisis? I am thinking of women like Sheila Bair, Brooksley Born, Janet Yellen, and Elizabeth Warren. Too often, they were ignored and dismissed—but they were proven right. We also know that women are good managers and good crisis leaders. For example, a study of over 7,000 leaders showed that women fared better in 12 of 16 competencies in 12 of 15 sectors. Another recent study shows that women are often parachuted in to save companies in deep trouble—although they are also more likely to be fired from these positions, allegedly because of the risk taken in hiring them.

We need to put an end to the idea that toughness flows from testosterone, and that toughness is top.

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“ ” ...when women get the chance to lead, they actually lead better.

None of this will surprise you. It certainly does not surprise me. We know that women are more inclined to make decisions based on consensus-building, inclusion, compassion, and a focus on long-term sustainability. They draw from deep wells of wisdom, from the tenacity taken from a lifetime of tempests and tribulations. As one of my personal heroes, Daw Aung San Suu Kyi, put it: the empowerment of women “cannot fail to result in a more caring, tolerant, just, and peaceful life for all.” Once again, real change must begin with changing attitudes. We need to put an end to the idea that toughness flows from testosterone, and that toughness is top.

Often, it all boils down to confidence. What holds women back is not competence, which they usually have; but confidence, which they often lack. While underqualified and underprepared men leap forward, overqualified and overprepared women hide in the shadows, doubting their abilities, holding themselves to an impossible standard of perfection.

This needs to change. How? By crushing these nasty mind bugs that dull our sentiments and sensibilities. By changing the mindset and resetting the narrative. I have come to the view that gender targets and quotas must play a role here. The mountain is simply too steep to climb without a little help on the way up. We must force the change, or stay mired in the comfortable numbness of complacency. I am also a passionate believer in mentors and role models. In survey after survey, women list this as a major barrier to advancement. We need to look out for each other. Ultimately, I would love to see a world where women let their confidence roar from the rooftops; where their cups run over with selfassurance; where their voices resound across the pinnacles of power.

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If we dare the difference, the difference will deliver.

Conclusion

Let me conclude today with some words from Sylvia Plath: “We shall by morning inherit the earth—our foot’s in the door.” We have certainly made great strides toward gender equality. But while our foot might be in the door, we are still standing outside—in the cold. It is now time to fulfill the promise—to create a world where every little girl from every corner of every continent can fulfill her potential

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without impediment or prejudice. To make sure that nobody ever again will doubt for even an instant that a woman can be a top surgeon, or indeed a leader in any field that she might choose. If we dare the difference, the difference will deliver. Thank you very much.

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A New Multilateralism for the 21st Century The Richard Dimbleby Lecture was founded in memory of veteran BBC broadcaster Richard Dimbleby, who died in 1965. It has been delivered by an influential business or political figure almost every year since 1972. Christine Lagarde, Managing Director of the International Monetary Fund, delivered the 2014 lecture at Guildhall in London on February 3.

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Introduction: The Legacy of Bretton Woods Good evening. It is a great honor to be invited to deliver this year’s Dimbleby Lecture, and I would like to thank the BBC and the Dimbleby family for so kindly inviting me— and especially David Dimbleby for his warm words of introduction. This evening I would like to talk about the future. Before looking ahead, however, I would like to look back—for the clues to the future can often be read from the tea leaves of the past. I invite you to cast your minds back to the early months of 1914, exactly a century ago. Much of the world had enjoyed long years of peace, and giant leaps in scientific and technological innovation had led to path-breaking advances in living standards and communications. There were few barriers to trade, travel, or the movement of capital. The future was full of potential.

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Yet 1914 was the gateway to 30 years of disaster—marked by two world wars and the Great Depression. It was the year when everything started to go wrong. What happened? What happened was that the birth of the modern industrial society brought about massive dislocation. The world was rife with tension—rivalry between nations, upsetting the traditional balance of power, and inequality between the haves and have-nots, whether in the form of colonialism or the sunken prospects of the uneducated working classes. By 1914, these imbalances had toppled over into outright conflict. In the years to follow, nationalist and ideological thinking led to an unprecedented denigration of human dignity. Technology, instead of uplifting the human spirit, was deployed for destruction and terror. Early attempts at international cooperation, such as the League of Nations, fell flat. By the end of the Second World War, large parts of the world lay in ruins.

The 44 nations gathering at Bretton Woods were determined to set a new course based on the principle that peace and prosperity flow from the font of cooperation.

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I now invite you to consider a second turning point—1944. In the summer of that year, the eminent economist John Maynard Keynes and a delegation of British officials embarked on a fateful journey across the Atlantic. The crossing was risky—the world was still at war and enemy ships still prowled the waters. Keynes himself was in poor health. But he had an appointment with destiny, and he was not going to miss it. The destination was the small town of Bretton Woods in the hills of New Hampshire, in the northeastern United States. His purpose was to meet with his counterparts from other countries. Their plan was nothing less than the reconstruction of the global economic order. The 44 nations gathering at Bretton Woods were determined to set a new course based on mutual trust and cooperation, on the principle that peace and prosperity flow from the font of cooperation, and on the belief that the broad global interest trumps narrow self-interest. This was the original multilateral moment, 70 years ago. It gave birth to the United Nations, the World Bank, and the International Monetary Fund—the institution that I am proud to lead. The world we inherited was forged by these visionary gentlemen—Lord Keynes and his generation. They raised the phoenix of peace and prosperity from the ashes of anguish and antagonism. We owe them a huge debt of gratitude.

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Because of their work, we have seen unprecedented economic and financial stability over the past seven decades. We have seen diseases eradicated, conflict diminished, child mortality reduced, life expectancy increased, and hundreds of millions lifted out of poverty. Today, however, we are coming out of the Great Recession, the worst economic crisis— and the great test—of our generation. Thanks to their legacy of multilateralism—international cooperation—we did not slip into another Great Depression that would have brought misery across the world yet again. We all passed the test—rejecting protectionism, reaffirming cooperation. Yet there will be many more tests ahead. We are living through a time every bit as momentous as that faced by our forefathers a century ago. Once again, the global economy is changing beyond recognition, as we move from the industrial age to the hyperconnected digital age. Once again, we will be defined by how we respond to these changes. As we look ahead toward mid-century, toward the world that our children and grandchildren will inherit from us, we need to ask the questions: what kind of world do we want that to be—and how can we achieve it? As Shakespeare says in Julius Caesar: “On such a full sea are we now afloat, and we must take the current when it serves, or lose our ventures.” This evening, I would like to talk about two broad currents that will dominate the coming decades—increasing tensions in global interconnections and in economic sustainability.

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We are living through a time every bit as momentous as that faced by our forefathers a century ago.

I would then like to make a proposal that builds on the past and is fit for the future: a strengthened framework for international cooperation. In short, a new multilateralism for the 21st century.

Tensions in Global Interconnections GROW TH IN INTERCONNEC TIONS I will start with the first major current: tensions in global interconnections, tensions between a world that is simultaneously coming closer together and drifting further apart. By “coming together,” I mean the breakneck pattern of integration and interconnectedness that defines our time. It is really the modern counterpart of what our ancestors went through in the fateful years leading up to 1914.

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For one thing, world trade has grown exponentially. We are now in a world of integrated supply chains, where more than half of total manufactured imports, and more than 70 percent of total service imports, are intermediate goods or services. A typical manufacturing company today uses inputs from more than 35 different contractors across the world. Financial links between countries have also grown sharply. In the two decades before the crisis in 2008, international bank lending—as a share of world GDP—rose by 250 percent. And we should expect this to rise further in the future, as more and more countries dive into the financial nexus of the global economy. We are also living through a communications revolution. It has produced a starburst of interconnections, with information traveling at lightning speed from limitless points of origin. The world has become a hum of interconnected voices and a hive of interlinked lives.

Just look at the great linking of the global economy over the past few decades.

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Today, 3 billion people are connected to each other on the Internet. Three million emails are sent each second. There are almost as many mobile devices as people on the planet, and the “mobile mind-set” is deeply embedded in all regions of the world. In fact, the highest rates of mobile penetration are in Africa and Asia. Back in 1953, when people tuned in to the coronation of Queen Elizabeth II, their experience was mediated essentially by one voice— the masterful Richard Dimbleby, whom we honor today. In contrast, when Prince George arrived last summer, his birth was heralded by more than 25,000 tweets a minute. With such a dizzying pace of change, we can sympathize with Violet Crawley, Downton Abbey’s countess, who wondered whether the telephone was “an instrument of communication or torture.”

BENEFITS AND COSTS OF INTERCONNEC TIONS This brave new world—this hyperconnected world—offers immense hope and promise. Stronger trade and financial connections can bring tangible benefits to millions of people— through higher growth and greater convergence of living standards. The dream of eliminating extreme poverty is within our reach.

or how social media carrying the message of Malala in Pakistan pricked the conscience of the entire world. It is not all bright skies, however. When linkages are deep and dense, they become hard to disentangle. In such an interwoven labyrinth, even the tiniest tensions can be amplified, echoing and reverberating across the world— often in an instant, often with unpredictable twists and turns. The channels that bring convergence can also bring contagion. Because of this, the global economy can become even more prone to instability. If not managed well, financial integration can make crises more frequent and more damaging. Consider, for example, where and how the recent global financial crisis began—in the mortgage markets of suburban America—and spread all around the world. The communications revolution too has a dark side. It can sow discord, instill factionalism, and spread confusion. Instead of an online forum for ideas and expression, we could have a virtual mob or a global platform to promote intolerance or hatred. Instead of a beautiful symphony, we could have an ugly cacophony. So the key challenge for us in all this will be to magnify the good and diminish the bad.

The communications revolution too can be a potent force for good. It can empower people, unleash creativity, and spur change. Think about how Twitter messages helped to galvanize the participants in the Arab Spring,

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DIFFUSION OF POWER If managing the great “coming together” were not difficult enough, it will be further complicated by the other current that I mentioned: the tendency for the world to grow further apart, even as it draws closer together. This is a paradox. What do I mean? I mean the diffusion of power across the world— toward more diverse geographical regions and more diverse global stakeholders. Unlike with integration, our forefathers experienced nothing like this. It is a defining feature of our hyperconnected age. One of the major trends of our time is the shift in global power from west to east, and from north to south—from a few to a handful to a myriad. Fifty years ago, the emerging markets and developing economies accounted for about a quarter of world GDP. Today, it is half, and rising rapidly—very likely to two-thirds within the next decade. The diffusion of power also goes beyond country relationships, extending to a whole host of networks and institutions that inhabit the fabric of global society. Think about the rising nexus of nongovernmental organizations, which can use the communications revolution to extend their reach and amplify the voice of civil society. In just 20 years, the number of these groups associated with the United Nations rose from 700 to nearly 4,000.

Think about the growing power of multinational corporations, who now control two-thirds of world trade. According to some research, 12 multinational corporations now sit among the world’s top 100 economic bodies in terms of sheer size. Think about powerful cities—31 of them are also on that list of the top 100. And they continue to grow. By 2030, about 60 percent of the world’s population will live in cities. Think also about the rising aspirations of citizens who feel increasingly part of, yet not quite adjusted to, our interconnected “global village.” By 2030, the global middle class could top 5 billion, up from 2 billion today. These people will inevitably demand higher living standards, as well as greater freedom, dignity, and justice. Why should they settle for less? This will be a more diverse world of increasing demands and more dispersed power. In such a world, it could be much harder to get things done, to reach consensus on issues of global importance. The risk is of a world that is more integrated—economically, financially, and technologically—but more fragmented in terms of power, influence, and decision making. This can lead to more indecision, impasse, and insecurity—the temptations of extremism— and it requires new solutions.

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Tensions in Economic Sustainability We will also need solutions for the second broad current that will dominate the next few decades—tensions in economic sustainability, those between staying strong and slowing down. Of course, the immediate priority for growth is to get beyond the financial crisis, which began six years ago and is still with us, as the markets remind us these days. This requires a sustained and coordinated effort to deal with problems that still linger—a legacy of high private and public debt, weak banking systems, and structural impediments to competitiveness and growth—which have left us with unacceptably high levels of unemployment.

This can create problems on both ends of the demographic spectrum—for youthful countries as well as for graying ones.

You are used to the IMF talking about these issues, I know. Tonight, however, I want to set these issues in the context of longer-term impediments. Three in particular—demographic shifts, environmental degradation, and income inequality. As with global interconnections, some of these problems would look familiar to our ancestors—rising inequality, for example. But others are new and novel, such as pressures on the environment.

A youthful population is certainly fertile ground for innovation, dynamism, and creativity. Yet everything will depend on generating enough jobs to satisfy the aspirations of the rising generation.

DEMOGR APHICS Let me start with demographics. Over the next three decades, the world’s population will get much larger and much older. In 30 years time, there will be about 2 billion more people on the planet, including three-quarters of a billion people over the age of 65. By 2020, for the first time ever, there will be more people over 65 than children under 5.

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The geographical distribution will also change: young populations in regions like Africa and south Asia will increase sharply, while Europe, China, and Japan will age and shrink. In the coming decades, we expect India to surpass China, and Nigeria to surpass the United States, in terms of population. And both China and India will start aging in the near future.

Right now, the young countries are seeing a “youth bulge,” with almost 3 billion people—half the global population—under age 25. This could prove a boon or a bane, a demographic dividend or a demographic time bomb.

This calls for a single-minded focus on improving education—and, in particular, on the potentially massive effects of technological change on employment. Looking ahead, factors such as the Internet revolution, the rise of smart machines, and the increasing high-tech component of products will have dramatic implications for jobs and the way we work. Yet governments are not thinking about this in a sufficiently strategic or proactive way. Aging countries will have different problems, of course. They will face slowing growth precisely at a time when they need to take care of a retiring generation—people who have contributed to society and expect, as part of the social contract, to be provided with decent social services as they move into their twilight years. This too can create tensions.

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Everything will depend on generating enough jobs to satisfy the aspirations of the rising generation.

Migration from young to old countries might help to release some pressure at both ends. Yet it could also inflame tensions—the brain drain could sap productive potential from source countries, and a sudden influx of people could erode social cohesion in host countries and fuel nationalism. Yes, migration can help, but it must be managed well.

ENVIRONMENTAL DEGRADATION So demographics is one potential long-term obstacle. A second is environmental degradation, the newest and greatest challenge of our era. We all know what is at stake here. More people with more prosperity will stretch our natural environment to the limit. We can expect growing pressure points around water, food, and energy scarcity as the century progresses. By 2030, almost half of the world’s population will live in regions of high water stress or shortage. Hovering over all of this is the merciless march of climate change. Because of humanity’s hubris, the natural environment, which we need to sustain us, is instead turning against us.

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Make no mistake, it is the world’s most vulnerable people who will suffer most from the convulsions of climate. For example, some estimates suggest that 40 percent of the land now used to grow maize in sub-Saharan Africa will no longer be able to support that crop by the 2030s. This will have hugely disruptive implications for African livelihoods and lives. A few years back, Prince Charles gave this very Dimbleby Lecture. He used the occasion to make an impassioned plea to respect the natural law of ecological sustainability. “In failing the earth,” he said, “we are failing humanity.” The bad news is that we are getting perilously close to the tipping point. The good news is that it is not too late to turn the tide despite the rising seas. Overcoming climate change is obviously a gigantic project with a multitude of moving parts. I would just like to mention one component of it—making sure that people pay for the damage they cause. Why is this aspect—getting the prices right—so important? Because it will help to reduce the harm today and spur investment in the low-carbon technologies of tomorrow.

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Phasing out energy subsidies and getting energy prices right must also be part of the solution. Think about it: we are subsidizing the very behavior that is destroying our planet, and on an enormous scale. Both direct subsidies and the loss of tax revenue from fossil fuels ate up almost $2 trillion in 2011—this is about the same as the total GDP of countries like Italy or Russia. The worst part is that these subsidies mostly benefit the relatively affluent, not the poor. Reducing subsidies and properly taxing energy use can be a win-win prospect for people and for the planet.

INCOME INEQUALIT Y Demographics and degradation of the environment are two major long-term trends—disparity of income is the third. This is really an old issue that has come to the fore once again.

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We are all keenly aware that income inequality has been rising in most countries. Seven out of ten people in the world today live in countries where inequality has increased over the past three decades. Some of the numbers are stunning—according to Oxfam, the richest 85 individuals in the world own the same amount of wealth as the bottom half of the world’s population. In the United States, inequality is back to where it was before the Great Depression, and the richest 1 percent captured 95 percent of all income gains since 2009, while the bottom 90 percent got poorer. In India, the net worth of the billionaire community increased twelvefold in 15 years, enough to eliminate absolute poverty in this country twice over. With facts like these, it is not surprising that inequality is increasingly on the global community’s radar screen. It is not surprising that everyone from the Confederation of British Industry to Pope Francis is speaking out about it—because it can tear apart the precious fabric that holds our society together.

Seven out of ten people in the world today live in countries where inequality has increased over the past three decades.

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Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential. It is easy to diagnose the problem, but far more difficult to solve it. From our work at the IMF, we know that the fiscal system can help to reduce inequality through careful design of tax and spending policies. Think about making taxation more progressive, improving access to health and education, and putting in place effective and targeted social programs. Yet these policies are hard to design and—because they create winners and losers—they create resistance and require courage. Nevertheless, we need to get to grips with it, and make sure that “inclusion” is given as much weight as “growth” in the design of policies. Yes, we need inclusive growth. More inclusion and opportunity in the economic life also means less cronyism and corruption. These problems must also rise to the top of the policy agenda.

ROLE OF WOMEN There is one more dimension of inequality that I wish to discuss here—one that is close to my heart. If we talk about inclusion in economic life, we must surely talk about gender. As we know too well, girls and women are still not allowed to fulfill their potential—not just in the developing world, but in rich countries, too. The International Labor Organization estimates that 865 million women around the world are being held back. They face discrimination at birth, on the school bench, in the board room. They face the reticence of the marketplace—and of the mind. And yet, the economic facts of life are crystal clear. By not letting women contribute, we end up with lower living standards for everyone. If women participated in the labor force to the same extent as men, the boost to per capita incomes could be huge—27 percent in the Middle East and North Africa, 23 percent in south Asia, 17 percent in Latin America, 15 percent in east Asia, and 14 percent in Europe and central Asia. We simply cannot afford to throw away these gains. “Daring the difference,” as I call it—enabling women to participate on an equal footing with men—can be a global economic game changer. We must let women succeed, for ourselves and for all the little girls—and boys—of the future. It will be their world—let us give it to them.

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A Multilateralism for a New Era

That does not mean, however, that we need to go back to the drawing board.

I have talked tonight about the main pressure points that will dominate the global economy in the years to come—the tension between coming together and drifting apart, and the tension between staying strong and slowing down. I have talked about pressures that would have seemed familiar a century ago, and some that are entirely new.

Thanks to the inheritance of history, we have specific, working forms of cooperation at hand. Again, think about the United Nations, the World Bank, the World Trade Organization—and of course the IMF. We might call these concrete—or “hard”—forms of global governance.

Now, how do we manage these pressure points? Where are the solutions?

HARD AND SOFT COOPERATION Overcoming the first tension really boils down to a simple question: do we cooperate as a global family, or do we confront each other across the trenches of insularity? Are we friends, or are we foes? Overcoming the second tension requires us to face common threats that are not bound by borders. Do we face adversity together, or do we build yet more borders and Maginot Lines that will be mere illusory protections? The response to both tensions is therefore the same: a renewed commitment to international cooperation, to putting global interest above self-interest, to multilateralism. As Martin Luther King once said, “We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.” This is really an old lesson for a new era. At such a momentous time as this, we need to choose the ethos of 1944 over 1914. We need to rekindle the Bretton Woods spirit that has served us so well.

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We also have a number of “soft” instruments, such as the G20 at one end and networks of nongovernment organizations at the other. These entities have no formal mandates or legal powers of enforcement, but they do have value. They can move quickly, and they can wedge open the doors of dialogue. And, as Winston Churchill famously said, “to jaw-jaw is always better than to war-war.” We have seen the power of multilateralism in action, both “hard” and “soft.” For an example of soft cooperation, we need look no further than right here in London five years ago, when the G20 countries rallied to turn back the tide of crisis, and made sure the world did not slip into a second Great Depression. As for more concrete forms, I invite you to consider the historic role played by the IMF down through the years—helping Europe after the war, the new nations of Africa and Asia after independence, the former Eastern Bloc after the Iron Curtain fell, and Latin America and Asia after crippling crises. During the current crisis, we made 154 new lending commitments, disbursed $182 billion to countries in need, and provided technical assistance to 90 percent of our member nations. And we have 188 of them.

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REQUIREMENTS OF THE NE W MULTILATERALISM The beauty of the new multilateralism is that it can build on the old—but go further. The existing instruments of cooperation have proven extremely successful over the past decades, and they must be preserved and protected. That means that institutions like the IMF must be brought fully up to date, and made fully representative of the changing dynamics of the global economy. We are working on that. More broadly, the new multilateralism must be made more inclusive—encompassing not only the emerging powers across the globe, but also the expanding networks and coalitions that are now deeply embedded in the fabric of the global economy. The new multilateralism must have the capacity to listen and respond to those new voices.

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The new multilateralism also needs to be agile, making sure that soft and hard forms of collaboration complement rather than compete with each other. It needs to promote a long-term perspective and a global mentality, and be decisive in the short term to overcome the temptation toward insularity and muddling through. Fundamentally, it needs to instill a broader sense of social responsibility on the part of all players in the modern global economy. It needs to instill the values of a global civil market economy—a global guildhall, as it were. What might this mean in practice? It clearly means many things, starting with all global stakeholders taking collective responsibility for managing the complex channels of the hyperconnected world. For a start, that means a renewed commitment to openness, and to the mutual benefits of trade and foreign investment.

Fundamentally, the new multilateralism needs to instill a broader sense of social responsibility on the part of all players in the modern global economy.

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It also requires collective responsibility for managing an international monetary system that has traveled light-years since the old Bretton Woods system. The collective responsibility would translate into all monetary institutions cooperating closely—mindful of the potential impact of their policies on others. In turn, that means we need a financial system for the 21st century. What do I mean by that? I mean a financial system that serves the productive economy rather than its own purposes, where jurisdictions only seek their own advantage provided that the greater global good prevails and with a regulatory structure that is global in reach. I mean financial oversight that is effective in clamping down on excess while making sure that credit gets to where it is most needed. I also mean a financial structure in which industry takes co-responsibility for the integrity of the system as a whole, where culture is taken as seriously as capital, and where the ethos is to serve rather than rule the real economy. This has special resonance right here in the city of London. As a financial center with global reach, it must be a financial center with global responsibility. And with all due respect and admiration, that goes beyond hiring a Canadian to head the Bank of England. We also need the new 21st century multilateralism to get to grips with big-ticket items like climate change and inequality. On these issues, no country can stand alone. Combating climate change will require the concerted resolve of all stakeholders working together—governments, cities, corporations, civil society, and even private citizens. Countries also need to come together to address inequality. As but one example, if

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countries compete for business by lowering taxes on corporate income, this could make inequality worse. Overall, the kind of 21st century cooperation I am thinking of will not come easy. It might get even harder as time passes, when the curtains fall on this crisis, when complacency sets in—even as the seeds of the next crisis perhaps are being planted. Yet given the currents that will dominate the coming decades, do we really have a choice? A new multilateralism is nonnegotiable.

Conclusion On that note, let me end by going back again to the beginning—to Keynes and that famous tryst with destiny. Referring to that great multilateral moment, he noted that “if we can so continue, this nightmare, in which most of us here present have spent too much of our lives, will be over. The brotherhood of man will have become more than a phrase.” History proved Keynes right. Our forefathers vanquished the demons of the past, bequeathing to us a better world—and our generation was the main beneficiary. We are where we are today because of the foundation laid by the generation before us. Now it is our turn—to pave the way for the next generation. Are we up to the challenge? Our future depends on the answer to that question.

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The Global Calculus of Unconventional Monetary Policies Delivered at the annual Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole, Wyoming, on August 23, 2013

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ood afternoon. Let me thank Esther George for inviting me to this year’s Symposium. I am delighted to be here, as always. The Federal Reserve System and this event in particular are well known for being at the cutting edge of monetary policy research and analysis. The reflections of this morning certainly live up to that reputation. The challenge for today’s generation of policymakers is to rethink and reimagine how to get our economies back to work. One of the most striking aspects of that has been the willingness of central banks in advanced economies to “dive into the deep end” of the policymaking pool. In many respects, central banks have been the heroes of the global financial crisis. Compared with conventional monetary policy, the unconventional monetary policies of the past few years have been bolder in ambition and larger in scale. These exceptional actions helped the world pull back from the precipice of another Great Depression. The crisis also gave us cause to rethink the extent to which the world is interconnected. A bankruptcy in the United States in 2008

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brought the world economy to its knees. Then eurozone troubles shook the global economy again. Another worry today is the risk of a slowdown in emerging markets, pulling back growth everywhere. Unconventional monetary policies bring an added twist. This is very much on our minds, of course, as we have watched developments this week. It reminds us that policy actions in one corner of the world can reach all corners— and it is the job of the IMF to shine a light on developments in all corners of the world. More broadly, unconventional monetary policies involve navigating a new world. In one sense, it is like stepping into a dark room. To borrow some words from John F. Kennedy: “We are not here to curse the darkness, but to light the candle that can guide us through that darkness to a safe and sane future.” It is our collective job to light a candle in that dark room. So, this is my main message today: we need to work better together to understand more fully the impact of these unconventional policies— local and global—and how that affects the path of exit. And, above all, we must use the time wisely and not waste the space provided

…policy actions in one corner of the world can reach all corners…

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Global policymakers— all policymakers, within countries and across countries— have a responsibility to take the full range of actions needed to restore stability and growth, and to reduce imbalances.

by unconventional policies. Global policymakers—all policymakers, within countries and across countries—have a responsibility to take the full range of actions needed to restore stability and growth, and to reduce imbalances. In that spirit, I would like to share some of the Fund’s thinking in three main areas: One, how has unconventional monetary policy, in the US and elsewhere, affected the world economy so far? Two, how will it affect the world going forward, especially as one prepares for exit? And three, is there a mix of global policies that can better deliver lasting growth?

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The Merits of Unconventional Monetary Policy (UMP) So Far The natural place to start is: looking back, were unconventional monetary policies needed and did they help? I know this is an open question for some. The Fund’s clear assessment, however, is that the impact so far has been positive. Why do I say that? Early in the crisis, UMP helped prevent a collapse of the financial system and a collapse of activity. This was the case with quantitative easing in the United States and large-scale assets purchases in the UK. Later, the ECB’s longer-term refinancing operations and outright monetary transactions significantly reduced the tail risk of a euro area breakup.

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Faced with financial turmoil, UMP helped support economic activity and financial stability—both domestic and global. This is certainly true in the initial phase of UMP, when these objectives worked in unison. The Fund has been giving a good deal more attention to the wider implications of these policies in our revamped surveillance framework. We are tracing out the interconnections within countries—say, between the financial sector and the real economy—and between countries. It is difficult to pin down the exact ramifications of these policies with any degree of precision. There are simply too many moving parts, and certainly many different opinions, across countries. As I said—we stand on “terra nova.” That said, we have to try, we do try, and we will try harder. We examined the spillovers of UMP in a report that we released earlier this month. Estimates suggest that QE by the Fed is likely to have reduced long-term US bond yields by over 100 basis points prior to the market correction earlier this year, boosting world output by more than 1 percent. I know that estimates vary. Still, we can say with some confidence that UMP shored up activity in the face of a possible global depression. Measures of market risk tell a similar story, reducing market uncertainty during periods of elevated financial stress. The probability of extremely large price changes, for example, declined across a range of markets immediately following UMP actions by the Fed. Obviously the major gains were in the early phases, when the conditions were most severe. But even since, UMP has been a success.

On balance all countries benefited: first from removing the gravest risks of financial turmoil, then from the boost to growth. This may not always be the case going forward.

The Current Global Calculus of UMP That brings me to my next main point: where do we stand with UMP today? Let me say it up front: I do not suggest a rush to exit. UMP is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off. The day will come when this period of exceptionally loose monetary policy, both conventional and unconventional, must end—in line with economic recovery and its impact on inflation. We need to plan for that day, especially since we do not know exactly when it comes. One thing we can say for certain: the path to exit will and should depend on the pace of recovery, the latter mitigating the potential downsides of the former. This calculus will not be easy, however. Together, we need to keep an eye on both financial stability and growth. Together, we need to watch whether the benefits of UMP are subject to diminishing returns. Together, we need to analyze whether the financial side effects get worse over time.

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Unconventional monetary policy is still needed in all places it is being used, albeit longer for some than for others.

Just as with entry, exit will take us into uncharted territory. Yet I remain optimistic. Central banks handled entry well, and we see no reason why they should not handle exit equally well. So, the Fund and policymakers need to start thinking about what exit will eventually look like. That includes the implications for global economic and financial stability: the whole system, not just one part of it. This is an issue that the Fund has been watching and will continue to watch closely. It is, after all, the IMF’s raison d’être. For now, I would like to highlight a few aspects of how we are thinking about these channels and connections. One, the balance of stability and risk-taking. The relationship between the two is not straightforward. Certainly, long periods of very loose monetary policy and ultralow rates, mixed with the hunt for higher yields, could prove to be a recipe for unhealthy risk-taking. At the same time, the absence of UMP could easily have resulted in worse

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growth outcomes, with even greater risk of financial distress.

As always, we will know much more as time passes. In particular, we will know whether the global market correction earlier this year was a useful reminder that exuberance can go too far, or if it is the start of a new period of choppy conditions and regular scares. We all hope for the former, but prudence suggests planning for the latter possibility.

Some modes of UMP affect the long end of the yield curve, perhaps more so than conventional monetary policy. That would tend to affect a broader range of assets and asset classes than we typically see with conventional monetary policy, and thus creates a risk-taking incentive that could prove worrying. Weighing these factors, our sense is that today’s calculus of UMP benefits is still clearly positive for UMP countries. Two, we need to look more closely at the spillovers.

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Admittedly it is difficult to disentangle the effects of UMP from other factors affecting economic outcomes. Still, tightening cycles in the past have created concerns or spillovers, and we should learn from history. For now, advanced and emerging countries have generally done a good job managing the policy implications from UMP. We have been working on a series of case studies: 13 of the largest non-UMP countries that collectively represent about 40 percent of global output. Following the initiation of UMP, we have seen episodes of asset price increases and rising capital flows—by one measure, cumulative net flows to emerging markets rose by $1.1 trillion since 2008, squarely above its long-run structural trend by an estimated $470 billion. Corporate leverage and foreign exchange exposures also increased in several cases. Real estate prices were buoyant, for example, in Brazil, Canada, China, Korea, and Thailand. Stock prices rebounded for a considerable time in China, Mexico, and Russia. And credit expanded rapidly in Brazil, China, Korea, and Turkey. In recent months, some of these developments have been partly reversed. These positive trends, of course, are what we would expect, even with conventional policy. Again, it is the recipe of low interest rates and the hunt for return—investors search for other opportunities, capital flows into emerging markets, with the usual potential for appreciation and credit growth. In general, countries have undertaken sound macroeconomic management, with actions to make their financial systems more secure— including macroprudential and capital flow management measures.

The upshot of all this is that the present calculus of UMP for non-UMP countries is, on balance, still positive. At least for now. We all know that the situation can turn quickly—as we have seen in recent days in some emerging market economies. These risks require constant monitoring and reassessment. Three, thinking more about the taxonomy of exit will help better assess the balance of risks and spillovers. Let me ask a very basic question. What do we mean by “exit” from UMP? The answer to this is not always clear. We have seen many innovations. Yet the conventional and unconventional are often lumped together. Monetary policies today are multifaceted, involving “forward” guidance about future policies, purchases of private assets to support stability in specific markets, and less focused “quantitative easing” purchases that aim to boost activity more generally. In the long term, it is clear that exit from UMP will involve phasing out, and ultimately reversing, all of these policies. That does not mean that they will all occur at the same time. Indeed, it seems likely that some of the more “conventional” aspects of UMP, such as guidance on the future path of policy rates or the rate of future asset purchases, will be adjusted well before any assets are sold. This means that exit from UMP is likely to be slower and longer than is often portrayed—and feared. It is also safe to assume that exit will depend on progress on other policies and on the durability of the recovery. In fact, for exit to be understood and digested as smoothly as possible by the markets, it needs to be contingent on the strengthening of the economy.

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A Better Mix of Global Policies That brings me to my third and final main point: the broader policy path forward. Monetary policy, as good as it is assumed to be, cannot do everything, cannot provide all the answers, cannot solve every economic problem. I do not need to convince this audience of that point! Fundamentally, UMP needs to be complemented by a broader spectrum of policies that can move the global economy forward. Let me step back from that for a moment. There are certainly some who feel that the IMF has been reluctant to advise—or dare I say, has been “soft” on—those countries pursuing UMP. I disagree. We have consistently emphasized, for a number of years now, that the policy mix needs more medium-term

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fiscal, financial, and structural reforms. But, even without these other desirable policies, it has been better to have than not to have UMP. I do worry that all the hard work of central banks will be wasted if not enough is done on other fronts—to adopt the admittedly more difficult policies needed for balanced, durable, and inclusive growth. I am talking here about all countries, not just UMP countries. While we will not know the precise counterfactual, I would say this: UMP is providing the space for more reforms. We should use that space wisely. UMP should not be code for Ultimately More Procrastination! For UMP countries, getting the mix right means two things. First, push ahead with deeper reforms to lay the foundation for durable and lasting growth. Do not waste the space provided by UMP.

Fundamentally, unconventional monetary policy needs to be complemented by a broader spectrum of policies that can move the global economy forward.

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We need this broader spectrum of policies to sustain growth over the longer term, to ensure fiscal sustainability, and to repair ailing banking systems. The exact combination of policies varies by country. The IMF has covered these issues at length on other occasions, most recently in our annual economic assessments for several major countries, so I will not rehash them. More progress on the broader policy front can help make UMP more effective today, taming potential risks. It can also help open the door for a smooth exit. Let me give you one example. Some countries—especially in the euro area—still need to work on financial repair, to unclog the financial plumbing and get credit flowing, reduce financial fragmentation, and help make monetary policy work better. More broadly, making progress on regulatory reform can help make the system safer. Since UMP helped save the financial sector, it is only reasonable to ask for accelerated completion of financial sector reform in return. The second responsibility is for central banks to manage the risks from exit. Everybody in this room understands the overriding importance of communication. Policymakers should be clear and open about the full range of considerations that will affect UMP decisions—both economic activity and financial stability. It is also important to communicate risks on both sides of the equation—the risks to recovery from exiting too soon and the risks to financial stability from exiting too late.

Yes, people have legitimate concerns that communication about financial conditions could undermine market stability. Yet saying too little could well be worse, leading to market surprises. Even if managed well, exit from UMP may well present other, non-UMP countries with an arduous obstacle course. So, how should the non-UMP countries prepare and react? For the most part, they have already been ahead of the curve in dealing with potential risks. They should continue to follow their own lead. The precise policy actions will vary with country circumstances. Non-UMP countries need to vigorously pursue the deeper policies that our reports have outlined for lasting medium-term growth. Indeed, recent concerns about slowing growth potential in emerging markets only reinforce this point. The equally important issue, however, is what to do if faced with renewed financial instability. This presents serious risks to the nonUMP economies. The good news is that they have the tools to deal with it. Exchange rate flexibility will help, but not at all cost. Some market intervention may help moderate exchange rate volatility or shortterm liquidity pressures. So far, both advanced and emerging countries have used macro- and microprudential measures to throw sand in the wheels of excess—dealing with frothy credit growth or potential financial sector vulnerabilities. In some circumstances, capital flow management measures have been useful.

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Failing to act at the global level, with each country playing its part, could put the global recovery at risk.

Yet even with the best of efforts, the dam might leak. So, we need further lines of defense—lines of defense that reflect our interdependence, our common purpose, and our mutual responsibility for the global economy. Here, swap lines—along the lines provided by major central banks early in the crisis—can help. For the Fund’s part, we stand ready to provide policy advice and financial support, including on a precautionary basis through our various instruments. Above all, we need to all work together, and work better together.

Conclusion

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That is the right note on which to tie this all together.

There is scope for international policy coordination and cooperation to improve global outcomes. No country is an island. As I said at the outset, in today’s interconnected world, the spillovers from domestic policies—UMP included—may well feed back to where they began. Looking at the wider effect is in your self-interest. It is in all of our interests. I am not suggesting that this would be easy. Coordination is difficult to achieve in practice.

Not everyone agrees about the size, or even the direction, of spillovers. Bridging or at least narrowing these differences is an important step toward deciding the future course of policy.

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We can best meet these challenges by working openly together. Our discussion here today can help move us in the right direction. As a forum for international policy cooperation, the Fund can help. It is also incumbent on us to use our surveillance to effectively support the policy decisions our member countries face. We can delve more deeply into the policy interconnections and spillovers among our member countries. We can offer clear analysis of what can be gained by working together. And we can encourage policymakers to understand how their actions fit into the global policy agenda.

Policies and policy coordination are not yet where they need to be. Failing to act at the global level, with each country playing its part, could put the global recovery at risk. With action, however, we can place the world economy on a path of strong, sustainable, and balanced growth. The world has done enough treading water. It is time now for policymakers to swim to the shore. Take this as some wisdom from a former synchronized swimmer! Thank you.

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Global Risks Are Rising, but There Is a Path to Recovery Delivered at the annual Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole, Wyoming, on August 27, 2011

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et me first thank Tom Hoenig for inviting me to participate in this remarkable conference in Jackson Hole. Tom has served the Federal Reserve System with great distinction and has made a significant contribution to economic and monetary policy discussion. And let me also recognize my friend John Lipsky who, after five years of distinguished service as First Deputy Managing Director of the IMF, will be stepping down—and who has been so generous in giving up his speaking slot to me today.

back from the public to the private sector. On the second, the idea was that higher demand in surplus countries would make up for a lower spending path in deficit countries. But the actual progress on rebalancing has been timid at best, while the downside risks to the global economy are increasing.

Listening to the many wise voices here over the last day or so, I am struck by several salient themes. The global economy continues to grow, yet not enough. Some of the main causes of the 2008 crisis have been addressed, yet not adequately. There remains a path to recovery, yet we do not have the luxury of time.

Developments this summer have indicated that we are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed. So we must act now. It is a matter of vision, courage, and timing. Decisive action will bolster the confidence that is required to restore and rebalance global growth.

Two years ago, it became clear that resolving the crisis would require two key rebalancing acts—a domestic demand switch from the public to the private sector and a global demand switch from external deficit to external surplus countries. On the first, the idea was that strengthened private sector finances would allow the engine of growth to switch

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Those risks have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed.

We are not without options. We know what needs to be done to support growth, reduce debt, and prevent further financial crises. But we need a new approach—based on bold political action, with a comprehensive plan across all policy levers, implemented in a coordinated global way. 

The stakes are clear: we risk seeing the fragile recovery derailed. So we must act now.

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The Balance Sheet Problem

The Policy Agenda

As we all know, a major cause of the crisis was too much debt and leverage in key advanced economies. Financial institutions engaged in practices that magnified, disguised, and fragmented risk, while households borrowed too much. Experience tells us that these excesses (combining both housing and financial crises) take a long time to work off—and require decisive action. We have made some progress, but not enough to unshackle growth.

What should be done? Clearly, the scope for policy action is much narrower today than in 2008. There are no easy solutions, but that does not mean there are no solutions.

I am by no means downplaying what has been done. In 2008, governments took bold action to prevent a calamitous collapse in demand. They offset private contraction with fiscal expansion and used public resources to recapitalize financial institutions. They strengthened financial regulation and reinforced the capacity and resources of international institutions. And monetary authorities did their part as well. But today, it is public sector balance sheets themselves that are in the firing line. Today, the headline problems are sovereigns in most advanced economies, banks in Europe, and households in the United States. Adding to this—global growth is also being held back by policies that slow demand in some key emerging market economies while balance sheet risks are increasing in others. The fundamental problem is that in these advanced economies, weak growth and weak balance sheets—of governments, financial institutions, and households—are feeding negatively on each other. If growth continues to lose momentum, balance sheet problems will worsen, fiscal sustainability will be threatened, and policy instruments will lose their ability to sustain the recovery.

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Put simply, while fiscal consolidation remains an imperative, macroeconomic policies must support growth. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery. The precise path is different for each country. But to meet the credibility test, each country needs a dual focus: a primary emphasis on durable measures that will deliver savings tomorrow, which, in turn, will help to create as much space as possible for supporting growth today—at least by permitting a slower pace of consolidation where possible. For instance—measures that change the rate of growth of entitlements, health, or retirement. Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation. This is particularly true as (1) in most advanced economies, inflation expectations are well anchored; and (2) pressures from energy and food prices are abating. So, policymakers should stand ready, as needed, to dive back into unconventional waters. Micro-level policy actions to relieve balance sheet pressures—felt by households, banks, and governments—are equally important. We must get to the root of the problem. Without this, we will endure a painful and drawn-out adjustment process. Structural reforms will surely help boost productivity and growth over time, but we should take care not to weaken demand in the short term.

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Put simply, while fiscal consolidation remains an imperative, macroeconomic policies must support growth.

While we can all agree on the broad brushstrokes of what needs to be done, the devil is always in the details. I would like to delve deeper into the different problems of Europe and the United States.

EUROPE I’ll start with Europe. Here, we need urgent and decisive action to remove the cloud of uncertainty hanging over banks and sovereigns. Financial exposures across the continent are transmitting weakness and spreading fear from market to market, country to country, periphery to core. There are three key steps that Europe should take.

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First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing. It does not necessarily mean drastic up-front belt-tightening—if countries address long-term fiscal risks like rising pension costs or health care spending, they will have more space in the short run to support growth and jobs. But without a credible financing path, fiscal adjustment will be doomed to fail. After all, deciding on a deficit path is one thing; getting the money to finance it is another. Sufficient financing can come from the private or official sector— including continued support from the ECB, with full backup of the euro area members. Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries—or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking

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As we take a global perspective, we should not—and cannot— forget the low-income countries, where populations are especially vulnerable to economic dislocation in the rest of the world.

private resources first, but using public funds if necessary. One option would be to mobilize EFSF [European Financial Stability Facility] or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns. Third, Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project. In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone’s economic tensions. So, Europe must recommit credibly to a common vision, and it needs to be built on solid foundations—including, for example, fiscal rules that actually work.

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THE UNITED STATES

In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery—especially by making a serious dent in long-term unemployment. A fair amount has been done to restore financial sector health, but house price declines continue to weaken household balance sheets. With falling house prices still holding down consumption and creating economic uncertainty, there is simply no room for half-measures or delay. So, the United States needs to move on two specific fronts. First—the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future

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consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

policies keep domestic demand growth too slow and currency appreciation too modest, if not blocked outright—even if this is not in their own or the global interest. Some other emerging markets—including those that have allowed their exchange rates to appreciate—are dealing with threats to economic and financial stability from capital inflows.

Second—halting the downward spiral of foreclosures, falling house prices, and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low-interest-rate environment.

So, the lack of rebalancing hurts everyone, while at the same time, everyone should recognize that decoupling is a myth. If the advanced countries succumb to recession, the emerging markets will not escape.

The Global Dimension Stepping back to a global perspective, as I said at the outset, rebalancing has not advanced sufficiently, despite the slow growth in deficit countries. In some key emerging economies,

As we take a global perspective, we should not—and cannot—forget the low-income countries, where populations are especially vulnerable to economic dislocation in the rest of the world. These countries need to focus on protecting themselves from future storms—including by rebuilding policy buffers and investing in social safety nets. The international community, of course, must stand ready to help.

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I am confident that with the right actions, strong, sustainable, and balanced growth can and will be restored.

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“ ” There is a clear implication: we must act now, act boldly, and act together.

Conclusion

In sum, risks to the global economy are rising, but there remains a path to recovery. The policy options are narrower than before, but there is a way through. There are lingering uncertainties, but resolute action will help to dispel doubts. I am confident that with the right actions, strong, sustainable, and balanced growth can and will be restored.

There is a clear implication: we must act now, act boldly, and act together. I can assure you that for its part, the IMF will continue to do everything in its power to advocate for this outcome and to lend its material support wherever it is requested and relevant.  Thank you.

As in the first phase of the crisis, we have reached a point where actions by all countries, doing what they can, will add up to much more than actions by a few.

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Complete List of Speeches, Blog Posts, and Articles 2 0 1 1– 2 0 1 9

Scan here for digital version with links to all speeches, blog posts, and articles.

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Complete List of Speeches, 2011-2019 Ingredients for Malaysia’s Economic Prosperity

Finding a Path to the Higher Plain of Inclusive Growth

June 24, 2019

May 16, 2019

Forging a Stronger Social Contract— the IMF’s Approach to Social Spending

How to Ensure the Effective and Sustainable Financing of International Development

June 14, 2019

May 7, 2019

Strengthening the Economic Engine: Prosperity and Resilience of CESEE Economies in a Changing Trade Landscape

A Personal View on Leadership

June 12, 2019

The Next Steps for International Cooperation in Fintech June 8, 2019

Opening Remarks at the United States 2019 Article IV Press Conference June 6, 2019

Mexico: An Opportunity for Financial Inclusion May 28, 2019

Georgia—Harnessing Reforms to Boost Inclusive Growth May 20, 2019

Uzbekistan’s Reforms: A New Equation for Inclusive Growth and Cooperation May 17, 2019

April 30, 2019

BRI 2.0: Stronger Frameworks in the New Phase of Belt and Road April 26, 2019

Belt and Road Initiative: Two Key Channels to Achieving Financial Connectivity April 24, 2019

A Delicate Moment for the Global Economy: Three Priority Areas for Action April 2, 2019

Opening Remarks at the Spring Meetings Press Conference April 11, 2019

The Euro Area: Creating a Stronger Economic Ecosystem March 28, 2019

Opening Remarks on Corporate Taxation in the Global Economy March 25, 2019

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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Portugal and the Global Economy: The Way Forward

Winds of Change: The Case for New Digital Currency

March 1, 2019

November 14, 2018

The Financial Sector: Redefining a Broader Sense of Purpose

Three Bridges to a Prosperous Future

February 28, 2019

A Commitment to Shared Prosperity: The Next Chapter of Unity in Europe February 14, 2019

SME Development and Financial Inclusion in the Arab World February 10, 2019

Laying the Foundations of Good Fiscal Management in the Arab World February 9, 2019

Opening Remarks at the World Economic Outlook Press Conference January 21, 2019

November 5, 2018

New Economic Landscape, New Multilateralism October 11, 2018

Opening Remarks at the Annual Meetings Press Conference October 11, 2018

How Global Trade Can Promote Growth for All October 10, 2018

‘Steer, Don’t Drift’: Managing Rising Risks to Keep the Global Economy on Course October 1, 2018

Ghana: Planting Economic Seeds for Future Prosperity December 18, 2018

Looking Ahead to Chart Today’s Course: The Future of Work in sub-Saharan Africa December 17, 2018

Age of Ingenuity: Reimagining 21st Century International Cooperation December 4, 2018

Opening Remarks at the 2018 High-Level Caribbean Conference

Promoting Peace, Tolerance, and Respect September 26, 2018

Keynote Address at SecretaryGeneral’s High-Level Meeting on Financing the 2030 Agenda for Sustainable Development September 24, 2018

The Helen Alexander Lecture: The Case for the Sustainable Development Goals September 17, 2018

November 26, 2018

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Opening Remarks at the United Kingdom Article IV Press Conference September 17, 2018

Opening Remarks at the Center for Global Development Book Launch Event—Race to the Next Income Frontier: How Senegal and Other Low-Income Countries Can Reach the Finish Line September 14, 2018

Managing Debt Vulnerabilities in Low-Income Countries September 13, 2018

Opening Remarks at the 2018 Michel Camdessus Central Banking Lecture September 6, 2018

Euro 2.0: Past, Present, and Future of Euro Area Integration June 25, 2018

Opening Remarks at the United States 2018 Article IV Consultation June 14, 2018

Introductory Remarks at Foreign Policy’s Diplomat of the Year Award June 13, 2018

Address to St. Petersburg International Economic Forum May 25, 2018

Creating a Better Global Trade System

The Class of 2018: A New Odyssey May 12, 2018

Belt and Road Initiative: Strategies to Deliver in the Next Phase April 12, 2018

Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy April 11, 2018

Minding the Gaps to Deliver Prosperity for Asia April 10, 2018

A Compass to Prosperity: The Next Steps of Euro Area Economic Integration March 26, 2018

ASEAN and the IMF: Working Together to Foster Inclusive Growth February 27, 2018

Spending Reform for Sustainable and Inclusive Growth in Arab Countries February 9, 2018

IMF and BIS—Working Together to Boost Financial Stability February 8, 2018

Scaling-up the Inclusive Growth Agenda in the Arab Region January 30, 2018

May 14, 2018

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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Opening Remarks at the World Economic Outlook Update Press Conference

Opening Remarks at the IMF Research Conference on Globalization

January 22, 2018

October 11, 2017

Opening Remarks at the 2017 United Kingdom Article IV Press Conference

A Time to Repair the Roof

December 20, 2017

Djibouti—Harnessing Trade and Technology for Inclusive Growth December 18, 2017

October 5, 2017

Central Banking and Fintech— A Brave New World? September 29, 2017

The Foundations of Technological Transformation in Africa

Statement to the UN High-Level Panel on Women’s Economic Empowerment

December 15, 2017

September 19, 2017

Benin: Harnessing the Power of Economic Diversification

Opening Remarks at the 2017 Michel Camdessus Central Banking Lecture

December 12, 2017

September 18, 2017

Opening Remarks at the 2017 HighLevel Caribbean Forum: Unleashing Growth and Strengthening Resilience

Addressing Corruption with Clarity

November 16, 2017

Japan and the IMF: Working Together to Promote Inclusive and Sustainable Growth November 7, 2017

Opening Remarks at the 18th Jacques Polak Annual Research Conference: The Global Financial Cycle November 2, 2017

September 18, 2017

Asia-Pacific Region: Gearing Up for the Next Transformation September 6, 2017

Together, Korea’s Women and Economy Can Soar September 5, 2017

Working Together to Fight Money Laundering and Terrorist Financing June 22, 2017

Towards a More Secure Recovery Shared by All October 13, 2017

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Opening Remarks at European Development Days—Building a Virtuous Cycle: The IMF’s Commitment to Capacity Development and Domestic Resource Mobilization

Standing with the Central African Republic

June 7, 2017

November 18, 2016

What Comes Next? May 20, 2017

Belt and Road Initiative: Strengthening Financial Connectivity May 14, 2017

Belt and Road Initiative: Proven Policies and New Economic Links May 14, 2017

Building a More Resilient and Inclusive Global Economy April 12, 2017

January 25, 2017

Peru—Seizing Opportunities in a Changing Global Economy The Business Case for Women’s Empowerment November 18, 2016

Women’s Empowerment: An Economic Game Changer November 14, 2016

Opening Remarks at the 17th Jacques Polak Annual Research Conference: Macroeconomics After the Great Recession November 3, 2016

Reinvigorating Productivity Growth

Pakistan and Emerging Markets in the World Economy

April 3, 2017

October 24, 2016

Generating Public Revenue to Build Resilient Economies

The Role of Business in Supporting a More Inclusive Global Economy

February 12, 2017

October 10, 2016

Harnessing the Power of Transparency

Managing an Inclusive Transition for the Global Economy

February 8, 2017

Financial Stability and Pan-African Banking February 1, 2017

Becoming the Champion: Uganda’s Development Challenge January 27, 2017

October 7, 2016

Boosting Growth and Adjusting to Change September 28, 2016

Mending the Trust Divide September 18, 2016

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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Making Globalization Work for All September 13, 2016

Relations in Banking–Making it Work for Everyone July 18, 2016

Doubling Down on Development

Opening Remarks at the IMF-CGD Event on Financial Inclusion: Macroeconomic and Regulatory Challenges April 11, 2016

Decisive Action to Secure Durable Growth

July 14, 2016

April 5, 2016

Keynote Address at the Paris Club 60th Anniversary

The Role of Emerging Markets in a New Global Partnership for Growth

July 1, 2016

February 4, 2016

Opening Remarks at the 2016 Michel Camdessus Central Banking Lecture June 24, 2016

Opening Remarks at the 2016 United States Article IV Press Conference June 22, 2016

Unity in Diversity: The Case for Europe June 17, 2016

Managing Spillovers— Striking the Right Balance of Domestic Objectives and External Stability June 16, 2016

Kazakhstan–Embracing the Next Transformation May 24, 2016

The Case for a Global Policy Upgrade January 12, 2016

CEMAC: A Stronger Community for Stronger and More Inclusive Growth January 8, 2016

Nigeria—Act with Resolve, Build Resilience, and Exercise Restraint January 6, 2016

The Role of Personal Accountability in Reforming Culture and Behavior in the Financial Services Industry November 5, 2015

Catalyst for Change: Empowering Women and Tackling Income Inequality October 22, 2015

Brothers and Sisters, There is Much to Do October 9, 2015

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Managing the Transition to a Healthier Global Economy

Opening Remarks at the 2015 Camdessus Central Banking Lecture

September 30, 2015

May 14, 2015

Liberia: Overcoming Challenges— Past, Present, and Future

Ethics and Finance— Aligning Financial Incentives with Societal Objectives

September 11, 2015

Tunisia—A People United, A Destiny Responding September 9, 2015

Delivering on the Promise of 2025 September 6, 2015

The Future of Asian Finance: Ensuring Stability and Continued Prosperity September 2, 2015

Poised for Take-off—Unleashing Indonesia’s Economic Potential September 1, 2015

Seizing a Once-in-a-Generation Opportunity July 8, 2015

Lifting the Small Boats June 17, 2015

The Changing Landscape of Financial Intermediation June 4, 2015

Commencement Address at the Illinois Institute of Technology May 16, 2015

May 6, 2015

Reinvigorate Trade to Boost Global Economic Growth April 23, 2015

Remarks at High-Level Ebola Meeting: The Road to Recovery April 17, 2015

Remarks at World Bank Climate Ministerial Meeting April 17, 2015

Lift Growth Today, Tomorrow, Together April 9, 2015

Monetary Policy in the New Normal March 22, 2015

Opening Remarks at the 2015 China Development Forum March 22, 2015

Statement on the Catastrophe Containment and Relief Trust February 5, 2015

Three “Rosetta Moments” for the Global Economy in 2015 January 15, 2015

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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The IMF at 70: Making the Right Choices—Yesterday, Today, and Tomorrow

Navigating Monetary Policy in the New Normal, Monetary Policy in a Changing Financial Landscape

October 10, 2014

May 25, 2014

Challenges of Job-Rich and Inclusive Growth

Closing Remarks at the Conference on Building the Future: Jobs, Growth, and Fairness in the Arab World

October 8, 2014

The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre

May 12, 2014

The Arab Countries in Transition— Strengthening the Economic Middle

October 2, 2014

May 8, 2014

The Economic Power of Women’s Empowerment

Opening Remarks at the Conference on Monetary Policy in the New Normal

September 12, 2014

Supporting the European Recovery in a Rapidly Changing World July 18, 2014

Investment for the Future—Higher Investment for Stronger Growth July 6, 2014

Opening Remarks at the Inaugural Camdessus Central Banking Lecture July 2, 2014

Africa Rising—Building to the Future May 29, 2014

Economic Inclusion and Financial Integrity May 27, 2014

April 13, 2014

The Road to Sustainable Global Growth—the Policy Agenda April 2, 2014

China’s Next Transformation: The Key Steps Forward March 23, 2014

China’s Youth: Global Leaders, Global Citizen March 23, 2014

Opening Remarks at the China Development Forum March 23, 2014

The Global Economy in 2014 January 15, 2014

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Mali at the Dawn of the New Year: From Crisis to Recovery January 9, 2014

Outlook for Europe: Boosting Growth and Employment

Unleashing the Economic Potential of the Maghreb—the Role of Foreign Investment January 9, 2013

Toward a Second Ivoirien Miracle

December 10, 2013

January 7, 2013

Addressing Challenges in Gulf Cooperation Council Economies

Global Financial Sector Reform: An Unfinished Agenda

November 10, 2013

October 25, 2012

The Future Global Economy and the Future Fund

Opening Remarks at the Bank of Japan-IMF High-Level Seminar “Challenges of the Global Financial System: Risks and Governance under Evolving Globalization”

October 11, 2013

Managing the New Transitions in the Global Economy October 3, 2013

The Global Calculus of Unconventional Monetary Policies August 23, 2013

Eastern Europe and Romania— The Path to Prosperity by Christine Lagarde in Bucharest July 16, 2013

The Global Policy Actions Needed to Stay Ahead of the Crisis April 10, 2013

Fulfilling the Asian Dream—Lasting Growth and Shared Prosperity April 7, 2013

October 14, 2012

The Road Ahead—A Changing Global Economy, A Changing IMF October 12, 2012

Opening Remarks at the Signing Ceremony for 2012 Bilateral Borrowing Agreements October 11, 2012

New Perspectives on Asia’s Role in the Global Economy July 12, 2012

Partnership and Recovery— The Shared Path to Global Stability and Growth July 6, 2012

Completing the Task: Financial Sector Reform for Stability and Growth June 8, 2012

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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Latvia and the Baltics— a Story of Recovery

Africa’s Future: Responding to Today’s Global Economic Challenges

June 5, 2012

December 20, 2011

Global Connections and Global Citizens

An Address to the 2011 International Finance Forum

May 23, 2012

November 9, 2011

The Legacy of Charlemagne— Wolfgang Schäuble and European Integration

Global and Regional Policy Challenges

May 16, 2012

Anchoring Stability to Sustain Higher and Better Growth May 7, 2012

Banque de France Financial Stability Review on Public Debt—Special Address to Panel Discussion

November 7, 2011

The Challenges for the Global Economy September 9, 2011

Challenges and Opportunities for the World Economy and the IMF July 26, 2011

April 21, 2012

IMF/Center for Financial Policy Roundtable on the Future of Financial Regulation April 17, 2012

Seizing the Moment—Thinking Beyond the Crisis April 12, 2012

Cooperation and Connectedness April 3, 2012

Global Challenges in 2012 January 23, 2012

Securing Niger’s Economic Future in Uncertain Global Economic Times December 21, 2011

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Complete List of IMF Blog Posts How to Help, Not Hinder Global Growth June 5, 2019

Getting Real on Meeting Paris Climate Change Commitments May 3, 2019

Corporate Taxation in the Global Economy March 25, 2019

Give Today’s Children a Chance September 24, 2018

Ten Years After Lehman—Lessons Learned and Challenges Ahead September 5, 2018

Shifting Tides: Policy Challenges and Opportunities for the G20 July 18, 2018

A Global Imperative

Estimating Cyber Risk for the Financial Sector

March 8, 2019

June 22, 2018

Unlimited Opportunities: Creating More Jobs for Young People in Emerging Market and Developing Economies

Creating a Better Global Trade System

January 22, 2019

When History Rhymes November 5, 2018

Economic Gains from Gender Inclusion: Even Greater Than You Thought November 28, 2018

G20: Step Up to Boost Inclusive Growth November 28, 2019

Realizing the Potential of the G20 Compact with Africa October 30, 2018

May 29, 2018

Shining a Bright Light into the Dark Corners of Weak Governance and Corruption April 22, 2018

An Even-handed Approach to Crypto-Assets April 16, 2018

Policy Actions to Sustain Growth and Guard Against Risks March 15, 2018

Addressing the Dark Side of the Crypto World March 13, 2018

Ending Harassment Helps #TheEconomyToo March 5, 2018

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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A Dream Deferred: Inequality and Poverty Across Generations in Europe

The Fruits of Growth: Economic Reforms and Lower Inequality

January 24, 2018

January 26, 2017

Three German Economic Challenges with European Effect

The Calculus of Conflict in the Middle East

January 17, 2018

September 16, 2016

Corruption Disruption

To Boost Growth: Employ More Women

December 8, 2017

Stepping up the Fight Against Money Laundering and Terrorist Financing July 26, 2017

No Time to Stand Still: Strengthening Global Growth and Building Inclusive Economies

September 14, 2016

We Need Forceful Policies to Avoid the Low-Growth Trap September 1, 2016

The US Economy: Above 2, Below 5, and 4 P’s

July 5, 2017

June 22, 2016

Fintech—Capturing the Benefits, Avoiding the Risks

Doing It All—Women Boost the Bottom Line for Home, Firm, and Country

June 20, 2017

The Compact with Africa— The Contribution of the IMF June 12, 2017

Protecting Education and Health Spending in Low-Income Countries June 6, 2017

Fintech—A Brave New World for the Financial Sector? March 21, 2017

Maintaining the Positive Momentum of the Global Economy March 14, 2017

March 7, 2016

Migration: A Global Issue in Need of a Global Solution November 11, 2015

US Economy Returning to Growth, but Pockets of Vulnerability June 4, 2015

Reigniting Strong and Inclusive Growth in Brazil May 28, 2015

Fair Play—Equal Laws for Equal Working Opportunity for Women February 23, 2015

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Time to Act on the G-20 Agenda: The Global Economy Will Thank You

Women Can Help Grow the World Economy

February 6, 2015

September 23, 2013

Unlocking Latin America’s Huge Potential

An Open and Diverse Economy to Benefit All Algerians

December 2, 2014

March 18, 2013

Jobs and Growth: Supporting the European Recovery

What We Can Do to Improve Women’s Economic Opportunities

January 28, 2014

March 8, 2013

Mali—At the Dawn of a New Year

Building on Latin America’s Success

January 11, 2014

December 6, 2012

A New Frontier for Kenya and Africa

Sendai: A Tale of Natural Disaster, Resilience, and Recovery

January 8, 2014

Myanmar: Awakening to Countless Possibilities December 9, 2013

Korea: Keeping It Dynamic December 6, 2013

Cambodia: Moving Beyond the Frontier December 4, 2013

How to Get the Balance Right: Fiscal Policy at a Time of Crisis May 6, 2012

Women in Leadership March 9, 2012

Saudi Arabia: A Key Regional and Global Player February 8, 2012

Back to Asia November 29, 2013

Building Bridges to The Future in the Gulf November 12, 2013

Great Transitions in the Global Economy October 10, 2013

October 10, 2012

Hope and Perseverance on Tunisia’s Demanding Road Ahead February 2, 2012

The Arab Spring, One Year On December 6, 2011

Resolve and Determination— How We Get Out of This Together September 27, 2011

CO M P L E T E L I S T O F S P E E C H E S , B LO G P O S T S , A N D A R T I C L E S • 2011– 2019

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Complete List of IMF Finance & Development Magazine Articles Updating Bretton Woods June 2019

A Global Imperative March 2019

The Voice of Youth June 2017

Path to Development June 2015

Focus, Flexibility, Service September 2014

Dare the Difference June 2013

Fragmentation Risks September 2012

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Christine Lagarde Born in Paris in 1956, Christine Lagarde completed high school in Le Havre and attended Holton-Arms School in Bethesda, Maryland (USA). She then graduated from law school at University Paris X and obtained a master’s degree from the Political Science Institute in Aix-en-Provence. After being admitted as a lawyer to the Paris bar, Lagarde joined the international law firm of Baker & McKenzie as an associate, specializing in labor, antitrust, and mergers and acquisitions. A member of the Executive Committee of the firm in 1995, Lagarde became the Chairman of the Global Executive Committee of Baker & McKenzie in 1999, and subsequently Chairman of the Global Strategic Committee in 2004. Lagarde joined the French government in June 2005 as Minister for Foreign Trade. After a brief stint as Minister for Agriculture and Fisheries, in June 2007 she became the first woman to hold the post of Finance and Economy Minister of a G7 country. From July to December 2008, she also chaired the ECOFIN Council, which brings together economics and finance ministers of the European Union. As a member of the G20, Lagarde was involved in the group’s management of the financial crisis, helping to foster international policies related to financial supervision and regulation and to strengthen global economic governance.

As Chairman of the G20 when France took over its presidency in 2011, she launched a wide-ranging work agenda on the reform of the international monetary system. In July 2011, Lagarde became the eleventh Managing Director of the IMF and the first woman to hold that position. In 2016, she was selected by the IMF Executive Board to serve for a second five-year term. On July 16, 2019, Lagarde announced her intention to resign following her nomination for the position of President of the European Central Bank. Her resignation was effective September 12, 2019. Lagarde was named Officier in the Légion d’honneur in April 2012. A former member of the French national team for synchronized swimming, Christine Lagarde is the mother of two sons.

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