(Version in 中文)
I am delighted to be back in China this week for a high-level seminar in Nanjing on the international monetary system. Every time I come to this part of the world, I am impressed by the dynamism of the economies and the optimism of the people. The future is here.
The region’s economic performance over the past few decades has been nothing short of remarkable. Asia now accounts for about a third of the global economy, up from under just a fifth in 1980. This trend has been reinforced by the crisis, with the emerging market powerhouses leading the global recovery.
Asia has also made tremendous progress with poverty reduction. China alone has pulled hundreds of millions of people out of poverty over the past few decades. Such a feat has never before been accomplished in the history of human civilization.
But to sustain this progress, Asia needs to grapple with numerous challenges today, among them the need to deal with overheating pressures and volatile capital inflows. And this relates directly to our discussion at Nanjing.
The current international monetary system has certainly delivered a lot. But it also has flaws that need to be fixed, especially if the next phase of globalization is to succeed in bringing a strong and broad-based rise in living standards. I see four pressing issues:
- Imbalances across and within countries. We need stronger cooperation to promote effective global adjustment and discourage countries from running policies that lead to global imbalances. The G20 Mutual Assessment Process and the IMF’s “spillover reports” for the five most important systemic economies—which look at the effects of country policies across their borders—are steps in the right direction. More ambitious ideas, including a strengthening of countries’ multilateral obligations and of accountability mechanisms for these, are also worth discussing.
- No framework to oversee capital flows. Everybody knows that capital flows can sometimes be destabilizing. This is something many countries worry about. But we do not have globally agreed “rules of the road” on what they should do. Sometimes we need to look at old ideas with a fresh perspective, and we are developing more of a consensus view. In the past, capital controls were not in our toolkit. Today, we see them more as part of the toolkit, although only in specific circumstances and not, of course, as a substitute for good macroeconomic policies.
- Inadequate global liquidity. We need to strengthen the global financial safety net, to reduce the need to “self-insure” by building up costly reserves buffers. There are a number of options here. One possibility is to strengthen partnerships with regional financing arrangements. Another is to improve the predictability of systemic liquidity provision more generally.
- Too few options for safe global assets to meet the demand. The question here is how to diversify reserve assets. One option is to encourage greater international use of currencies other than the four currently in the SDR basket, including those of large dynamic emerging markets. Over the longer term, the SDR itself could play a greater role.
These issues go right to the heart of the IMF’s mandate, and their resolution will require further engagement and discussion among our global membership. Certainly, they are challenges in which all global citizens have a stake—to support an ongoing recovery and avoid future crises, ensuring better outcomes for all.
The Nanjing meeting was a useful step toward the international monetary system of the future. And speaking as the head of the IMF, it was also a useful step in advancing the partnership between Asia and the Fund. A partnership that I firmly believe will continue to strengthen in the future.