As prepared for delivery
Introduction: Priorities for 2013
Good evening. Let me begin by thanking my dear friend Klaus Schwab for the singular honor of addressing all of you.
I know we are all still deeply concerned with the state of the global economy. Where do we stand? Well, thanks to policy actions taken over the past year, we have seen some respite and some stabilization in financial conditions.
But it is not all good news. The recovery is still weak, and uncertainty is still high. As the IMF announced just a few hours ago in our World Economic Outlook, we expect global growth of only 3½ percent this year, not much higher than last year. The short-term pressures might have alleviated, but the longer-term pressures are still with us.
As I have said recently and it bears repeating: we have avoided collapse, but we need to guard against any relapse. 2013 will be a make-or-break year.
We all know the imperative—keep up the momentum on the policy actions needed to put uncertainty to rest.
What does that mean? For the Euro Area, it means making firewalls operational; pushing ahead with banking union; continuing with the difficult but necessary fiscal adjustment at the country level; and supporting demand, especially with further monetary easing.
For the United States, it means pulling together in the national interest and avoiding further avoidable policy mistakes, such as failing to agree on increasing the debt ceiling—and, for the United States and Japan, reaching agreement on medium-term debt reduction.
For the emerging and developing economies, faring better despite their concerns about continued turmoil and lack of decisive action in the advanced economies, conditions differ greatly. Some are more vulnerable than others, but they need to rebuild the policy space that has been used up in alleviating the crisis in recent times.
So these are the short-term priorities as I see them.
The broader view
But here in Davos I would like to take a somewhat broader view—looking to the longer horizon, to the new global economy taking shape before our eyes.
Over the past few months, I have visited all of the major emerging regions of the world—Africa, Asia, the Middle-East, and Latin America. And I must say, the world looks very different from their vantage point. It is a world of challenges, yes, but it is also a world of “resilient dynamism”.
The burning question is this: how we can make sure that all regions grow strongly, converge rapidly, and succeed in meeting the aspirations of their people?
To answer this question, we need to reflect upon some of the megatrends shaping the future. Many thought leaders are pondering this issue, including here at the World Economic Forum. I would submit the following four pivot points:
- First, a growing demand for individual empowerment, including for women, and a growing sense of a single global community.
- Second, a reallocation of political and economic power across the world. By 2025, for example, two-thirds of the world’s population will live in Asia. This can lead to greater cooperation or to greater tension and competition.
- Third, a seismic shift in demographics, as the “youth bulge” in various emerging regions rubs up against the “graying” populations elsewhere. Sixty percent of the population in the Middle East and North Africa is under 30. It is 70 percent for sub-Saharan Africa. Again, either a great opportunity or a source of instability.
- Fourth, increasing vulnerability from resource scarcity and climate change, with the potential for major social and economic disruption. This is the real wild card in the pack.
So how can we successfully navigate our way into this future world? There are no easy answers. So where to begin? I think it starts with the new generation on the march—in a world that is flatter, more closely-knit, more interconnected than ever before in history.
This new generation thinks differently. It is a generation weaned on immediacy, democracy, and global reach of social media. Consider the scale: Facebook and Twitter have about one billion and 500 million users respectively. If they were countries, they would be the 3rd and 4th largest nations in the world!
Perhaps we can lay the groundwork for future success by embracing some of the emerging values of this new generation. Let me touch on three of these in particular: (1) greater openness; (2) stronger inclusion; (3) better accountability.
1. Greater Openness
Let me begin with openness. This generation is a global generation and an open generation. Open to the world, and to the idea of a common global community.
In a sense, this is really an old lesson for a new era—that when countries transcend the narrow national interest and come together for the global good, everybody wins. This was the reason the IMF was founded in 1944—and it remains our guiding principle.
In fact, this principle is more important today than ever before. In this era of globalization, cooperation needs to be hardwired into the psyche of policymakers. Why? As we saw clearly during the crisis, this is a world where economic jitters in one region or market can have instant repercussions all across the globe. In a flat world, there is no room for economic silos.
But old instincts die hard. At the first hints of improving sentiment, countries are enticed to retreat to the alluring comforts of their own backyards. They face the perennial temptations to look only at the national interest—with competitive devaluations, barriers to trade, and a zeal to protect their own financial institutions at the expense of others. This is an anachronistic mindset ill-suited to a modern global economy.
On the contrary, opening up and removing barriers has proven to be more efficient. I am thinking, in particular, about trade and financial integration.
Look at Asia, for example. This is a region that has made tremendous progress in trade integration—trade within Asia tripled over the past decade, and regional trade among emerging Asian nations grew even faster. But it has lagged behind in financial integration. It is not investing enough of its own savings in its own future.
And yet, the advantages of financial integration in Asia are clear. It can lift people up by boosting domestic demand and helping small firms get access to credit. It can make economies safer, by providing more insurance against adverse developments. It can reduce inequality, by helping financial inclusion.
Other regions too can benefit from more integration, including the Middle East and Africa. These regions will gain from opening up—knocking down barriers to trade and welcoming investment. In this way, they can set in train a virtuous circle of higher productivity, enhanced economic diversity, and greater resilience against external turmoil.
Take the Maghreb, for example. On its own, each country in the region is small. But together, they form a vibrant market of 90 million people, offering limitless possibilities.
Possibly the greatest integration of all comes from Europe. If you look behind the daily headlines related to the Eurozone crisis, you see a region in the midst of a historic process of integration. It is really the culmination of a centuries-long search for peace and prosperity, with the understanding that by linking arms you are unlocking swords—and also unlocking a million avenues for mutual gain.
Yes, the European economy faces serious issues that need to be addressed—deeper banking and fiscal union, for example. But destiny beckons through the smoke and the fog. And I, for one, am optimistic about Europe’s future, especially if it stays on the path of reform, integration, and renewal.
2. Stronger inclusion
Let me turn to what I see as the second major aspiration of the new generation and the new global economy: stronger inclusion. Our close-knit world is a participatory world. The new generation demands opportunities for all and insists on tolerance, respect, and fairness for all.
Just look at some recent examples—from the yearnings on the Arab Street for greater dignity and opportunity, to the brave cry of young women for education and equality, and to the heartfelt urge of Indian women for greater respect and justice. These demands must be met.
What does it mean for economic policymakers? It means that we need more fairness in economic life, more inclusion. This has numerous dimensions.
At its core, it relates to growth. Surely we have all learned by now that it is no longer enough to focus on growth alone. We need all people to share in rising prosperity—and, by the same token, share fairly in any economic adjustment needed to achieve or restore prosperity.
As Franklin Roosevelt once said: “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.”
Inclusive growth is certainly a top concern of policymakers. The message is resonating widely.
I was not surprised, therefore, to see that the World Economic Forum’s most recent survey puts “severe income disparity” at the very top of global risks over the next decade. Excessive inequality is corrosive to growth; it is corrosive to society.
I believe that the economics profession and the policy community have downplayed inequality for too long. Now all of us—including the IMF—have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust. The research reaffirms this finding.
What is less clear is how we achieve more inclusive growth in practice. Certainly, universal access to decent education is the non-negotiable starting point. Beyond that, I believe policies such as robust social safety nets, extending the reach of credit, and—in some cases—minimum wages can help.
Above all, inclusive growth must also be job-rich growth. This is really a symbiotic relationship—we need growth for jobs and jobs for growth. Right now, 202 million people are looking for work, and two in five of the jobless are under 24. Relieving this sense of desperation must be the over-riding goal of everything we do.
Inclusion has other dimensions too.
Gender inclusion is critically important, and, frankly, too often neglected by policymakers. In today’s world, it is no longer acceptable to block women from achieving their potential. Think about it: women control 70 percent of global consumer spending.
All studies point to the economic benefits of full female participation in the labor force, in the economy, in society. One recent study estimates that by simply raising women’s employment rates to the level of men, GDP would jump significantly—by 5 percent in the United States, 9 percent in Japan, 10 percent in South Africa, 27 percent in India, and 34 percent in Egypt.
The evidence is clear, as is the message: when women do better, economies do better. So policymakers and economic leaders must do better in supporting women. That means we must tear down all obstacles in the path of women, even the subconscious obstacles of the mind.
One other point on inclusion: we need a greater sense of solidarity across generations. We need to be cognizant of the legacy we are leaving for those who will come after us. One such legacy is public debt, which now hovers around 110 percent of GDP among the advanced economies—the highest level since World War II. We owe it to the next generation to put in place credible plans to reduce this burden on them.
Even more important is the issue of climate change, which, in my view, is by far the greatest economic challenge of the 21st century. The science is sobering—the global temperature in 2012 was among the hottest since records began in 1880. Make no mistake: without concerted action, the very future of our planet is in peril.
So we need growth, but we also need green growth that respects environmental sustainability. Good ecology is good economics. This is one reason why getting carbon pricing right and removing fossil fuel subsidies are so important. This too is an element of inclusion.
3. Better accountability
Let me turn to my third and last principle for the new global economy: better accountability. The new generation demands transparency. They demand good governance. We must deliver.
Just look at the role of information technology in forcing change. It was the citizen power of social media that sparked a peoples’ transformation in the Middle East, put pressure on U.S. policymakers to compromise on the fiscal cliff, and prompted Chinese policymakers to publish frequent updates of pollution levels.
These forces for greater accountability will only get stronger. Of course, governments can try to push back and restrict access to information technology. But this is like King Canute ordering the tide not to come in!
Accountability is really a two-way street—institutions must be accountable to citizens, but citizens must also have the knowledge, education, and training needed to hold them accountable. It is mutual responsibility.
What does this all mean for economic life—in the public sector, the private sector, and international institutions too?
Beginning with the public sector, we have learned that good governance is the bedrock of economic success. Without strong institutions, good policies cannot be developed and implemented.
Zero tolerance for corruption must be foundational. The state must be the servant rather than the master of the people—meeting their basic needs and providing an enabling environment for the private sector to thrive.
But the private sector also needs to be accountable. The goal of the private sector cannot be only profit; it must also be to add value, create jobs, develop the new ideas that drive an economy forward. Vested interests and arbitrage typically hinder the accountability principle.
One has in mind the financial sector, which turned out to be insufficiently accountable—to its clients, its shareholders, and to society in general. As we all know, the global economic crisis was, in many respects, a governance crisis originating in the financial sector. It hid too much activity in murky and dark corners, and put its own short-term gain ahead of supporting the real economy.
As Plato said long ago, “Excess generally causes reaction, and produces a change in the opposite direction.”
Frankly, we need to see more of that change in 2013. Finishing the job of financial sector reform must be a priority. We can already see too many signs of waning commitment—dilution of reforms, delays in implementation, inconsistency of approaches. And we can see the risks—a further weakening in capital and liquidity standards; and not enough progress on key areas like cross-border resolution, shadow banking, and derivatives. We must also move in the direction of more prudent compensation practices.
Ultimately, again, this is all about accountability: we need a financial sector that is accountable to the real economy—one that adds value, not destroys it.
One final point on accountability: it also relates to international financial institutions like the IMF. We too must respond to the new imperative for greater accountability.
And so we are trying to become more open and transparent, reaching out to all stakeholders. Recognizing the profound changes in the global economy, we are pushing ahead with our governance reforms so that all countries have a fair stake in the running of the institution.
For at the end of the day, our job too is service: for our 188 member countries. We must be accountable to them—but even more than that, to the citizens of those countries who now hold us, rightly, to a new standard of effectiveness.
Conclusion: A New Moment in History
Let me conclude. I believe that if we continue to act, 2013 will be a defining year in terms of finally getting beyond the crisis. But more than that, I believe we are standing in the antechamber of a new global economy, marked by rapidly shifting circumstances and new modes of thinking.
Yes, this new economy will be geographically different, driven more by the dynamic emerging markets and developing countries. But it will also be generationally different, shaped by different values and principles.
What we need today is a “new moment in history” that embraces the values of a new era—more openness and cooperation between nations, more inclusion and solidarity among peoples, and stronger accountability of those responsible for the global economy. That includes many of the people here in this room.
In the final analysis, there are no easy answers to the big burning questions like the sources of future growth and the harnessing of technology to benefit the entire planet. But we can at least say that, together, we are grappling with the right issues—with our intelligence, goodwill, and courage.
Let me assure you that the IMF will always be ready to help in whatever way we can.