Speech

Economic Diplomacy and the Need for a New Multilateralism by Christine Lagarde, Managing Director, International Monetary Fund

October 29, 2014

As prepared for delivery

Introduction: Diplomats and Economists

Good evening. Thank you so much, David, for your kind introduction. And let me also thank Secretary Pritzker and President Fred Hochberg for their generosity.

For almost half a century, Foreign Policy has been an indispensable voice in promoting global understanding and cooperation—in the service of diplomacy. This role has never been more important than today; a role that we are fortunate to have Foreign Policy play with such distinction under the leadership of David Rothkopf.

I am glad to say that we are on the same side in this never-ending struggle for a better and more peaceful world. Throughout its 70-year history, the IMF has also sought to promote understanding and cooperation—economic diplomacy in the service of global financial stability.

I am delighted, therefore, to accept this award as recognition of the goal that we pursue. I receive it on behalf of our membership and my colleagues at the Fund. I am proud to lead this exceptional group of public servants, who strive tirelessly to support a global economy in which all nations and people can prosper.

When one speaks of diplomacy, political issues, conflicts typically come to mind. Yet, my experience is that economic issues often lie just beneath the surface of many political disputes and weave the fabric for many political solutions. The IMF is often involved in this interplay between economics and politics. 

As you know, the Fund was created in 1944 through far-sighted diplomacy, in which the United States played the leading role. As the heirs to the Bretton Woods legacy, we have every reason to claim that diplomacy is in our DNA.

The IMF’s stock in trade, of course, is economic expertise. However, we approach our work with the mindset of multilateralism: the idea that no nation can go it alone; that key policies spill over and back; that the best solutions are negotiated solutions; and that knowledge is to be shared. 

This is not a new idea. But it has undergone many changes, and I believe it needs to further evolve.

Tonight, I would like to discuss our multilateralism—the past, the present, and especially the future, where a multilateralism for the 21^st Century is needed.

1. Multilateralism of the Past

First, the past. In 1944, the IMF’s founders had seen a half century of devastation. To avoid the same nightmare, they broke a fundamental link between economic isolationism, economic instability, and conflict.

In their new world, economic isolation would be replaced by cooperation, economic instability by prosperity, and war by peace. In this way, economists joined forces with traditional diplomats. It was the original multilateral moment.

That we regard such cooperation as a basic necessity today testifies to the success of this new approach then, even if the implementation proved challenging.

The commitment to cooperation through the Bretton Woods system was the foundation on which a new Europe rose from the rubble and ruins of war. I experienced it for myself: between 1950 and 1995, France’s per capita GDP rose nearly fivefold; Germany’s more than sevenfold.

And beyond Europe, throughout the world in the last 70 years, there has been more economic progress for more people than at any comparable period in history.

Multilateralism has been at the heart of it all. 

It supported the newly independent nations when the winds of change and decolonization blew through Africa and other parts of the developing world. When the Iron Curtain lifted, the international community lent expertise and financing to ease the transition to new market economies.

Cooperative efforts helped Latin America to emerge from its debt crisis in the ‘80s, and East Asia from its financial crisis in the ‘90s.

The same has been true in recent times: the Great Recession that began in 2008 did not become another Great Depression largely due to the bold, coordinated response from the international community—led by the G-20.

What lessons can we draw from this history? For me, a major one is that multilateralism lies behind the success of the good times and reduces the duration and intensity of the bad times.

It is the IMF’s raison d’être to promote this cooperation. We provide a unique platform for global economic dialogue; and we employ the instruments of our economic diplomacy—financing, analysis, technical assistance—to bolster confidence and galvanize action.

By design, we are expected to go into the most difficult economic situations. We are expected to be the first responders. We are expected to be the problem solvers. We may not always get it right first time, but we are always learning—and always trying to find solutions, and improve them. 

To paraphrase Woodrow Wilson, our job is to:

“… make the world safe for stable growth and prosperity.”

So this is where we have been: an IMF serving the broader interests of the international community since World War II.

Where are we now? That brings me to my second point—today’s multilateralism.

2. Multilateralism of the Present

I sometimes say, “This is not your father’s IMF.” It is certainly not your father’s world either—or your mother’s! Like many of you, we are dealing with problems with no easy answers. And yet we all must find answers.

What are some of today’s key economic challenges?

First, six years after the financial crisis hit, we still face the reality of a global economy struggling to regain cruising speed. I spoke at our recent Annual Meetings of the danger of a “New Mediocre”—the combination of anemic growth and weak job creation casting a dark cloud over the future. I am encouraged that our membership strongly agreed on policies to create “New Momentum”—including through growth- and job-friendly fiscal policies, structural reforms, and appropriate infrastructure investment.

Second, as this audience knows only too well, geopolitical problems compound our economic difficulties. 

• In Ukraine, for example, a young democracy is struggling to piece together an economy undermined by conflict and corruption. The IMF—once again playing the role of first responder—is providing policy and financial support to create the space for badly needed reforms, and thereby catalyze assistance from others. 
• In the Middle East, much of the hope engendered by the Arab Spring has vanished—in particular through conflict in Iraq, Syria, and Libya. Yet, with our partners, the Fund is actively supporting economic reform in Jordan, Morocco, Tunisia, and Yemen, including by making available over $9 billion in financing. In Egypt and elsewhere, our work to help build policymaking capacity aims to rekindle hope, especially for the young people of that region.
• In another fragile region, West Africa, it is Ebola that threatens to unravel hard-won stability. Working with the World Bank and others, we quickly disbursed $130 million in additional support to Guinea, Liberia, and Sierra Leone—a unique feature of the Fund’s financing being that it reached those countries within a matter of days. Still, we all recognize that the international response continues to lag the spread of this devastating disease. The IMF is ready to do more. 

A “mediocre” global recovery. The intense confluence of politics and economics in various “hotspots.” Humanitarian disasters. Challenges like these can only be held at bay—they can only be overcome—through working together.

Indeed, cooperation is essential because even more complex issues loom on the horizon. This brings me to my third and final theme: the need for a “New Multilateralism” for the future.

3. Future Challenges and the New Multilateralism

One thing is certain: 21st Century challenges demand global solutions.

The model of Adam Smith’s “invisible hand”—where pursuing one’s own self-interest would also serve the collective interest—requires solid institutional underpinnings, such as the rule of law, a currency, a competition watchdog, to name a few.

On the international scene, these underpinnings are more tentative. Multilateral institutions such as the UN and the IMF have provided a global framework for the cooperation of sovereign states, and they have served their purpose well.

Yet, to me it looks more and more as if Adam Smith’s model is being turned upside down.

What do I mean?

Given the high degree of interconnectedness in the modern global economy, many of the challenges we face represent a collective threat, and call for a collective response. Rather than collective good arising out of self-interested action, it is only by acting collectively that an individual country’s self-interest can be achieved.

One obvious example is climate change. Cutting carbon emissions in an individual country cannot solve the problem while others pursue unchanged or opposite policies. Average temperatures are rising and so is the risk of more volatile agricultural output, more food and water insecurity, and more frequent natural disasters. All countries are vulnerable, and all countries must act collectively to tackle the issue. 

The same is true for other problems that are now becoming more visible:

• Increasing income inequality is being felt hard from the U.S. to China. Too many people feel left out, too many people feel frustrated. If not addressed, these challenges could lead to serious breakdowns in social and political cohesion. 
• There is the rising demand for better economic inclusion, hampered by gender inequality suffered by an estimated 865 million women who are being held back—ironically, in economies that need new productive forces.
• There is also sheer demographics: aging populations in some regions and huge bulges of young people in others. Some numbers: there were one billion people in Africa four years ago; that number could rise to 2.7 billion by 2050. Where will all the jobs come from? For the first time in history, the world will have more over 65 year olds than 5 year olds. Who will pay the pensions?

These are sobering issues in a world that is changing in so many other ways. Global supply chains and cross-border finance draw us closer day by day. A communications revolution connects billions and transports us instantly from Tahrir Square to trading floors and back.

Meanwhile, new centrifugal forces are at work: sectarian divisions, underground operations, non-state actors, shifting centers of power. How do we conduct economic diplomacy with a multitude of voices insisting on being heard—and at 140 characters a time?

Frankly, I am not sure how we will manage all these challenges. But I am sure that we can only do it by listening to each other, dreaming together, getting real together, and working together. 

What might a “new multilateralism” look like? 

• It needs to build on the institutions of cooperation that have already demonstrated their efficiency, credibility and representativeness—but these institutions must progress to constantly mirror changing global dynamics.
• It needs to harness the various dimensions of global solutions through cooperation between these institutions, without division, without turf battles, but with a true sense of partnership.
• It needs to find a way to include important new networks of influence that are bringing their voices to bear on major global issues—from inequality, to inclusion, to transparency, to the environment; it needs to do so without losing its efficiency.
• It needs, above all, to instill a broader sense of “civic responsibility” on the part of all players in the modern global economy, including the private sector, and specifically financial sector players. What I am talking about here is a renewed commitment to the global public good. What I am talking about here is the ability to define and identify the mutual interest and solutions that will serve the global public good.

Conclusion: Responsibility and Commitment

In concluding, I would like to remind us all of a responsibility—and a commitment—that can only be addressed in this very city.

You may have heard this before, but please bear in mind a line by the late Richard Holbrooke:

“Diplomacy is like jazz: endless variations on a theme.”

So here it goes:

The international community has agreed to reform the IMF to increase the representation of the emerging market countries—more in line with their increased role in the global economy. The reforms would also help sustain the Fund’s capacity to meet the challenges ahead.

Once again, therefore, I would like to add my voice to that of virtually the entire IMF membership in calling upon the U.S. Congress to approve the 2010 quota and governance reforms. By this simple act of international solidarity, the U.S. will demonstrate the global leadership that it displayed so amply seventy years ago, and should continue to display.

On that note, it is fitting to recall the words of John Maynard Keynes at Bretton Woods. By constructing a new international world order at the end of World War II, he declared:

“The brotherhood of man will have become more than a phrase.”

We must avoid another “nightmare” and strive toward a better sisterhood—of man. I am a multilateralist by upbringing, conviction, and profession, and I am convinced that we cannot let those visions and expectations vanish and be squandered.

Once again, I thank you for this honor, and I look forward to working with all of you in the future.