Speech

Reflections on International Spillovers and Cooperation

November 1, 2018

Good morning. Welcome to the 19^th Jacques Polak Annual Research Conference. I would like to express my appreciation to the colleagues who have worked so hard to make this event possible, especially our Economic Counsellor and Director of Research, Maury Obstfeld, who will soon be leaving the Fund to return to the comforts and challenges of academia. I will return to that milestone in a moment.

This conference is known for its focus on cutting edge topics, and this year we bring together a stellar group of academics and policymakers to address the issue of international spillovers and cooperation.

Technological advances, the rapid growth of trade, and the explosion of gross capital flows have produced cross-border integration that perhaps go beyond the imagination of this institution’s founders. But for all its benefits, this integration also has left some people behind and produced risks and crises that have tested policy makers—not least the Global Financial Crisis—and will continue to test them.

Now we are facing threats to the global interconnectedness built over the past 75 years: an escalating tariff war; heightened restrictions on investment; concerns about intellectual property; and the risk of dismantling global supply chains. Too often as a profession we have overlooked how to deal with the dislocations that come with increased trade and globalization. But recent political developments are forcing us to confront these issues, for example, in the broader discussion of inequality and stagnant middle class incomes, at least in the West.

We don’t know how far this will go. But it is not hard to foresee the negative consequences that these policies could produce. This is a good opportunity to talk about how a renewed commitment to international cooperation is more essential than ever.

We need as a profession to fully grasp what is at stake—the interplay of economic forces and policy decisions, and the complexities that global integration has created. So, this conference presents a unique opportunity to examine the spillovers and the associated challenges to our work and our analytic frameworks. Many of you have devoted your research to trying to understand these challenges, and our work is enriched by your efforts.

The Growth of Trade

Let’s take a moment to examine some of the forces at play, beginning with trade.

Trade in goods and services increased from around 40 percent of global GDP in 1990 to about 60 percent now. We have experienced a sweeping transformation in which production has become fragmented across borders, and a significant share of trade now comprises intermediate goods and related services. This process has profound implications for spillovers and for the cost of protectionism.

First, shocks are likely to spread more widely across borders and within countries. Businesses now rely on parts and services from producers in many countries. They sell their output—whether in intermediate or final form—to multiple destinations. When one link in that supply chain breaks, the entire network will feel the effects.

We witnessed this after the 2011 earthquake in Japan, which disrupted the automobile supply chain. We were able to trace the global reverberations.

Second, once supply chains are established, imposing trade barriers can trigger a costly adjustment process. Needless to say, we have not seen this on the scale that some policymakers envision. And even without an actual change in trade policies, the uncertainty alone may lead to adjustments in investment and trade patterns.

Technology transfer and intellectual property have been a key element of the expansion of trade. But here, too, uncertainties about policies are casting shadows on investment. Looking forward, the future of e-commerce may also become an issue—witness the emerging debate about how online payment systems like China’s Alipay will or will not be allowed to expand across borders.

Capital Flows and Financial Stability

On capital flows, we are all deeply aware of the rapid growth of financial flows and gross stocks of foreign assets and liabilities. Cross-border holdings of financial assets are now at around 200 percent of global GDP, compared with about 70 percent in 1995.

Accordingly, the potential spillovers and the financial stability risks have grown exponentially. We saw during the Global Financial Crisis how interconnected counterparty risk threatened the world economy.

In fact, we now talk a lot about a “global financial cycle,” a theme that we discussed extensively at the last year’s conference. Macroeconomic policies in major economies can lead to globally synchronized fluctuations in capital flows and in asset prices. The balance sheets of global banks also provide an important transmission channel for spillovers from monetary policy, and going forward, the balance sheets of asset managers may be the driving force of cross-border spillovers. The Global Financial Crisis was characterized by particularly high synchronicity.

Since then, we have seen the consequences of monetary policy in the advanced economies for the rest of the world, first as central banks embarked on unprecedented loosening, and then from the Taper Tantrum onward, as they moved to normalize.

Capital flow boom-and-bust cycles are not new, and policymakers in the emerging market and developing world are experienced navigators. But the challenges we see now are not trivial for many countries grappling with uncomfortable levels of corporate and sovereign debt, and the increased role of non-bank institutions is an important new development we should be thinking about.

These global flows also challenge policymakers as they deal with large and potentially destabilizing capital flows. Spillovers have raised interesting policy questions, such as how to think about monetary, exchange rate, capital flow management and macroprudential measures in a coherent and integrated way.

A few years ago, we formulated an institutional view on liberalizing and managing capital flows, and we will be thinking more about integrating the broader set of policy questions as we go forward—something we aim to do together with policymakers and academics.

We also cannot lose sight of the problem of current account imbalances. As we know, not all imbalances are created equal, and our most recent External Sector Report found that approximately half of last year’s global current account balances were excessive, and that they pose risks to global stability. It is essential that countries work together to reduce them.

International Cooperation Under Stress

That brings me back to the subject of global cooperation.

As you can see behind me, the logo for this year’s conference is sailors’ knots—which represent connections and cooperation. But if you are into sailing, you know the danger if these knots come undone, especially during storms. I’m told the choice of logos was not so deliberate, but it’s apt imagery for where we are today.

Today, international cooperation is under stress, and doubts have been raised about the reliability of the principles and institutions we have depended upon since World War II. We should not lose sight of the important achievements that cooperation has brought: the coordinated monetary policies in the aftermath of the Global Financial Crisis; the response to the European debt crisis; the financial reforms enacted under the umbrella of the Financial Stability Board; and, at the regional level, the constructive collaboration of groups such as ASEAN.

But the rise of distrust and discord is evident any time you pick up the newspaper or open a web browser. The alternative to cooperation can all too easily be fragmentation, a path we should try to avoid.

The challenge for us, and the international community, is to hear the voices of those left behind by global integration and do more to see that the benefits of globalization are retained and widely shared.

At the IMF annual meetings in Bali last month, the Managing Director reiterated the Fund’s call for a new multilateralism; one that is “more inclusive, more people-centered, and more results-oriented.” The IMF is fully supportive of efforts to reform the parts of the multilateral framework that may be outdated or in need of modernizing, including with respect to trade.

Reform has been central to the work we have been undertaking for the past 20 years, affecting our governance, our lending, our policy advice, and our analytic capabilities. If we are to strengthen the bonds of cooperation, a results-oriented multilateralism must be based on a clear understanding of the facts on the ground. That is why this conference is so timely and important. And the IMF being a champion of multilateralism is the right place to have this conversation.

This brings me back around to Maury Obstfeld. The theme of this conference was set a year ago. It speaks to Maury’s vision and intellectual leadership that he saw the need to address spillovers in a rigorous way and decided to do so here at the Annual Research Conference.

This conference is emblematic of his contributions to the IMF and the broader landscape of his economic scholarship. We at the Fund have been privileged to benefit from his insights for more than three years. And for me personally, working with Maury has been a privilege and a pleasure.

Under Maury’s leadership, the Research Department has prepared high-impact World Economic Outlook chapters on the post-crisis global economy, the wage and inflation puzzles, the macroeconomic effects of climate change, and the weakness of global trade. The External Sector Report has received greater prominence. We recently have produced a trade paper with the World Bank and the WTO. I could go on, but I suspect I am already embarrassing Maury enough.

We will be in good hands going forward as Gita Gopinath takes over the reins as Economic Counsellor. Gita is here today, and I look forward to welcoming her in the New Year.

But now is the moment for all of us to offer our deepest appreciations to Maury for his intellectual contributions, his policy insights, and his friendship. I invite you to join me in a round of applause, and I welcome you to what promises to be a terrific event.