ï»¿Martin Wolf, Associate Editor and Chief
Economics Commentator, Financial Times, United
Kingdom; Global Agenda Council on Systemic
Financial Risk:
Good morning. We're going to start nice and
promptly. My name is Martin Wolf, the Financial
Times. I have had the pleasure of moderating
this session on several occasions and it's
always been very exciting and stimulating
and pleasurable, at least for me, and we have
a particularly remarkable panel, I think,
today to discuss the issue which I'm sure
is closest to most of your hearts, which is:
are we out of the mess and, if we are, what
follows? The situation is obviously very,
very different from what it seemed to be a
year ago and very, very much better and we
want to address not only the short-term questions
of what might happen as we come out of the
recession, but also we now have, I think,
the opportunity to discuss some of the longer
term structural questions in the world economy
and we will address those as well.
Now, before I introduce the panel and the
issues, I have been â€“ to tell you first
of all this session will go on until midday,
so we have longer than normal. That should
give us time for questions from the floor,
at least the last 20 minutes or so, so prepare
your brilliant questions. After this is over,
there will be â€“ you're asked to stay
because we're going to have the spectacle
of the South African launch and you all know
what that is of, what they're launching, and
I imagine that's going to be quite an exciting
event.
Now let me introduce the panellists. Starting
the far left is Josef Ackermann, who is of
course Chairman of the Management Board of
Deutsche Bank and a very distinguished representative
of the financial-services industry. And, one
has to add, a survivor, which is quite something.
After the last two or three years, I admire
anyone who's heading an institution that still
stands.
Next to him is Lawrence â€“ Larry â€“
Summers, former Treasury Secretary and so
forth, now Director of the National Economic
Council at the Office of â€“ in the White
House and, of course, President Obama's principal
economic advisor.
Next to Larry is Christine Lagarde, who is
Minister of the Economy, Industry and Employment
in France.
Next to her is Dominique Strauss-Kahn, a fellow
citizen of France and Managing Director of
the International Monetary Fund.
Next to him is Zhu Min, who has moved from
the Bank of China and is now Deputy Governor
of the People's Bank of China, the institution
that manages approximately $2.5 trillion,
so a very important person in the institution.
And next to him is Montek Ahluwalia, Deputy
Chairman of the Planning Commission of India
and, as I think I've remarked before in this
place, in addition to that, my very first
boss. We worked together 40 years ago, I can't
â€“ I hesitate to admit this, at the
World Bank.
And finally, immediately to my left is Minister
Yoshito Sengoku, who's Minister for National
Policy at the Cabinet Office of Japan.
What are the issues? Well as far as the recovery
is concerned, the short term, a friend of
mine, he may be here, MoisÃ©s Naim of Foreign
Policy, said that the fancy acronym for this
recovery which he was giving me, which I mentioned
in a blog, is LUV, L-U-V. L is for the shape
of the recovery of the European Union, U is
for the shape of the recovery of the United
States, and V is for the shape of the recovery
of Asia and emerging countries. And I rather
like this acronym. It seems to me get it very
well.
Now, in that very mixed picture in terms of
dynamism and overheating that obviously creates
big questions about how stimulus should be
withdrawn and where, in what way and how differentiated
it should be. That's obviously a very big
question and that, in turn, depends very much
on whether we should see the recovery we're
now having as being a genuinely private â€“
we're beginning to see genuine private sector-led
recovery or are we still relying on this simply
staggering policy stimulus. I would like to
remind you that the monetary and fiscal policy
settings in the developed world today have
simply no historical precedent. We've never
seen anything like this in peace time, so
that creates a huge issue in terms of how
we're going to get out of it, where the tightening
should occur.
Then in the longer-term issues we face we
all know some of the issues: global imbalances
and exchange rate policies, an issue which
is being looked at under the direct â€“
at the behest of the G20, the new institutional
format for global discussion of the so-called
'multilateral assessment programme'. We have
the huge outstanding issues of financial-sector
reform, which got quite a jolt last week,
as everybody knows, with the announcement
by the President of the Volcker Rule, which
shocked, astonished, amazed and excited and
thrilled, I have to say, people around the
world. And we have, of course, on a bigger
level too quite fundamental transformations
in the relative success and size of nations'
economies, the extraordinary continued rise
of China and India and, clearly, the discredit
into which â€“ and we must be clear about
â€“ into which the Western models have
fallen. And that raises the question of what
the 'new normal', as Mohamed El-Erian of PIMCO
calls it, is going to look like.
So, that's the background and with that introduction
let me turn, first of all, to his view on
the short term to Dominique Strauss-Kahn.
Dominique Strauss-Kahn, Managing Director,
International Monetary Fund (IMF), France:
Thank you, Martin. I think, in a nutshell,
the news are better, we all know this. Growth
is coming back sooner and faster than expected,
but we have all to keep in mind that this
recovery is still fragile. And it's mostly
fragile because when you look in detail in
the figures it appears clearly that even if
the growth figures are rather good, and the
last figures we have from the US are really
encouraging, a large part of this is still
supported by public funding and the private
demand is still rather weak. So the question
of when â€“ Martin asked when should
we exit from the stimulus which has been put
in place, let me remind, by the way, that
the idea of the stimulus first appeared on
this stage two years ago â€“
Wolf: By you.
Strauss-Kahn: Thank you. But, okay, now we
need to exit, so is it time to end it? And
the problem is â€“ there are two problems.
The first one is that obviously the recovery
is a multi-speed recovery. I like your LUV
acronym and it shows clearly that the Asian
part of the world is now close to the total
recovery, goes fast. It's not exactly the
same thing in other parts of the world, including
Europe, and so the question of dealing with
this different speed in the recovery, especially
in the relationship between US and China,
is something at which we have to look with
great attention. We are not in a system where
the recovery looks as if it was everywhere
the same thing. It's bound to be sluggish
at least in Europe, maybe in the United States
and that's one of the big problems for the
looking forward.
If we consider the exit, the question is not
only the multi-speed, but the fact that the
situation is totally asymmetrical. If we exit
too late, even if different countries exit
at different times, of course, if they exit
too late it's a waste of resources, it's bad
policy, it's increasing public debt, we should
avoid this, we should avoid this. But if you
exit too early, then the risks are much bigger
and even if our forecast in the IMF is not
at all a forecast of a double dip, the only
reason why this kind of tail risk of a double
dip may appear would be that the exiting of
the stimulus would be too â€“ go too
fast and would be too early. And in this case,
frankly, I don't know what we could do, because
most of all the thing we had in the toolkit
has been used on the monetary side, on the
fiscal side. And so the probability is low,
but the risk is high if something like this
happens.
So it's totally asymmetrical and because the
fiscal system and ability problem is going
to be one of the biggest problems, maybe the
biggest problem in the coming years, but it's
going also to be a problem for several years,
the question is not of three months earlier
or three months later. We will have to deal
with this for five, six, seven years depending
on the country. So really the asymmetry between
exiting too early or exiting too late is very
strong and our recommendation, of course,
is not to exit too early, which means probably
that all what has been prepared for 2010 in
terms of stimulus has to be really implemented.
Now, a second point I would like to make very
quickly is that besides the stimulus one of
the big things which has been discussed during
the crisis was financial-sector reform and
finally we come to grips with this financial-sector
reform. Another very bold proposal has been
made, you just mentioned Obama's proposal,
some other thing has been proposed in the
UK, and I only have to applaud to the fact
that the momentum, the political momentum
to deal with the financial sector is still
there.
My fear is that we may, at this occasion,
forget one of the key lessons of the crisis,
which is coordination. And the financial-sector
reform has also to be coordinated. There is
big risk of thing which will be done only
country per country trying to fix the problem
of your own problem, of your own country,
limiting the risk for your own taxpayer and
creating problems in other countries. It's
obvious that if you just look for a kind of
self-insurance where you deal with the liquidity
of your own financial sector and ask it to
be at the high level of liquidity you may
create a problem in the rest of the world.
So the question of coordinating this financial-sector
reform is, for me, a top priority and I'm
a bit afraid that we are not going exactly
in this direction.
So, three â€“ two key messages. First,
the situation is better but fragile. Let's
look a lot on what's going on in the relationship
between the traditional western world and
Asia and especially China.
Second message: we have to go ahead strongly
in the financial-sector reform, more rapidly
than has been done until now and the political
pressure cannot wait for supervisory conclaves
and the traditional time it takes to make
this kind of reform. But we have to do it
in a very coordinated way and the IMF, as
it has been asked by the G20, will provide
in April a report on this question of a contribution
of the financial sector to its resolution
fund or something like this and I think that
this proposal may be helpful to try to coordinate
the different ideas which have been proposed
until now.
Wolf: Thank you very much. We'll come to the
financial-sector reform issue, which for sure
is â€“ later on. I'd like to turn to
you, Minister Lagarde, and I would be particularly
interested in how far you agree that the big
danger, as Mr Strauss-Kahn has said, is that
we withdraw our stimulus too soon.
Christine Lagarde, Minister of Economy, Industry
and Employment of France; Member of the Foundation
Board of the World Economic Forum:
Martin, I agree with that principle and â€“
although it's not new, but I think that particularly
now timing is absolutely critical and I'll
try to give you three examples. We used to
operate under the principle of the triple
T last year: it had to be temporary, targeted,
and timely. I operate myself now under the
triple R principle, where we have to pursue
the recovery and we have to empty the stimulus
package bag that we have and we're certainly
going to do so. We have to keep up with the
reform programme that we have so that the
economy becomes flexible enough to pick up
the wind as it comes. And third R, we have
to restore public finances. And the timing
of that and the balancing between the recovery
process that has to continue, the reform that
needs to be maintained and the restoration
or the restoring of public finances is a tough
line to draw.
Second example of where timing I think is
critical and it has to do with the economy
and the point that Dominique just made; it's
how do we combine the public opinion frustration
and the necessary time that it will take for
the banking industry to restore some of its
parameters and to rehabilitate itself with
those public opinions. Big timing issue.
Third timing issue, what you described and
what we're going to hear from other speakers
is that we have this L-U-V. I think the shape
of the L is a bit different from the capital
L as we see it, but clearly Europe is going
to grow slower in terms of accounted growth
relative to emerging markets and we see a
clear, you know, it's like tectonic plates
which are readjusting and we are seeing a
readjustment at the moment. The question is
how do we regulate, combine, take enough leadership
to control the overheating that is likely
to take place either on the economic front
or on the social-political front depending
on whether you are in a rapid growth country
or a slow growth one. Again, timing issue.
Wolf: I would certainly want to come back
to talk a little bit more about what's happening
in the Euro zone, but I'm â€“ and I think
there's a very interesting discussion whether
we're talking about an uppercase or lowercase
L, but either way, the down leg has been rather
horrible for many countries, though in fact,
I think least of all for France of the big
countries in Europe, including here, of course,
the UK. So I congratulate you on the resilience
of your country in this crisis.
I'm now going to turn to Montek Ahluwalia
for a view of what must look â€“ feel
very different: no down leg at all, just a
question of the size of the up leg in India.
You did have a slowdown in growth; is this
all over and how do you see the prospects
for India and Indian policy over the next
year or so?
Montek S. Ahluwalia, Deputy Chairman, Planning
Commission, India:
Thanks, Martin. Well, I mean certainly no
down leg in terms of GDP, as you say. I mean
after four years of growing at 9%, the next
two years we average about seven. Domestically,
of course, you know, when you get used to
9% and all that it holds up, even the deceleration
is a matter of concern, but there's no doubt
that the economy, like in many other economies
in Asia, has weathered this crisis very well.
We assume now that assuming we get back to
some kind of global normal, even if it's not
the new normal it won't be the old normal,
we would hope that in the coming year â€“
I mean our financial year begins in April
â€“ we would move from what looks like
7.5% or so this year to something over 8%
next year and then get back to 9%. Now there
is a lot of questioning obviously that if
the global new normal is not going to provide
the export-led demand to support this why
do we assume that we can get back to 9%? And
our answer to that is it's going to be domestic
investment led â€“ domestic investment
replacing what would otherwise have been export
demand and that investment should be in infrastructure.
I mean that's the biggest thing lacking in
India, so we're really working on whether
we have enough projects ready, whether we
have the domestic financing mechanisms to
support it, and obviously there will have
to be some external financing also. I mean
we're going to move from what was kind of
a near balanced current account to a somewhat
larger deficit, but I don't think the deficit
will be more than 2.5% of GDP. And I think
with the expected revival in capital flows
that can be easily financed.
I mean the big question facing us, as elsewhere,
is the whole issue of exit. Now, like everybody
else, we also resorted to a stimulus. I mean
if you measure the stimulus as how much did
the fiscal deficit go up, the combined deficit
of the central and the state governments,
it was about three percentage points higher
in each of the two years of the slowdown.
Now, we are greatly helped, of course, by
the fact that earlier the high Indian deficits
used to be compared with the Maastricht criteria
and we didn't look very good. But right now,
and this is the whole point about comparing
deficits is to look at what's happening elsewhere,
we're reassured that the Indian deficit is
lower than the United States, lower than the
United Kingdom. Growth is much higher, the
debt ratio is not that much different. So
really, all the fears that might have existed
about the macroeconomics shouldn't exist today.
But the signal we're clearly giving is we
need to get back in a medium term to a more
reasonable fiscal deficit position. It's not
our view that the present fiscal deficit,
which will probably be about 10% of GDP, taking
both the centre and the states together, it's
not our view that this is the normal thing.
But we want to bring it down gradually and
that's what policy will be aimed at. Meanwhile,
we hope that we can see a continuing rebound
in investment.
Now, the good news, I think, is that the successful
performance of the economy in the short run
has in fact created a lot of confidence in
the private sector. In fact, there's a marked
difference in mood in Asia and the mood let's
say in the industrialized world. Maybe we
ought to be more worried about things, but
the fact is that investors are really quite
upbeat.
And I think on the supply side, I mean these
are economies which have demonstrated a capacity
to grow, so on the supply side there's not
a problem, we just need to make sure that
the global rebalancing of demand works to
our advantage and that's what we're trying
to do.
Wolf: Thank you very much and I think it's
a very, very important point to stress that
solvency relates not only to the deficit but
also, of course, the growth of the denominator
and nominal GDP. In a country which is growing
nominal GDP at way over 10% a year, this is
rather easier than one where it's actually
shrinking. This is obviously a central point
and I can also imagine some pleasure in pointing
out the number of developed countries with
much bigger fiscal deficits than yours after
all the lecturing that you have received.
I'm now going to turn â€“ we're talking
now about Asia â€“ to Asia's giant developed
country, Japan. So how does â€“ which
was very hard hit by the crisis initially,
though there's been some bounce back, but
there was a huge decline in GDP because of
external shock. So we're now going to turn
to Minister Sengoku for his view of the prospects
for Japan.
Yoshito Sengoku, Minister of State for National
Policy, Japan:
Thank you, Mr Chairman. It is my great pleasure
to be able to be with you at this annual meeting
of the World Economic Forum. I am very grateful
to you. In terms of the short-term outlook
as well as long-term issues, probably there
will be a later part of this discussion which
will take this point up. In terms of short-term
issues, in the process of correcting the excessive
consumption in the US, so it will take some
time, in our view. However, the so-called
Lehman shock of the year before last caused
a major fall in our economy, and from that
fall, Japan and other countries in Asia â€“
in case of Japan mainly led by the growth
of the Asian economies and China, and also
our stimulus package of fiscal and financial
stimulus, we are now on the track of gradual
recovery. However, in the case of Japan, when
we look at manufacturing industries, the rate
of operation is still 80%. Recovery is still
at that level. Therefore we have a latent
internal unemployment held by various business
corporations. In other words, many companies
try to maintain the employment without laying
off the workers. Therefore, we have yet to
be on the autonomous, fully-fledged recovery.
So, that's how we see the state of the economy
now, but on the 19th September last year,
we have achieved the change of government,
that is the first major change of the government
in the history of the Japanese politics, and
the Prime Minister Hatoyama of the Democratic
Party of Japan became the Prime Minister.
This is a remarkable scene in our history.
We have 120 years of parliamentary democracy,
and 65 years have passed since the end of
World War II, and 85 years with the established
democratic parliament. We have seen the substantive,
fully-fledged change of the government in
this point in time.
Now, when we look at the issue of economic
structure, when we look at the post-Lehman
shock years, when we had suffered a major
blow â€“ not only the world economy,
and the Japanese economy also suffered, not
only short term, but will have to go through
the major change in medium to long term. We
have to achieve this structural change. So,
at this point of time, in terms of economic
structure, the political changeover took place.
In other words, we tend to overly rely on
the external demand that would like to change
the economic structure of Japan â€“ more
dependent on domestic demand, and dependent
more on the knowledge-intensive services industry
led by technology. So, maybe the Lehman shock
â€“ it may be the case that it gives
us the opportunity to change the economic
structure, and it is has an historic significance
that we are now are faced with this mission
of changing the Japanese economy. I would
like to conclude this at this point here.
Wolf: Thank you very much, Minister Sengoku.
I guess we will certainly discuss what some
of those structural changes might mean, particularly
if we are moving towards more domestic-demand
led economies. Everybody always promises this,
and yet as I pointed out in a recent column,
by my rough and ready calculations, at least
70-80% of world GDP is in countries that seem
to be hoping for export-led growth. It would
be helpful if we diminished that proportion
somewhat, since Mars probably isn't a very
good import market. Now let me turn to the
new Asian giant, China, which has had an astonishingly
successful stimulus programme, and a remarkable
growth performance last year, which some of
us â€“ and I have to admit, I among them
â€“ were somewhat sceptical about, so
congratulations. We hear a lot about overheating,
bubbles, and obviously the government is now
withdrawing â€“ thinking, or trying to
rebalance the economy in terms of excess demand.
So, what does 2010 hold for China and its
relationships with the world?
Zhu Min, Deputy Governor of the People's Bank
of China, People's Republic of China; Global
Agenda Council on the International Monetary
System:
Thank you, Martin. As you say, China had a
good year, and we have GDP growth at 8.7%.
But behind the number, I would say the structure
is much more balanced. Consumption growth
is very strong, at 15.6%, and if you are looking
for the regions, the east coast have a rather
lower growth rate, at around 7%, but the middle
and the west have 12-14% growth rates. So,
within China, the regional imbalancing has
been improved. The rural areas have improved
too. Infrastructure improved, and healthcare,
highways; education centres have been built,
because they are part of this 4 trillion RMB
stimulus package. Also, a social safety net
has started to build up. I think those are
the things behind the numbers. However, if
you are looking for this year, new challenges
emerge. The full challenge I would say is
still the inflation expectations. I have to
say, inflation is not set yet, but expectation
emerges. Last year, China has M2 growth rates
at 28.7%. The long growth is 31.7%. It is
very strong â€“ a lot of liquidity is
in the market. Last year overall, China still
has a CPR that was negative, 0.7%. But in
December, the CPR number jumped to 1.9%. In
this coming year, if oil prices go back to
$90 per barrel, and food prices still have
pressures on upsides, it will further reform
the price, for example, water, power, a few
things. In particular, indicators that M1
growth in the past few months much more stronger
than M2, doesn't mean the cash flow growth
is so strong then, the general money base.
So this means money velocity actually increased.
So, that was part of this inflation in our
expectations. We think they will be very important
issues for China policies in this coming year.
The second issue: still most important thing
is the structure change, and also deal with
overcapacities. The structure issues in China
is a remaining structure issue for years â€“
obviously consumption is still lower, investments
are still very strong. Yes, 15.6% consumer
growth is very strong, but we have 33% investment
growth. So, still not balanced to each other.
We will pay more attention to stimulate mass
consumption. So a serious policy, for example
â€“ income distribution policy in the
front. Further building of social safety nets:
health care, education, pensions, and subsidies
for a lot of goods, particularly to the rural
areas, to stimulate domestic consumption.
We will keep doing that to make sure the consumption
will grow. And we hope, and we expect in this
year, in the GDP growth rates, and a consumption
contribution to the GDP growth rates were
more or less equal to investment contribution
to GDP growth rates. There will be further
time in China where we have a more balanced
GDP growth, but as the target still allows
them to do.
The overcapacity also is a big issue. Last
year, with very strong growth, the heavy industry
picked up. We have a 16% industry growth.
But the heavy industry growth was 22%; light
industry growth, only 12%. With the heavy
industry to grow strong, the capacity increased,
for example, for steel mill. China have a
steel mill several hundred million tonnes
total, but the master demand is roughly 520
million tonnes. So it's around 182-200 million
tonnes over capacity on steel mill, which
is a quite big issue. The same thing happened
on cement, for example, shipyard building
â€“ they are all the few things. We understand
the US consumer is gone. Last year we had
a negative 16% export drop. We don't think
they will come back, so we have to carefully
manage the overcapacity issue, which obviously
is an important issue for restructuring.
The second main challenge for China is still
the macro-management. I very much agree with
what Dominique Strauss-Kahn mentions â€“
the rebound is still very fragile. We expect
to see a week of very volatile economic growth
in the international arena this year, particularly
we have seen the US economy will have bumpy
road, quarter by quarter, which obviously
will have an impact on Chinese imports â€“
impact on Chinese exports â€“ and so
with a consistent macro-management policy,
we will continue with accommodating fiscal
and monetary policy, and make sure we have
smooth macro-management, and make sure that
growth paths were stable all the year along,
which is also a major challenge. We are shooting
for roughly 8% or 9% GDP growth rates, though
we are confident we will get the number there.
The key issue for China is not number per
se; it is rather the quality, the efficiency,
the structure. We want to reach a more balanced,
more consumption-driven growth for this year;
with all the policies in hand, we are pretty
confident that we'll probably be there. Hopefully,
the international imbalance is gone.
Wolf: Obviously one of the many issues you've
raised there is if investment is growing at
this rate, and there is such an enormous excess
capacity in some crucial industries, many
people are very concerned that when we look
at the picture in 2011, excess capacity will
be even greater, and perhaps later we can
come to the question of whether the Chinese
government has any way of getting a handle
on that issue, which I think terrifies the
wits out of many people round the world. The
numbers you give, if I remember correctly:
your excess capacity in steel must be roughly
the total production of the European Union,
and vastly greater than the production of
the United States or Japan, which after all
are not small economies. This is quite a phenomenon.
Mr Ackermann, Josef Ackermann: how does the
recovery look to you from your industry? Are
you back to lending? Many people say you are
merely back to making fortunes for yourselves,
but there's no credit growth in any of the
significant economies. How far is there genuine
healing of the financial sector as it bears
on its capacity to support growth, particularly
in the developed world, where it's clearly
a problem, over the next year or so? Before
we get to the financial structure issues.
Josef Ackermann, Chairman of the Management
Board and the Group Executive Committee, Deutsche
Bank, Germany; Member of the Foundation Board
of the World Economic Forum; Chair of the
Governors Meeting for Financial Services 2010;
Co-Chair of the World Economic Forum Annual
Meeting 2010:
Thank you. Well, I agree with Christine that
probably the L is somewhat too pessimistic
for Europe, but I also think that the U and
the V is somewhat too optimistic for the other
regions. If you look on macro numbers, I think
that's somewhat misleading, because as many
of you know in the industrial sector, if you
look at different segments, where the correction
has been 30%, 40%, or 50%, even growth rates
of 5% or 7% means that you will have years
to wait before you reach the pre-crisis level.
That's why I think the situation is still
pretty fragile. If you look at the financial
markets, they have become pretty nervous again.
There are a lot of threats on the horizon.
It's asset inflation in some parts of the
world. It's clearly the commercial real estate
in some parts of the world. It's also what
we are seeing in terms of carry trades, which
may be unwound. Of course, also sovereign
risk has become a major issue â€“ legacy
assets still in the banking system. So, all
in all, I would say we better keep everything
on the somewhat cautious side.
The banking sector is clearly benefiting from
the tremendous initiatives being taken by
governments and by the central banks, but
there's also, of course, the risk of the timing
and the impact of the exit strategies, which
is pretty unknown to all of us, because we
have never gone through that. On top of that,
we have a complete change in the geopolitical
structure, namely what you just mentioned,
Martin â€“ this adjustment to the Chinese
growth, to the Chinese capacities means a
lot for the other parts of the world. I think
we have to cope with that, and in the transition
phase from a geopolitical situation where
you had a superpower dominating, to a multi-polar
world, you will see a lot of uncertainties,
and I think you will see a lot of volatility.
Now, for banks â€“ those who have been
more in the sales and trading have been quite
successful, also due to the fact that there
was a lot of liquidity in the market. Those
who are more exposed to the real economy clearly
have seen that default rates are going up,
and that the situation in many parts is still
not very satisfactory. And some of the legacy
assets are still on the balance sheets of
banks. Now, lending â€“ there is, of
course, always two sides to the story. If
the real economy slows down so much, as it
has done, the demand for credit is also lower.
That has to be taken into account in talking
about the statistical numbers. It is also
true that the regulatory uncertainties, the
taxation issues that have come up, but also
the risk awareness of banks, have led to a
more cautious credit policy, which has an
impact on the credit supply.
Wolf: Thank you very much, and again underlining,
at least for the developed world, this extreme
sense of uncertainty â€“ very much a
contrast, of course, with the very different
challenges we see facing Indian and Chinese
policy makers. Finally, in this round I would
like to turn to you, Larry. How does the US
now look, and particularly in the global context
you've seen set out? One issue that I'm particularly
interested in your comments on: the sort of
growth rate forecast we are seeing for the
US at the moment, and for Europe as well,
do not suggest any significant tightening
in the labour market. Will there continue
to be a hangover of high unemployment â€“
very high unemployment in the US, in a way
reflecting the extraordinary flexibility of
its labour market, and the rapid rise in productivity?
Does that concern you, not only as an economic
policy matter, but even as a political matter
in terms of maintaining the general thrust
of an open, integrated world economy?
Lawrence H. Summers, Director, National Economic
Council (NEC), Executive Office of the President,
USA:
Martin, thanks for being here, and more or
less, thanks for that question. What we are
seeing in the United States, and perhaps in
some other places, is a statistical recovery
and a human recession. We're gratified by
the most recent GDP figure. It suggests that
the policies to contain economic collapse
have been successful. My judgment, and I think
most people who've looked at it's judgment,
will be that GDP growth will continue at least
at a moderate rate for the next several quarters.
What is disturbing is the level of unemployment.
This is not just a cyclical â€“ though
it is heavily a cyclical phenomenon â€“
but a structural phenomenon as well. Just
to put it in a way it's not usually put, one
in five men in the United States between the
ages of 25 and 54 is not working right now.
A reasonable extrapolation would be that following
a reasonable recovery, it will still be one
in seven, or one in eight, who are not working.
That is in contrast to the mid-1960s, when
95% of men between 25 and 54 were working.
That suggests quite profound issues that will
ultimately impact politics, that impact the
decisions that businesses make, and underscore
what President Obama emphasized in his State
of the Union Address a few days ago â€“
the primacy of jobs. I might also suggest,
the primacy of maintaining the flow of credit
to medium-sized businesses, as a policy objective.
I am very optimistic about our support for
an integrated global economy. I think for
a whole set of reasons â€“ diversity
of its population, the openness of its institutions,
the way in which it serves as a magnet for
people from all over â€“ I think the
United States is very, very well positioned
to gain from increased global integration,
but it's going to have to work for people
if it's going to be politically sustainable.
That's why the jobs and the credit agenda
are so very crucial.
I might just also say that while I believe
very strongly in the importance of growth-oriented
policies today, because no one is going to
have a healthy fiscal situation in a global
economy that is not growing at a reasonable
rate. I think it is also essential to recognize
â€“ and maybe this is a segue to our
medium-term discussion â€“ that in the
United States and in other parts of the industrialized
world â€“ you know, we're somewhat unique
in the United States in doing every six months
a careful 10-year budget projection and so
our problems become particularly salient.
Those aren't done in most other countries,
but if they were done in most other industrial
countries in the same way our Congressional
Budget Office does it, it would not be pretty.
And our ability to maintain confidence over
the short and medium-term will depend not
on taking overly rapid fiscal consolidation,
which I think could be quite problematic,
but in finding ways to provide confidence
that over the medium-term we are not on trajectories
where debt grows indefinitely at rates more
rapid than income, and so that too is a crucial
part of the American macroeconomic policy
picture and I think needs to be kept in mind
as a general issue.
Wolf: Let me just before â€“ I would
feel remiss if I didn't address this issue
now, so it fits actually sort of interface
between them, which is how the external environment,
what's happening in the external environment,
particularly relating to the so-called imbalances
problem, which is also being addressed, and
â€“ I don't think it's an issue we can
avoid â€“ exchange rate policies around
the world, including those of China; how relevant
you feel those sorts of questions are for
the short to medium-term prospects of the
US, or how much, essentially, this is all
still fully within your own domestic control,
that there is no â€“ that the external
environment is in no sense a constraint on
your ability to deliver the sorts of outcomes
that you need, not only in terms of GDP, but
in terms of obviously generating jobs for
these people, I presume many of whom had lost
jobs in manufacturing.
Summers: I will leave exchange rates to the
Secretary of the Treasury, but I will relate
very well to Dominique's comment, that not
everyone can have export-led growth. And the
way we get to that picture, I imagine, Dominique,
is that the countries that have traditionally
have had export-led growth desire to continue
that export-led growth, and the countries
that haven't had export-led growth and have
been substantial borrowers desire to reduce
their borrowing, and there is an adding-up
problem, and I think it's quite a serious
adding-up problem, and we do need some policy
reorientation if we are going to maximize
two things: we are going to maximize the adequacy
of demand and its location in the global economy
to push growth forward; and if we are going
to maintain support for the global open trading
system and maintain resistance to protectionism.
You know, one of the last points he made in
his writings before he died was, Paul Samuelson
emphasized that strong as robust as it was,
the principle â€“ some of the most important
qualifications to the standard economic arguments
for free trade went to situations in which
there was significantly unemployed resources
and aggregate-demand shortfalls and went to
situations in which mercantilist policies
were being pursued in some parts of the world.
So I think this rebalancing issue is important
both, to use IMF-type lingo, in a conjunctural
or cyclical context and in terms of the medium-term
growth paradigm.
Wolf: I'd like then actually to bring this
conversation, which now gets to some longer-term
issues, to Dominique Strauss-Kahn. There are
two issues particularly that you might want
to address. The first is the one that we've
just discussed, and you are engaged in this
mutual assessment programme, which is a very
interesting new initiative, which is actually
mandated to you by the G20 leaders themselves,
and you are supposed to produce some estimates
of the compatibility, consistency, the adding
up as it were of policies around the world,
the big countries, by April. And then also
where we are on the financial-reform question.
You raise particularly yourself the question
of: are we all doing this in a coordinated
way? We have a global financial system. Obviously
everybody knows there was tremendous anxiety
or distress, or whatever it may be, expressed
about the sudden announcement by President
Obama last week. Perhaps you would like to
address those questions as well.
Strauss-Kahn: Well, thank you, Martin. On
the first question, I think that the well-known
question of imbalances are looking a little
better than before the crisis. If you really
want to kind of catch it, we had a huge country
with huge deficit, namely the US, and, on
the other side, a huge country with huge surpluses,
namely China. Now, what happens? On the one
hand, the US consumer is saving more. And
I think this is going to last for a rather
long time because of important change in the
households' behaviour. If it's the case, that's
good news for the imbalances. Maybe bad news
for growth â€“ we'll come to that later
â€“ but that's good news for imbalances
because, of course, more saving means less
deficit both on the domestic side and on the
current-account side.
On the other hand, in China those strong stimulus
which has been put in place was basically
to shift from a totally export-led growth
model to a more domestic growth-led model,
and this also goes with a rebalancing of the
situation. So in both sides things are improving.
Is it enough? Obviously not. And when you
are looking to the new sources of growth and
asking yourself, 'Who is going to replace
the US consumer?' If this guy's going to consume
less, then everybody's eyes are turning to
emerging countries, including China, and hoping
that the decrease in US consumption will be
offset by an increase in the emerging countries'
consumption: China, India, Brazil and others.
The problem is it doesn't add up as easily.
It will take a lot of time. It's not the same
kind of product. It is very difficult to shift
this growth model in China and so what we
have been asked to do by the G20 â€“
and the first run will be provided by the
Finance Minister in April â€“ is a kind
of assessment of what's going on. When you
take the different focus from the different
countries and just try to add up, does it
make sense, or is there some inconsistency?
And obviously, we're not at the end of the
process but we already see that there will
be a lot of inconsistency. And then there
will be a second stage from April to the meeting
of the leaders in June, where some policy
can be suggested to correct those inconsistencies,
some simulation can be made to try to see,
okay, having those figures which don't add
up, what can we do to avoid the distortion
and try to have a more cooperative way to
look at the future.
I think this exercise, which is totally new,
has nothing to do with the different kind
of forecasts we had before, it may be very
useful. But of course it relies on the cooperation
of all the G20 members and their willingness
to work together and look at the problems
together. I think that the very strong consensus
that took place during the crisis and the
climate of the crisis is still there and that
the willingness to work together is still
there. That's the part of hope. We will see
how this exercise goes on, but I think that
the really â€“ it is very important for
the global economy to be able to see that
we went through a global crisis, there is
no domestic solution, there can be only global
solutions. But to be able to assess those
global solutions you need to have a vision
of the kind of growth model we may have after
the crisis which, obviously, will not be the
same before the crisis.
Now on your second point â€“ I just said
a few words about this before â€“ a large
part of the immediate causes of the crisis
relied on the lack of regulation, or adequate
regulation and supervision, in the banking
sector in the US and also in many other developed
countries. So they are having a big call to
try to reform the system, trying to avoid
pro-cyclicality and different kinds of technical
things on which I'm not going to elaborate.
And a lot has been done. It would be totally
unfair to say that the progress have not been
already done. But in my view it's not enough.
It has taken a long time to build things like
Basel II for instance: 12 years. But we don't
have 12 years to build the reform of the financial
sector today and so we need to speed up. And
the political pressure in most advanced economies
is very strong and so I do understand why
President Obama, others, may have to propose
things, and I think they are going in the
right direction in maintaining the momentum
of this political will to do something.
Now, the point is, as I mentioned before,
that we cannot have different kinds of regulation,
and different kinds of solution in the different
parts of the world. This will not work together
and even not only would it be inconsistent,
but it may also create new kind of problems.
So my call is really a call to a more coordinated
way to make these reforms. I think all the
proposals that have been made are very interesting.
I can have some reservations on one point
of another, but that is not the real issue.
The real issue is that if we want to do something
to mitigate the risk of a new financial crisis
â€“ I'm not saying avoiding any kind
of financial crisis, we will have other financial
crises in the future â€“ but if you want
to mitigate the risk then we absolutely need
to put in place things which today are not
really looked at with enough attention.
Let me just give you one example, the one
my institution is working with every day:
cross-border banking has obviously been during
this crisis one of the major issues. And the
way a bank from one country having a subsidiary
in another country may repatriate what they
are doing where they have subsidiary, creating
â€“ solving part of their problem at
home, but creating new problems as well. This
kind of thing has to be addressed. We cannot
have reform of the system which will only
deal with the problems seen by each country
for its own financial system.
And, again, it may seem to you a very simple
thing, obvious, but in reality I'm afraid
that we are not following this route and that
is why I call on a much more coordinated way
to look at this financial-sector reform.
Wolf: Can I just follow that up â€“ I've
got a number of aspects â€“ with you,
Josef Ackermann. From your point of view,
are the regulators the problem or the solution?
Ackermann: Well, they are absolutely part
of the solution. And I must say that the dialogue
between political leaders, regulators and
bankers have become very, very constructive
indeed. I think we all know something has
to happen quickly to restore confidence in
the system. I would, if I may, distinguish
between three different layers. The first
layer is where we need absolute harmonization
on the global level. That is, for all these
aspects, where they compete with each other.
That is, capital requirements, liquidity requirements.
Then you may have the second layer. Then you
may have, for domestic reasons, some different
regulations: mortgage market in Germany, or
in the United States, or you name it. And
the third layer â€“ and that is the more
complicated one â€“ is where some countries
start adding new taxation, for whatever reasons,
or changing the business model.
Now how do you do that on a global level?
First of all, what is the impact on efficiency
of the global financial system? And secondly,
of course, what does that mean in terms of
complexity for managing global banks. That's
why I am saying in all these aspects. And
I think we are in full agreement that things
have to happen, but we need some sort of grandfathering
for implementation. But we also have to ask
ourselves, 'What is the trade-off?' The trade-off
needs a macro impact study, not only on the
corporate level for banks, but also on the
economics side. We can stabilize individual
banks by having huge capital ratios, but maybe
the lending is no longer available. Or many
other things: what does it mean if you have
specific regulations for certain activities,
for the efficiency and liquidity in certain
markets. So in that sense it is much more
complex and think we should start introducing
it and while introducing it we may be able
to adapt because things may go somewhat further
than what we have anticipated.
Our goal is, and this is the noble task of
the financial sector, not only to be resilient
to shocks but also to help the real economy
and the people to grow and to prosper. And
that is always to be borne in mind because
it is an optimization issue between stability
and efficiency, and if people think we can
move back from a market-based system to a
bank base, that would be an illusion. We are
too far advanced in terms of disintermediation
of the global economy.
Wolf: Thank you very much. I would like to
turn now to â€“ do you want a make a
comment on this specific issue? Yes, please.
Sengoku: Thank you. In the face of subprime
loan issue, the Lehman debacle was triggered
and led to the global financial crisis, and
what is described as investment turned out
to be speculation and the short-term sell
through speculative behaviours, and also the
multiple times of leverage, so a sheer speculation,
and in the background there was a state of
global excess liquidity, so far away from
the demand of the real economy. I think it
is the view shared by everyone here. So, then,
this kind of extreme generation bubbles bursting
and then another generation of bubbles and
bubbles. After 1990s in the process of globalization
of 20 years this kind of fallacy has been
repeated in the world economy in a way. So,
some kind of global centre of regulation would
be needed, or maybe the case like international
solidarity tax to tax the speculative transaction
of currencies and others, and that tax revenue
could be used for the aid assistance for developing
countries or for alleviating the global environmental
issues. And, whether the governments in the
world would agree to that and accommodate
to that, that I think is a major issue.
Now we in Japan, or Asia, shall I say, we
have this philosophy of living with nature
and we always look at medium to long-term
investment. I think capitalism, in essence,
has the ethical backbone and lynchpin; so
the lesson we should learn is that the capitalism
we nurture will be the capitalism to nurture
and grow the economy, not the leverage capitalism
of selling through, and to serve the real
economy and the requirement. So, capitalism
should undergo a major change. The entire
world should not look at the speculative financial
transactions, short-term selling and arbitraging.
That would cause the entire fatigue of the
world economy. Now, Japan is committed to
continue to excel in manufacturing technology
activities and green and ecological technology
like clean energy and rapid transit and the
marine water desalination and so forth. Such
advanced technology we are willing to offer
to all the countries in the world and to make
it as a part of a long-term project by all,
and this is going to be a part of a national
strategy to cooperate with all the countries.
Wolf: I am very much interested to hear that
your language is more or less identical to
that of the French President. So, two very
major industrial countries both think that
capitalism needs pretty comprehensive reform.
I think that the issue, very importantly,
is probably a little bit beyond the panel,
but it is certainly on the table. Then there
is another sort of capitalism we hear constantly
about: state capitalism and its impact on
the world. So that brings me perfectly to
you, Zhu Min.
I am going to raise a couple of structural
issues with you, one we have already talked
about; some of us think that $2.5 trillion
in reserves might be enough and that maybe
there are higher return investments. Some
of us wonder why you are so determined to
let the Federal Reserve make your monetary
policy, which, as your own government has
frequently pointed out, is wildly inappropriate
for China now. So there is an issue about
how you manage your external policies in the
medium term. Exchange rate, reserve accumulation,
monetary policies: how is that going to evolve?
It has enormous impact on the world and that
fits very well with China's idea about how
these medium-term structural shifts towards
consumption, towards a better balanced economy,
is actually going to proceed in the post-crisis
era. How to you see these two aspects of your
policies fitting together?
Zhu Min: Basically, Martin, thanks for your
question though, and this is still the growth
model as Larry mentions and Dominique mentions.
The crisis tells us a pure export-driven growth
model is not sustainable and we have to change
it. We are working on it and I think everybody
will agree with me, since last year this has
been improved. But it takes time because it
is a structure issue; in the front it is an
income distribution issue, in the back it
is social safety-net issue, and then a lot
of other issues of financial instruments make
people be able to borrow money. But the real
fact is that China gets rich only goes through
one generation. In the UK it takes 150 years
from poor to middle income. In the States,
it takes another 60-80 years, three to four
generations, for the people to get rich. So
the behaviour is very different. I am still
a very old-fashioned person; if the glasses
work okay I would not throw them away to buy
a crystal one. Although my income increased,
I would still use it.
So this is lagging behind and we really want
to increase domestic consumption but still
it will take some time. Internationally, the
US have total consumption of $10 trillion
a year and the Chinese have less the $2 trillion,
$1.65 trillion, whereas India they have less
than $3 trillion. So there is still a very
imbalanced structure and this needs a lot
of international cooperation to manage a balanced
and smooth structure change for us to increase
consumption and for the other side to decrease
consumption as well. I think this is the fundamental
issue. I think the whole thing is that everybody
sees it and everybody is working on it; we
saw on the US side the signal has increased
and also the current deficit and consumption
stabilize. The upswing happened in China and
India, consumption increased. But they need
a lot of policy cooperation on an international
level because it is absolutely a global issue
and it is a long-term issue; it is not short-term,
you cannot do the whole thing overnight.
Now I will tell you the good news. The young
people in China have very different consumption
patterns between the ages of 20 and 30. They
have 200-220 million now and they are growing
hopefully by more, but I don't know whether
they can borrow money because they have no
money. That is the first issue. The second
issue is, yes, China accumulated a lot of
foreign exchange. Everybody talks about that
and it is a problem, right? How can we have
a more foreign exchange if we have no more
money and people say you have too much money?
How can this become a problem? I think that
is the real issue sometimes that is difficult
to understand. During the Asian financial
crisis, all the Asian countries run. You need
a self-defence ring, enough reserve to protect
yourself otherwise you are very vulnerable.
We saw what happened in South Korea, we saw
what happened in Indonesia, Malaysia, whatever.
And we knew that because currencies non-convert,
but we still have enough reserve. I think
it is a very important issue still today because
within the globalization without a very sound
global reserve system and we need those things.
Number two, this is a structure issue. The
reason we have more reserves is because we
have more savings; the reason we have more
savings is because the other side has less
savings, so it is just a migration of the
global saving dislocated in different areas.
We would be more than happy to have international
cooperation on those issues to solve those
issues that also require international cooperation
and still those long-term issues. But I think
this is an issue that needs to be solved and
China is open and ready to engage in all this
process.
Wolf: I think that is a very impressive answer.
I still have this strange feeling that if
you sent a cheque for $1,000 to every man,
woman and child in China, they would find
some way to spend it, but maybe that is a
mistake and they would actually all invest
it. They could...
Zhu Min: Martin, do you want to be Chinese?
Wolf: I don't think I would make a very good
Chinese! Montek, how do you see the structural
problems? You have a very different position
in the world from China; in this respect,
nicely balanced, and this is just somebody
else's problem. How does it bear on your own
strategy?
Ahluwalia: This is what they call a rich discussion,
in the sense that a large number of issues
have been raised, so I am going simplify a
little bit and just make three points which
will cover some of the different issues. The
first is we have had a very good discussion
on the rebalancing of global demand. I mean
it is very simple: if you want to sustain
a particular growth on the supply side which
is feasible, there has to be the demand to
sustain it, and we know that in industrialized
countries for demand to go down, somebody's
demand must go up. Now, as far as India is
concerned, we are contributing our bit. We
are trying to jack up investment, Zhu Min
mentioned that China is jacking up consumption
which is excellent, it makes sense from their
point of view because consumption is a very
small proportion of GDP. In India's case investment
is good but it is still 36-37% and we want
to raise that. The net result we hope will
be a current-account deficit, not a kind of
near balance, so I think in that sense we
are small players in the big G20 group, but
whatever it is we are going to be contributing
to global demand.
Now, from our point of view, to sustain that,
we have to be able to finance the current-account
deficit, so a lot of the financial reform
issues that are being talked about are very
relevant for us. We welcome the move in the
global financial system to out in place a
reasonable regulatory structure. Actually,
our banks were always â€“ what now is
a great compliment â€“ were boring banks,
we weren't out there at the frontiers of innovation.
So, from our point of view, the global regulation
that is being talked about will bring the
global norm closer to the more conservative
things that we were doing, though we would
still have to move in the direction of financial
reform and liberalization to get to what the
world thinks is appropriate, and we will do
that. What we are concerned about is how that
is going to affect flows towards developing
countries.
Now, in India's case, I mean it could be argued
that bringing in regulatory reform, once the
system has settled down, should actually send
more flows to developing countries, because
we know that what was going on was an artificial
creation of a belief that you can be highly
liquid and earn high returns in the domestic
industrialized country markets. That is no
longer going to be the case. So where is it
that high returns are going to be earned?
Clearly in the fast-growing parts of the world.
As and when the financial sector has worked
that out, which I hope they will, it should
become possible for them to think that in
the mediation of savings it ought to be moving
towards at least the faster-growing emerging
market countries. We are not going to be very
dependent on commercial bank borrowing, so
even if there is a temporary constraint because
of deleveraging, I don't think we are worried
about that. Our ability to absorb, to borrow
what we want to absorb, will not be affected.
We are much more concerned about what happens
to foreign direct investment flows and that
is not just a matter of what happens in the
financial sector; it is a matter of how people
perceive globalization.
So I am hoping that we will get the financial
reform done, I am hoping that it is a financial
reform that will keep in mind that rational
allocation of capital will mean more going
to emerging markets and less going to exaggerated
mortgages, etc., in the industrialized world.
But a concern here is whether the regulatory
reform will be a disguised form of financial
protectionism. Now that is an issue that as
the structural reform is played out, and we
are glad that it is being done or should be
done, in the Financial Stability Board which
is now being democratized, all the G20 countries
are members, we are participating in the process,
I think we want to be sure that disguised
financial protectionism does not find its
way into the system under the guise of improving
the regulatory structure.
So the third key point, I think, and that's
going to affect a lot of, you know, investor
animal spirits, is what happens to all the
protectionist noise? Now, there is genuine
concern around the world that there's too
much protectionist noise. There's actually
also an appreciation that there's much more
noise than action, and I think from a political
point of view, we know that if you have to
â€“ if you're experiencing a downturn,
I think the point that Larry made about the
numbers of people who are out of a job because
actually some of them have walked out of the
labour force is much larger than the unemployment
rate. Clearly that's a political reality,
the world recognizes that, so I'm hoping that
the protectionist noise remains noise and
doesn't get translated into action.
You know, one of the issues that we need to
think about, for the last five or six years,
in the industrialized world, the charge towards
globalization and integration has been led
by the financial sector. The manufacturing
sector has actually taken it for granted and
not been the leading force in pushing for
multilateral trade negotiations etc, etc.
It's really been the financial sector. Now,
that sector at the moment can be, as it word,
in cricket terms, retired hurt, nursing its
wounds, understandable, it'll come back, but
as a result, in the short term, you do not
have, in the industrialized world, an organized
voice pointing to the need to maintain an
integrated global economy. I was very encouraged
by what Larry said, that this is a win-win
situation. He said that yesterday in this
forum. It's a win-win situation and in the
US's long-term interests, an integrated global
economy is very important. I think what's
going to happen is that the ability of the
world to resist protectionist pressure, which
is actually now in the industrialized world,
this is one of the great asymmetries. 10 years
ago, emerging market countries that were bringing
down trade barriers, were fighting a lot of
resistance and nervousness in their countries,
and we've done that successfully and actually
created a private sector which is quite open,
quite confident, willing to get on with the
world. I think it's now going to be â€“
it depends on the quality of political leadership
that can be mobilized to make sure that something
happens, and this is where the Doha round
comes in. You know, the credibility for global
action is going to be tested by the Doha round,
not by climate change. That's a very important
issue, but it's a longer-term issue. I find
it very difficult to believe that if the global
community can't resolve multilateral trade
negotiations that it will be able to handle
much more complex issues like climate change.
It's going to be difficult.
That's it, thanks a lot.
Wolf: I'm losing control. He covered everything.
At least you've done my summing up. I'm losing
control, as I knew I would. This is ultimate
herding cats experience. Dominique Strauss-Kahn
wanted to intervene and I want to offer Minister
Lagarde a last word before we might get a
couple of questions if we're very disciplined.
Strauss-Kahn: So thank you, Martin, for giving
me the floor for the third time, I'll be very,
very short. Looking at the new growth model
and what we're going to do in the coming years,
there are different points and I don't want
to address all of them. One is obviously debt
sustainability and that will be one of the
main concerns for many countries. Another
one is the one we were just discussing extensively
on the relationship between surplus countries
and deficit countries and this kind of thing.
But the third one I would like to emphasize
on a little is that the growth model obviously
will be a low-carbon growth model, and it
may surprise some of you that this may be
a concern for the IMF, but it is, because
when I look at what happened in Copenhagen,
it seems to me that the question behind the
discussion was not only a question of binding
requirements or things like that, but also
obviously a question of financing, and I cannot
believe that the problem could be as big as
we all know, saying that it may be the biggest
challenge that mankind ever had to face, that
for several generations our kids and the kids
of our kids will live in an impossible word
and that we will be stopped by traditional
financing problems, so then if we have to
think out of the box, then if it's obvious
that developing countries don't have the money
to pay for adaptation and mitigation of the
climate change problem, if it's obvious that
developed countries don't have the money because
they have this debt sustainability problem,
directly linked to the solution we provide
for this crisis, then we'll have to find innovative
ways to finance it and we are going to provide
some ideas built around a green fund devoted
to finance the $100 billion a year, which
is the figure which is commonly accepted that
is needed for addressing the problem, based
on a capitalization of this fund coming from
central banks, backed by special drawing rights
issued by the Fund. And we are going to propose
a system which will be criticized a lot, but
that's not the problem, which provides a very
innovative way to try to find a financing
to deal with a question which cannot be seen
as a huge problem with no solution.
So the growth model out of the crisis certainly
has to deal with traditional questions of
growth models â€“ debt sustainability,
imbalances and all those kinds of things,
I'm not saying that's not important at all,
it's of critical importance â€“ but also
it has to do â€“ it has to be a low-carbon
growth model, which means that the financing
for this has to be provided, and if it cannot
be provided, and obviously it cannot be through
traditional and orthodox ways of financing,
then we have to find out-of-the-box ideas
and we will release a paper in a couple of
weeks with one possible of these out-of-the-box
ideas based on what we know and what we can
do, which is Sirs issuance, so I want to just
make this small announcement.
Wolf: Okay. Another big structural issue,
Minister Lagarde. I'm particularly interested
in two aspects, if you can do them very briefly.
Do you have anything you would like to add
specifically because I know you've been very
involved in the financial regulation thing?
And then finally there's the Euro zone imbalances
issue. Many of us are concerned that the net
pressure in the Euro zone is for massive fiscal
contraction and that that will make very,
very difficult for it to make a contribution
to global growth, and, after all, the Euro
zone is the world's second-largest economy.
So would you like to comment briefly on those
two points?
Lagarde: Well, I will actually try to combine
the two, Martin, because I think that it's
â€“ certainly the Euro zone experience
is relevant to the coordination that Dominique
was referring to, and coordination of economic
policies, just like any coordination, is extremely
difficult and that's what we've been experiencing
in the Euro zone. The Euro zone has been in
existence for 10 years, the European Union
for far longer than that, but to coordinate,
to make sure that we adopt the same economic
policies, that we see the same urgency at
the same degree, at the same level, is a tough
call and it's an exercise of discipline that
each member has to adhere to, and I have no
doubt that all members of the Euro zone understand
the issue and understand the urgency of delivering
against commitment. It's clearly an everyday
test, so when Dominique is referring to the
need for coordination, and all of the panel
speakers have referred to that need for coordination,
I have, I have enthusiasm and concern at the
same time, and I believe that in the interest
of time, which I believe is very much of the
essence, in the face of our public opinions,
in the face of the need for development in
some countries, of readjustment between others
and unemployment rising in many others, I
think that in addition to this long-term coordination
goal that we should have, which is difficult
to accomplish, which is a matter of discipline
for each and every member, I would like to
commend the IMF and the FSB for the work that
they're doing, but my suspicion is that sooner
rather than later, they're going to have to
enter into a job of reconciliation.
In other words, rather than pure coordination
and making sure that everybody plays exactly
by the same rules, applying the same models,
we're probably going to have to enter into
this reconciliation exercise where we're going
to have to check whether the rules applied
here actually are consistent with the rules
applied somewhere else and are trying to achieve
the same purpose, and I'll give you one example
for that. If we look at the accounting rules,
for instance, and I won't bore you with the
details of former IAS39, but if we look at
the position taken by the FASB and the position
taken by the IASB and the goals and purposes
and expectations in various corners, I don't
see very well how we're going to converge
in that respect, and clearly that's wherein,
maybe as an alternative or as a pathway towards
convergence and coordination, we're going
to need these reconciliation efforts. It's
not the perfect solution, but in the interest
of time, I don't see what an alternative we
have at this point in time.
Wolf: Thank you very much. We only have five
minutes and I'm going to take one question
at this stage, see what â€“ very pointed.
Does anybody want? Yes. Person who's got a
hand up there. I have a suspicion I might
know this person, but of course I couldn't
see him.
Chris Giles, Economics Editor, Financial Times,
UK:
I have to apologize as another FT person.
It's Chris Giles from the FT. Four years almost
to the day, the governor of the People's Bank
of China sat on exactly this panel and committed
China to rebalance demand away from investment
and exports towards domestic demand and consumption,
and to slow the rate of growth of reserves.
I don't know how to put this politely, but
clearly we've heard the same thing today and
there might be a little bit of a credibility
problem in these commitments. Zhu Min, could
you answer why we should believe you more
today than we could believe your boss four
years ago?
Zhu Min: I'm sorry, I cannot see you, obviously,
but I cannot hear you clearly. What was...?
Wolf: Zhu Min, the question was, the promise
you made for rebalancing was made here four
years ago by the governor of the People's
Bank. What is different this time?
Zhu Min: Well, it's a long process; it's not
overnight things, right? We're working on
those things. It will probably will last for
another five years, or another four years,
but we're working on it. You will see the
progress day by day, year by year. I can promise
you that.
Wolf: China is a very old country, is the
normal answer to these questions. Time is
measured differently there. I will take one
more question, gentleman here. And very sharp.
Zhu Min: That's my lucky day.
Wolf: Everybody's interested in China.
Participant: Well, you know, you are the man,
so.
Wolf: Very quick.
Participant: The question is, I just don't
understand why an appreciation of the exchange
rate is not part of this rebalancing that
you are saying. Even just a few days ago here,
you said that you are seeing your currency
as stable, stability is a plus, but your currency
should not be stable, it should just go up.
Wolf: Okay. Sorry, Zhu Min.
Zhu Min: Finally, finally. Exchange rates
is an issue.
Wolf: One minute.
Zhu Min: Oh, I need one and a half minutes.
Wolf: We will be shot. Or I will be.
Zhu Min: I promise I am under your control.
It's an issue, obviously within this rebalancing
issue, but it's a small part. Exchange rate
change will not be able to change the whole
thing. We saw experience in Germany, we saw
experience in Japan, you change the exchange
rates and not necessarily change the global
trade balance. I think that's a very important
thing. The second thing is that China is a
developing country and also a big country
and the stability is very important there.
There are 1.3 trillion people, people need
a job. 70% of GDP are services we trade. A
stable exchange rate, I think ,when a crisis
comes in, is good for China, also for the
world, as I said, and when our neighbour or
the other currency depreciates 30%, we didn't
do it. When they appreciate another 25%, we
didn't do it. This is the path in China, it's
a similar package. We stick with the Pittsburgh
G20 meeting; the Pittsburgh G20 meeting says
the global should coordinate with excess strategy.
If the global isn't ready to do the excess
strategy, China is ready, and including various
things, so the liquidity issues, exchange-rate
issues and all those issues. Again, as Larry
mentioned and Dominique mentioned, there's
a lot of global coordination is required.
Wolf: Okay, I'd love to continue with that
issue for the next two hours. I'm going to
make three points in 10 seconds, from which
I take to be the big takeaways. One, nobody
has disagreed, surprisingly, that the great
danger is early exit from stimulus rather
than late exit, which suggests they're not
very confident about the sustained private
sector in the developed world. Secondly, there
is no consensus on a completely new capitalism,
but pretty strong sense that the financial
sector shouldn't be allowed to run quite as
it did before, but it's that new proposals
need to be regulated, coordinated, and there's
a lot of regulatory uncertainty out there
and it clearly wasn't really disputed. And
finally this rebalancing discussion is going
to be very, very long and very, very messy,
but at least countries are saying the right
thing, because they do seem to realize that
Mars isn't a good export market.
Zhu Min: It could be long, but it could be
very constructive.
Wolf: Of course. It's always constructive.
At least, the panel's very constructive. I
am pleased to thank the panel; they have been
excellent with these huge subjects.
