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Economy

The Interconnected Global Economy:
Challenges and Opportunities for the United States—and the World
Good afternoon. I would like to thank the Chamber and, in particular, Tom Donohue, for hosting me today. It is easy to be impressed by Tom’s time at the helm of the Chamber and his steady hand guiding your members through the crisis. Even more impressive is Tom’s lifelong dedication to championing American enterprise.

This is an exquisite venue. The beautiful flags and the delicately carved seals of the 50 U.S. states are a striking symbol of your membership. We have something similar at the IMF, where 188 flags represent our 188 member countries. This is a poignant symbol of the responsibility each institution has to its members and to the people they represent.

I am especially pleased to be with you today because of the longstanding nature of the IMF’s relationship with the Chamber. Both our institutions have an objective—and a responsibility—to serve society through a set of shared values: a commitment to expand economic opportunity for all; a belief in human potential; a desire to ensure that the right conditions are in place for private enterprise to fulfill its potential as an engine of growth and prosperity.
So I value this opportunity to engage with the world of business. You have your finger on the pulse of the real economy. To a great extent, it is through your efforts that growth and jobs are created.

It might surprise you to learn that American opportunity and enterprise have been a big part of my life. In fact, most of my career has been in the private sector. I spent 25 years of my professional life with the law firm Baker & McKenzie headquartered in Chicago. I came to know well the issues faced by the companies that we worked with both in the United States and around the world, and later on as Chairman of the Firm, the issues of a leader in a competitive service industry going global.

It is the interplay between the global economy and the U.S. economy on which I would like to focus today. In a world of increasing economic interconnections, the challenges facing the United States—and all of us—are greater; but so too are the opportunities. The question is how we can best come together—business leaders, labor groups, policymakers and others—to find the solutions that we need to secure a lasting, balanced, and widely shared recovery.

In that context, I would like to focus on three issues:
One, the current state of the global economy;
Two, the role of the United States economy in our interconnected world; and
Three, why the IMF matters for the global economy and for the United States.

I. The Global Economy Today
I recently returned from the G-20 Summit in St. Petersburg—where I know that the Chamber was represented as well. So, let me begin there.
Going into the Summit, some were anticipating a strong difference of views between the advanced and emerging economies about the gradual withdrawal—or ‘tapering’—of unconventional monetary policy in the U.S. and its potential spillover effects for other nations. Instead, countries had constructive discussions. G20 members recognized the need to ensure that exit from this exceptional monetary support, when it comes, should be orderly and clearly communicated. There was also a clear recognition that the emerging market economies, for their part, need to address their domestic challenges to manage any spillovers effectively.
I also had the opportunity in St. Petersburg to meet with business and labor leaders—the B20 and L20. Their consecutive presentations at a joint meeting with heads of state underlined the importance of business, labor and government working together to secure sustainable and inclusive growth.

The Summit took place in the context of a challenging—and changing—global economic environment. The IMF will release its updated forecasts in a few weeks. For now, let me say that while we are seeing some signs of recovery, global growth remains subdued.
However, the story is more complex than that. More and more economies are moving at different speeds. We also know that the fruits of growth are far from being shared widely—this is true for the U.S. and for many other countries.

Certainly, the advanced economies are in a better place than they were six months ago. We see that with growth picking up here in the United States—a point I will come back to a bit later. For the first time in a long time, the Euro Area is also beginning to grow, although there is still much to be done. And while Japan’s reform efforts are ongoing, it is also doing better thanks to aggressive policy support.

Emerging market countries are the other side of the story. In large part, they helped keep the global economy afloat during the crisis. Now, while still dynamic, their momentum is slowing. For some, this may be a shift toward more balanced and sustainable growth. For others, it reflects the need to address imbalances that have made them more vulnerable to the recent market turbulence.

We all talk about global interconnections and spillovers. I certainly came to appreciate this as Trade Secretary for France. What has struck me most since coming to the IMF is their size and significance.
Some examples: since 1980, the volume of world trade has increased fivefold. And trade has grown in importance for global production. World exports relative to output grew from 20 percent in 1995 to 30 percent in 2008, before falling during the Great Recession, and recovering somewhat since.
There has also been the rapid acceleration of financial integration. By the time of the crisis, global capital flows were more than triple their level in 1995.
The IMF’s recent ‘spillover’ analysis—how what happens in one country affects others—reinforces the importance of this interconnectedness. It suggests, for example, that if the world’s five major economies were to work together to adopt a more rigorous, comprehensive and compatible set of policies, it would increase global GDP by about 3 percent over the longer run.

We all have a large stake in these interconnections. What happens elsewhere in the world—be it the success of recovery in Europe or the continued smooth functioning of supply chains in Asia—matters increasingly for the United States. The converse is also true. What happens here matters increasingly for the global economy.

II. The Role of the United States in the Global Economy
This brings me to my second main theme: the critical role of the United States, and American business in particular, in our increasingly interconnected world.
The recovery gaining strength here is good news for America—and good news for the world. Admittedly, U.S. growth will be more modest this year than we would want—still well below 2 percent. Even so, it should accelerate significantly next year, by about one percentage point.

Indeed, the fundamentals of the U.S. economy have been improving gradually. Households are in better shape—they have lowered their debt and benefited from the recovery in house prices and the strong performance of the stock market. The housing sector is looking brighter, with ample potential for construction activity to pick up further. The private sector is yet again proving to be the primary engine of growth and job creation—and the main reason for weak growth this year is the very large ongoing fiscal adjustment, a theme I will return to shortly.

Job creation is the key ingredient of any economic recovery, domestic or global. The latest U.S. jobs data present a mixed picture. The unemployment rate has declined to 7.3 percent in August, but the participation rate has continued to decline, and employment remains well below pre-crisis levels. So the issue of jobs remains paramount.

Jobs and growth is an increasingly important component of the IMF’s policy advice. I know that it is very much on your minds here at the Chamber too.
Business—including the people in this room—have a key role to play. At the same time, policymakers also have an important responsibility to help shape the environment in which businesses and citizens can thrive—and jobs can be created.

So what should U.S. policymakers do? Here are a few points from our most recent assessment of the U.S. economy in July:
First, fix public finances. I have characterized this as a case of “slow down, but hurry up.” While we think it would have been more advisable to have a slower pace of fiscal consolidation in the short run—without using the blunt instrument of sequester—more action is needed to reduce long-run pressure on the budget. This includes addressing entitlement spending and higher revenues. In addition, the ongoing political uncertainty over the budget and the debt ceiling does not help. It is essential to resolve this—and the earlier the better—for confidence, for markets, and for the real economy.

Second, appropriately calibrated monetary policy, our advice is that exit from unconventional monetary policies should be gradual, linked to progress in the recovery and employment, and that it should be clearly communicated and in a dialogue.

Third, finish reforming the financial sector. There has been progress on this agenda— for example, the new capital and liquidity requirements for banks under Basle III—but the system is still not safe enough. Policymakers need to turn their attention to the outstanding danger zones, especially derivatives and shadow banking. The ultimate goal is clear: to have a financial system that is less prone to instability and better able to serve the real economy.
Financial sector reform, of course, is not the sole responsibility of the United States. It needs to be tackled in many countries and regions, ideally in a coordinated and consistent way to ensure the healthy function of the entire global financial system. I am thinking here for instance of the resolution of international financial institutions.

This brings me back to the point of global connections.
The United States plays a unique role in the global economy. I am thinking, for instance, of global trade—of which the U.S. accounts for 11 percent. The U.S. also represents 20 percent of global manufacturing value-added. I know that you recognize the potential of an even bigger market. Tom and others at the Chamber have often referred to 95 percent of your potential customers living “outside the U.S.”

America’s global financial ties are even deeper. Foreign banks hold about $5½ trillion of U.S. assets, while American banks hold about $3 trillion of foreign claims. Meanwhile, close to half of the S&P500’s sales originate from foreign operations.

These interconnections have great benefits for the United States. But they are not without risks—two-way risks—and we saw some of these play out during this crisis. We all remember, five years ago, how the collapse of one U.S. bank ushered in a harsh new reality across sectors, across countries, and across the world. As those tensions traveled across the Atlantic, for example, they exposed tensions in Europe.
Considering that 20 percent of U.S. exports are destined for Europe, and that more than half of U.S. overseas assets are held in Europe, you clearly have a large stake in the recovery there.

And yet, despite the risks, I know that you are also deeply aware of how much can be gained from engaging with the rest of the world.
President Taft, who helped establish the Chamber, captured this when he said: “I am in favor of helping the prosperity of all countries because, when we are all prosperous, the trade with each becomes more valuable to the other.”
What was true in President Taft’s day is even more true in today’s interconnected world: a strong U.S. economy and a strong global economy are two sides of the same coin.

III. The Role of the IMF
This brings me to my final point: the role of the IMF in the global economy—and why an effective IMF is important for our global membership and for the United States.
Earlier I spoke of the broad goals that the IMF and the Chamber share. We have something else in common. In 1914, on the eve of World War One, the Chamber’s first president, Harry A. Wheeler, said: “This is a new day when our methods are being reorganized, and the organized forces of labor and of agriculture and of commerce meet here in Washington, not for war, but for peace…”.

In much the same way, the IMF was born from the ashes of the Great Depression and World War Two, and grounded in the principle of good global citizenship: if countries work together to serve our common interests, everybody wins.
The IMF’s founders—an Englishman, John Maynard Keynes, and an American, Harry Dexter White—had a plan. A vision of a global economic “club” where countries could cooperate with a clear objective: global economic and financial stability.

Like a credit union for the world, the IMF’s member countries pool resources that can provide a lifeline to members in need. In fact, the first country to draw on IMF assistance was my home country, France.

A couple of decades later, the IMF helped the newly independent countries during decolonization. When the Berlin Wall fell, the Fund supported Eastern Europe’s efforts to transform from centrally-planned economies into market economies. In between, the IMF has helped its members to overcome economic crises—in Latin America in the 1980s, Asia in the 1990s and, most recently, in the Eurozone.
These actions might seem far removed from what happens in your business or in your economy, but they have very real implications. Our policy advice, for example—including in core areas like exchange rates or external imbalances—has helped to prevent or to ease the hardship of crises around the world. That, in turn, has helped reduce the possible negative fallout for the U.S. and for all countries.

And as the needs of our member countries have changed over time, so too the IMF has refined, repurposed and restocked its toolkit.
During this crisis, this has included a significant increase in our financial support, with over $300 billion in loans in over 50 countries—not just in Europe, but also in many other parts of the world, including in Africa and other low-income nations. We also introduced more flexible types of support that act as insurance for crisis prevention and have helped countries like Colombia, Mexico, and Poland.

Above all, the IMF has given much greater emphasis to global interconnections in its analysis—in particular, economic spillovers between countries, and also the critically important financial sector. To be effective into the future, we must continue to evolve and anticipate what lies ahead.
In this context, the IMF is currently working toward a set of governance reforms that will strengthen further our capacity to prevent and resolve crises; and at the same time, will help broaden our representation to better reflect the changing dynamics of the global economy. These “quota” reforms need the support of all our member countries—including the United States.

A Journey Together
What I have tried to describe today is a journey. A journey that the United States and the IMF have taken hand-in-hand. As our leading shareholder and steadfast partner for nearly 70 years, we have worked together for a mutual goal of global stability and shared prosperity.
The Chamber plays a vital role in this journey. Your focus on trade, on openness, on jobs, and on growth is essential—to helping the U.S., to helping the world, and to helping the IMF do its job.
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Developing world faces domestic challenges, as global economy stabilizes
The world economy appears to be getting back on its feet as risks from advanced economies ease.

Growth in the developing world will remain solid, albeit slower than the frenetic growth rates seen during the pre-crisis boom period, as developing countries grapple with home-grown challenges brought on by capacity constraints in many middle income countries, says the World Bank’s latest Global Economic Prospects, issued today.

Global GDP is expected to expand about 2.2 percent in this year and strengthen to 3.0 percent and 3.3 percent in 2014 and 2015.

Developing-country GDP is now projected to be around 5.1 percent in 2013, strengthening to 5.6 percent and 5.7 percent in 2014 and 2015, respectively, with growth in Brazil, Russia, India and South Africa projected to remain weak. Looking at broader region-wide trends, the East Asia & Pacific region is expected to grow by 7.3 percent this year; Europe & Central Asia by 2.8 percent; Latin America & the Caribbean by 3.3 percent; Middle East & North Africa by 2.5 percent; South Asia by 5.2 percent; and Sub-Saharan Africa by 4.9 percent.

For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will keep growth this year to a modest 1.2 percent, firming to 2.0 percent in 2014 and 2.3 percent by 2015. Economic contraction in the Euro Area is estimated to be 0.6 percent for 2013, compared with the previous projection of 0.1 percent. Euro Area growth is expected to be a modest 0.9 percent in 2014 and 1.5 percent in 2015.

Global trade, after contracting for several months, is expanding once again, but trade is expected to expand only 4.0 percent in 2013, well off the pre-crisis pace of 7.3 percent. Part of the resilience of global trade, despite the weakness in high-income economies, has been due to rapid expansion in South-South trade. More than 50 percent of developing country exports now go to other developing countries. Even when China is excluded, South-South trade has been growing at an average rate of 17.5 percent a year over the past decade, with manufacturing trade expanding as rapidly as commodities trade.
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Two challenges for the global economy
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Trends in prices and productivity are a risk to the recovery
If Christine Lagarde were a cartoon character, she would be Jiminy Cricket. Just like Pinocchio’s top-hat-wearing companion, the head of the International Monetary Fund has a penchant for acting as the talking conscience of global policy makers. This week Ms Lagarde took central bankers to task for not acting decisively enough against the “ogre” of deflation. The IMF chief believes that falling prices could be “disastrous” for the incipient global recovery.
Ms Lagarde’s warning is timely. Most rich economies – including the eurozone, the US and Japan – have inflation rates substantially below the targets that their central banks are set to achieve. In Britain the outlook is less worrying, since the consumer price index was at the Bank of England’s 2 per cent target in December. However, with producer price inflation rising as slowly as 1 per cent, there are legitimate fears that consumer prices could begin to decelerate more markedly at the start of 2014.

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Deflation carries two equally significant risks. First, shoppers have little reason to spend their money today, since they can reasonably expect goods to be cheaper next year. This has a damping effect on consumption, pushing prices further downwards. Second, deflation makes it much harder for governments and individuals to pay back their debts. As prices drop, the nominal value of loans stays the same while revenues decline. Debtors are therefore forced to use a larger proportion of their income to service their borrowings.

The conclusion reached by Ms Lagarde – that central banks should do more to support prices – is correct. However, there are sizeable differences in the scale of the challenges facing different countries.
For a start, the threat of deflation remains very much a rich-world problem, with many emerging markets, such as India and Brazil, grappling with the opposite threat of rising prices. Even among developed countries, the picture is far from uniform. After nearly two decades of deflation, the monetary authorities in Japan are finally succeeding in making prices rise again thanks to an ambitious programme of quantitative and qualitative easing. Even excluding energy, inflation in Japan picked up to 0.6 per cent in November, the highest in 15 years.

Where the IMF’s warning appears most relevant is the eurozone. The European Central Bank looks exceedingly relaxed about the currency union’s 0.8 per cent inflation rate. Ms Lagarde is right to call for a new injection of liquidity into the system, for example through a further round of cheap loans to the banks.
The mistake to avoid is assuming that securing the recovery is exclusively a matter for the central banks. Alongside disinflation, there are other equally disturbing trends at play in the global economy, which the monetary authorities can do little to change.

The most disquieting development is what is happening to productivity. A report by the Conference Board think-tank out this week showed that, for the first time in decades, there was a decline in the world’s ability to turn capital and labour inputs into goods and services. Were this slowdown to continue, the consequences for living standards would be gloomy: efficiency and innovation are the most important drivers of economic growth in the long run.

It is up to the governments to take steps that can help productivity rise again. The solution lies in structural reforms aimed at allowing the most innovative sectors to expand. The list – which includes investing more in physical and IT infrastructure, as well as increasing competition in the labour and product market – is a well-known one. The challenge, for both the developed and the developing world, is to ensure these changes are finally implemented.
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Top Ten Global Economic Challenges: An Assessment of Global Risks and Priorities
The beginning of 2007 offers a conflicting picture of the global economy for those trying to discern trends, challenges and opportunities. Concerns about energy security and climate sustainability are converging-finally bringing consensus in sight on the need for action in the United States, but prospects for breaking the global stalemate are still years away. While some developing countries are succeeding in bringing hundreds of millions out of poverty, too many are still mired in a doom spiral of conflict, poverty, and disease- despite the entry of new philanthropists, advocates and global corporations into the field of development. China's projected 9.6 percent growth rate is sending ripples to the farthest reaches of the planet-creating opportunities but also significant risks. The United States remains in the "goldilocks" zone, but this is premised on continued borrowing from abroad at historically unprecedented rates while many Americans fret about widening inequality and narrowing opportunity. While the United States concentrates on civil war in the Middle East, most leaders in the region are preoccupied with putting an outsized cohort of young people to work and on the road to becoming productive citizens.

What are the most important challenges we face and what are the potential solutions? In Washington, D.C., where short-term political wrangling too often crowds out the harder and more important long-term challenges, this inaugural publication of Brookings Global Economy and Development seeks to put the spotlight squarely back on the most consequential issues demanding action. It seeks to size these issues, offering policymakers and leaders a concise and clear view of the critical challenges as viewed by leading experts in the field. From economic exclusion of youth in the Middle East to a pragmatic approach to energy and environmental security, this "top 10" is intended to mark core issues and shed light on opportunities and challenges with a broader and longer-term perspective.

When we gather a year from now, we would expect many of these challenges to remain front and central, but we would hope this publication would elevate their visibility and help sustain a dialogue on their resolution.

1. Energy and Environmental Security
Warwick McKibbin and Peter Wilcoxen
Energy and environmental security has emerged as the primary issue on the global agenda for 2007. Consensus has recently been forged on the potential for long-term economic, national security and societal damage from insecure energy supplies and environmental catastrophe, as well as the intense need for technological advances that can provide low-polluting and secure energy sources. Yet despite growing global momentum, there is still little agreement on the best set of actions required to reduce global dependency on fossil fuels and greenhouse gas emissions. Confounding the international policy challenge is the disproportionate impact of high oil prices and global warming across nations, insulating some countries from immediate concern while forcing others to press for more rapid change.

2.Conflict and Poverty
Lael Brainard, Derek Chollet, Jane Nelson, Ngozi Okonjo-Iweala, and Susan Rice
In a world where boundaries and borders have blurred, and where seemingly distant threats can metastasize into immediate problems, the fight against global poverty has become a fight for global security. American policymakers, who traditionally have viewed security threats as involving bullets and bombs, are increasingly focused on the link between poverty and conflict: the Pentagon's 2006 Quadrennial Defense Review focuses on fighting the "long war," declaring that the U.S. military has a humanitarian role in "alleviating suffering, ? [helping] prevent disorder from spiraling into wider conflict or crisis."

3.Competing in a New Era of Globalization
Lael Brainard, Robert Litan, and Wing Thye Woo
Is the new episode of globalization just another wave or a seismic shift? While individual elements feel familiar, the combined contours are unprecedented in scale, speed, and scope.

4.Global Imbalances
Barry Bosworth, Lael Brainard, Peter Blair Henry, Warwick McKibbin, Kenneth Rogoff, And Wing Thye Woo
Today's interconnected world is in uncharted territory: the world's sole hegemonic power, the United States, nurses an addiction to foreign capital, while up-and-coming powers such as China and oil exporters sustain surpluses of increasing magnitudes. Some worry that the world is at a tipping point, where only a dramatic shift in economic policy can alter the looming trajectory. Others see underlying structural factors perpetuating gross imbalances for a sustained period.

5.Rise of New Powers
Chong-En Bai, Erik Berglöf, Barry Bosworth, David de Ferranti, Clifford Gaddy, Xiao Geng, Homi Kharas, Santiago Levy, Leonardo Martinez-Diaz, Urjit Patel, Shang-Jin Wei, Wing Thye Woo

The rise of "emerging powers"-a group that usually includes the so-called BRICs (Brazil, Russia, India, and China), but which sometimes is applied more broadly to include South Africa, Mexico and others-is reshaping the global economy and, more gradually, international politics. Growing much faster than the rest of the world, these economies are changing the structure of international production and trade, the nature and direction of capital flows, and the patterns of natural resource consumption. At the same time, the growth of these countries is beginning to shift the global distribution of power forcing the great powers to come to terms with the reality that they will need to share management of international rules and systems in the coming decades.

6.Economic Exclusion in the Middle East
Navtej Dhillon, Caroline Moser, and Tarik Yousef
The Middle East has before it what could be one of the greatest demographic gifts in modern history-a potential economic windfall arising from a young and economically active workforce. Today, young people aged 15- to 24- years old account for 22 percent of the region's total population, the highest regional average worldwide. With the right mix of policies, this demographic opportunity could be tapped to spur economic growth and promote stability.

7. Global Corporations, Global Impact
David Caprara and Jane Nelson
The private sector is becoming a significant player-indeed some might say the dominant player-in shaping the global economic and development agenda. Multinational corporations with operations that span the globe, and in some cases capacities and networks that match those of governments, have a particularly important role to play in helping to spread the opportunities and mitigating some of the risks of globalization.

8.Global Health Crises
Maria-Luisa Escobar, David de Ferranti, Jacques Van Der Gaag, Amanda Glassman, Charles Griffin, and Michael Kremer
From responding to the threat of pandemic flu to efforts to control the spread of HIV/AIDS, the world has begun to realize that global health issues are relevant for any citizen, regardless of nationality, residence or status. Despite improvements in the world's collective ability to battle disease with advances in medicine and technology, global health needs remain unmet, making the entire world vulnerable to health crises. In particular, the poor continue to suffer disproportionately from inadequate health services, exacerbating their struggle out of poverty.

9. Global Governance Stalemate
Colin Bradford, Ralph Bryant, and Johannes Linn
Today's global challenges-nuclear proliferation, the deadlock of global trade negotiations, the threat of pandemic flu, and the fight against global poverty-cannot be solved by yesterday's international institutions. To resolve the world's most pressing problems, which touch all corners of the globe, we must adapt our global governance approaches to be more representative and thus more effective by encouraging and enabling the key affected countries to take an active role in generating solutions.

10.Global Poverty: New Actors, New Approaches
Lael Brainard, Raj Desai, David de Ferranti, Carol Graham, Homi Kharas, Santiago Levy, Caroline Moser, Joe O'Keefe
The challenge of global poverty is more urgent than ever: over half the world's population-nearly 3 billion people-lives on less than $2 per day; nearly 30,000 children die each day-about 11 million per year -because they're too poor to survive. With such a toll, addressing poverty in new and more effective ways must be a priority for the global policy agenda. Fortunately, a variety of new actors are bringing new perspectives, new approaches and new energy to the challenge.
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Globalisation and Economic Policy (GEP)

GEP - the Globalisation and Economic Policy Centre - is the major centre in Europe studying the impact of globalisation and economic policy and one of the biggest of its kind in the world. The Centre has an impressive international reputation; its academics have advised the Treasury, the World Bank and WTO.
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