Questions for 2017 / Switch to inclusive global growth

Kazuki Wakasugi/The Yomiuri Shimbun

Christine Lagarde, managing director of the International Monetary Fund, speaks with The Yomiuri Shimbun in Washington.

The Yomiuri Shimbun This is the second installment of an interview series with leading intellectual figures around the world. The following is excerpted from an interview with Christine Lagarde, managing director of the International Monetary Fund.

At the IMF, we endeavor to take a global approach to issues — since that is our mission: global economic stability, the enhancement of global prosperity — and we also try to look at the virtues of a system on the basis of its history and its achievements. Today we can see that the liberalization of trade and the migration of peoples and capital has had many positive consequences, enabling developing and emerging economies to bring hundreds of millions of people out of poverty and to create a middle class in these countries. It has also led to a better allocation of the factors of production across the globe and to an improvement in competitiveness, including with regard to the factors of production and capital around the world and in terms of competition, which has generally benefited consumers in the advanced countries.

So, not only have hundreds of millions of people in China or, for example, Vietnam escaped poverty to form a middle class in their countries, but benefits have also accrued to consumers in the advanced economies, particularly the United States. A close study of the issues shows that it is very often the middle class and the poorest segments of the population in the advanced economies that have benefited from globalization in terms of consumption. That is the first aspect. Globalization has had a whole series of positive effects, which we have been witnessing over the past thirty years.

Second, we can also see that there are employment areas in certain sectors of the economy — particularly production in specific regions that have been strongly affected by the development of the textile industry in other countries, or steel-making or possibly the automobile industry — that have been affected by unemployment and plant closures because value chains have been organized differently to take advantage of lower costs. And so we subscribe to the view that the mechanisms of globalization must be rethought and improved to ensure that globalization benefits everyone and not just 60 percent of the global population. The 60 percent is bit of a guess, but it is essential that we take measures, often domestic measures, to improve vocational training, education and retraining in the places and for the populations that are affected by dislocations resulting specifically from methods of production.

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  • Kazuki Wakasugi/The Yomiuri Shimbun

    Christine Lagarde speaks during an interview at the International Monetary Fund headquarters in Washington.

Third, it has also been said that inequalities are increasing today in a number of countries, in many countries in fact, not just in the advanced economies, and that, in the face of these growing inequalities, if the objective we are pursuing is strong, sustainable, long-term growth, these excessive inequalities must be reduced through fiscal policies, particularly tax policies, and by means of measures to improve education and training levels, the integration of women in the labor market, and the elimination of discrimination against women.

So I don’t like to speak in terms of whether “neoliberalism is alive or dead” or whether the [U.S. President Ronald] Reagan- [British Prime Minister Margaret] Thatcher movement is dead.

I don’t believe that that is the issue. The issue today is that all economies and all businesses are closely interconnected and that this process is probably irreversible, but to make such trends socially acceptable they must benefit all. Those who are affected by job or income losses must have access to training and to what we call “the social safety net,” to ensure that they do not become the “victims” of globalization. That is what is needed.

I believe that we have currently undertaken research and other work in the IMF that indicates that open economies, international trade and capital flows are favorable to growth, but that such growth must be more inclusive and must aim to reduce inequalities.

[In regards to whether capitalism benefits the people of the world,] of course. But we are talking about a capitalism that is reformatted to benefit all and to avoid the growing inequalities that we have seen over the past 20 years.

‘Wait and see’ on Trump

[Regarding U.S. President-elect Donald Trump,] I believe that we need to give it some time, as [French] President [Francois] Mitterrand would have said. There are campaign promises. There are the strategy and tactics used to win elections. And then there is the reality of governing and handling the economic situation and taking account of all the American companies that are located in all countries in the world where there is a market. So I believe that it will be necessary to accommodate all of these issues as well. I believe it is too soon to see what long-term lessons can be learned from a period that has been a period of fighting and strategizing for victory. We hear both the positive and the negative. So I believe that we should wait and see what the overall approach will be in the economic sphere before coming to any conclusions. Here in the IMF we focus specifically on the economic circumstances and not the geopolitical situation as such.

China is already a global economic player. Japan is a global player. The eurozone is a global player as well. However, the United States is not just an economic global player, but a major military force, and it has a currency that is both a reference currency and a major reserve currency. I believe that we are not in a position today to replace this military, economic and monetary power by another country.

Brexit not shift from globalization

It has been said that there would be harmful consequences for Great Britain and financial consequences for the EU [European Union], not least from a budgetary standpoint. It is a free trade zone and a zone of freedom of movement that is fragmenting. In that sense it is a loss, I believe.

But, to return to something you said, I do not believe that this means that Great Britain is saying “no” to globalization or international trade. Great Britain is saying, “I wish to continue and I wish to be a champion of trade.” I myself have heard [British Prime Minister] Theresa May say very explicitly “the U.K. will be a champion of international trade, but we wish to do this on our own terms and in the context of bilateral agreements negotiated with other countries.” This is somewhat in line with the position that we heard during Trump’s election campaign: “We will continue to engage in trade, but trade that will benefit the United States and that will be based on bilateral agreements.”

“No man is an island.” The IMF has 189 members.

Japan’s dual labor market

[Regarding the status of the current Japanese economy,] Japan is clearly a case where growth has been “too weak for too long,” with prices and wages hardly rising for decades. Prime Minister [Shinzo] Abe’s efforts to stimulate the economy initially met with success, but the challenge to coax a rapidly aging society out of its deflationary mind-set is proving daunting — people are still hesitant to spend or invest more. Of particular concern at this juncture is the sluggish wage growth despite a tight labor market and a corporate sector that is sitting on a large pile of idle cash.

Fortunately, the BOJ [Bank of Japan]’s new monetary framework is making its easy monetary policy stance more effective and more sustainable, while the recently adopted fiscal stimulus is supporting demand.

We feel that what is missing is a stronger emphasis on income policies and structural reforms to boost the economy and weak potential growth. We suggest policies aiming for at least 3 percent annual base wage growth in both the public and the private sectors.

Priority should go to addressing labor market duality by promoting new hiring under contracts that balance job security and wage increases. Conditions of non-regular workers — which now constitute 40 percent of the work force and are in large part women but have no job security — need to be improved. Together with the removal of obstacles to full-time employment of spouses, progress toward equal pay for equal work and Prime Minister Abe’s new work style reform would allow Japan to draw on the untapped potential of its female labor force.

Track future oil price

The deal reached by OPEC [the Organization of Petroleum Exporting Countries] last November to cut oil production has resulted in a significant jump in oil prices. The production cuts will help reduce excess supply in the oil market, but the path of oil prices going forward will also be determined by the growth in the demand for oil. Another important dimension should be supply developments elsewhere, which include the response of U.S. shale production to higher prices.

Sustained global growth

I am an optimist [about the state of emerging economies in 2017]. Cautiously so, of course, but I have a good reason to be that way. We believe that the year 2017 could provide a major opportunity to move toward stronger and more sustained global growth. A number of factors could have a significantly positive impact. They include a push for structural reforms and resilience by the G-20; the continuing transition of China’s economy from exports, investment and industry to private consumption and services; the youthful dynamism in many Asian and Latin American economies; and the emphasis of the new U.S. administration on corporate tax reform and infrastructure investment that will have a significant impact on the rest of the world.

Emerging markets’ growth is expected to increase modestly, reflecting a gradual improvement in countries in economic distress. But, significant challenges remain, including from lower commodity prices, tighter external financial conditions, transition following Brexit, trade protectionism, structural bottlenecks and geopolitical factors.

Looking beyond 2017 and over into the medium term, a broad common objective for emerging market economies is continued convergence to higher incomes. How will they achieve that? By reducing distortions in product and labor markets and investing in education and health care. Maintaining macroeconomic stability by reducing financial vulnerabilities is also key. As we have argued for some time, growth-friendly fiscal policy and structural reforms can lift productivity, secure higher growth and thereby ensure a successful transition to higher income status.

As for China, the country continues to transition to a sustainable growth path and make progress on many dimensions of rebalancing. Inevitably, this transition entails big structural shifts in China’s trading patterns and an overall slowdown in its growth rate — as a result, there have been, and will continue to be, significant spillovers to the rest of the world. But let’s not forget that even at somewhat lower growth rates, China will continue to be a pillar of global growth. Moreover, a successful transition will benefit global growth and reduce risks associated with continuing rapid, unreformed growth.

This interview was conducted by Yomiuri Shimbun Senior Writer Tetsuya Tsuruhara and Washington Correspondent Takanori Yamamoto.

■ Profile

Lagarde, who was born in Paris, is the managing director of the International Monetary Fund. After working at a U.S.-based international law firm, Lagarde joined the French government in 2005 as minister for foreign trade. She became the first woman to serve as France’s finance minister in 2007 and the first woman to lead the IMF in 2011. She was reappointed to the top IMF post in 2016. She is 61. Speech

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