Regional imbalance definition
Remarks by Rodrigo de Rato y Figaredo
Managing Director, International Monetary Fund
at the National Press Club
Ottawa, Canada, June 20, 2005
1. Good afternoon—it is a pleasure to be here. This is my first official trip to Canada as Managing Director of the IMF, and it is a great honor to be invited to address you today.
2. As you know, the IMF is a key international institution for the promotion and maintenance of global economic stability and orderly growth. One important way through which we discharge this responsibility is by serving as an advisor, facilitator, and forum for global economic cooperation. It is against this background that I wish to use my remarks today to focus once more on two urgent issues that confront the world—that is, global imbalances, and fighting poverty in developing countries.
3. When we speak of global imbalances, we often are referring to the large current account deficit in the United States, and the matching surpluses in other countries such as Japan, emerging Asia, some oil-exporting countries, as well as other industrial countries, such as Canada. This situation is of great concern both because they reflect substantial gaps in growth performance between regions of the world and because they imply cross-border movements in capital that cannot be sustained forever. As it is, the current account deficit of the U.S.—which measured an unprecedented 6½ percent of GDP in the first quarter of 2005, as compared to the average of 1 percent of GDP in the early 1990s—is being financed by record levels of debt in the hands of foreign investors. It is unlikely that investor appetite for U.S. assets will continue to grow at this pace indefinitely.
4. Unless action is taken by policymakers to facilitate an orderly resolution of these imbalances, we run the risk of investors drastically reducing the flow of capital into the United States. In that event, the dollar could depreciate rapidly, currency and capital markets could become disorderly, and interest rates could rise sharply, posing serious threat to global economic stability. Such an outcome would be of particular concern to countries that are closely integrated with the U.S. economy, such as Canada. The broad-based weakness of the U.S. dollar in recent years has partly reflected concerns about the sustainability of the U.S. current account deficit. As the United States' largest trading partner, the impact on Canada has been significant, contributing to a rapid strengthening of the free-floating Canadian currency. Fortunately, Canada's robust economic framework, as well as high world oil and commodity prices, have served to mitigate the impact of these developments on Canada's macroeconomic performance, but the adjustment has not been wholly painless.
5. Global imbalances are, by their very definition, a problem of the global economy. Their resolution requires a collaborative international effort to address the underlying causes. The policy measures needed to address the imbalances are generally agreed; it is just that their firm implementation is still lacking. For that reason, it bears repeating what these measures are.
6. In the United States, the pursuit of credible medium-term fiscal consolidation remains paramount. The continued financing of the large U.S. current account deficit depends on the future attitude of foreign investors towards U.S. assets. Maintaining investor confidence in the dollar—and in the strength of the U.S. economy—would help prevent destabilizing dollar depreciation. A strong commitment to reducing the U.S. fiscal deficit would go a long way towards achieving that. The U.S.'s budget proposal for fiscal year 2006, which aims to halve the nominal budget deficit over 5 years, is a step in the direction of sustainability. However, firm implementation of this proposal is critical. More importantly, even bolder deficit reduction would be desirable and warranted, especially in view of the cyclical strength of the U.S. economy, and the importance of lowering government debt ahead of the retirement of the baby boom generation.
7. Stronger growth in Europe and Japan is a critical prerequisite for unwinding the existing imbalances. That is because a major contributory factor to the widening global imbalances has been the unbalanced pattern of global growth. Specifically, world economic expansion remains largely driven by the United States and China. In the euro area and Japan—which together account for nearly one-quarter of global output—economic performance has been relatively weak, although recent indicators point to positive signs in Japan.
8. The key to raising growth in Europe remains structural reform. Important progress has been made in recent years, including in pension, healthcare, and labor market reforms. These gains provide a firm foundation from which to further strengthen the European economy. The precise future requirements would of course differ across countries, but they should in general focus on further boosting labor utilization, product and service market de-regulation, and greater financial market integration. Labor market reform, in particular, will take on added significance with Europe's rapidly aging population. To sustain its basic social model for the benefit of future generations, Europe needs to create more jobs and maximize labor utilization.
9. Japan, like Europe, requires further structural reform to generate sustained growth over the medium term. A cyclical upswing and supportive policies have facilitated structural adjustment over the last few years, improving the underlying strength of the Japanese economy. Nonetheless, continued structural reform is required to generate sustained growth in Japan over the medium term. In particular, bank profitability and capital bases should be strengthened further to promote lending. Other areas for improvement include making labor markets more flexible, and opening up sheltered sectors of the economy—such as agriculture—to greater competition.