“Steer, Don’t Drift”: Managing rising risks to keep the Global Economy on Course

Christine Lagarde Head of IMF

By guest author Christine Lagarde, IMF Managing Director Speech at IMF Headquarters, October 1, 2018

Our event today is the penultimate leg of what we call our “Voyage to Indonesia”—the final leg being our Annual Meetings to be held next week in Bali.

This is a challenging and exciting moment for Indonesia, a country that has transformed itself in recent decades, unleashing its economic dynamism and harnessing the incredible ingenuity and diversity of its people. A country that is so often dealing with the hardship of natural disasters.

We can all learn so much from Indonesia and its ASEAN partners—especially when it comes to building resilience, embracing openness, and reaching out across borders.

One important lesson is that if countries work together, they are far more likely to enhance the well-being of their people than if they go it alone.

We saw this clearly during the global financial crisis.

This multilateral spirit is captured well by a beautiful Indonesian phrase—“gotong royong,” “working together to achieve a common goal.”

This spirit is needed more than ever to meet the challenges ahead.

This morning, I will talk about three of them: (i) building a better trade system; (ii) guarding against fiscal and financial turbulence; and (iii) rebuilding trust in policymaking and institutions.

Trade, turbulence, and trust

Changing Economic Weather

Before I get to the challenges, let me present a brief “lay of the land” on the eve of our Annual Meetings.

First, the good news. Global growth is still at its highest level since 2011 when economies were rebounding post-crisis. Unemployment is still falling in most countries. And the proportion of the global population living in extreme poverty has dropped to a new record- low of less than 10 percent.1

In other words, the world continues to experience an expansion that holds the promise of higher incomes and living standards.

So is everything fine?

Well, only up to a point.

For most countries, it has become more difficult to deliver on the promise of greater prosperity, because the global economic weather is beginning to change. What do I mean by that?

A year ago, I said, “the sun is shining—fix the roof.” Six months ago, I pointed to clouds of risk on the horizon.

Today, some of those risks have begun to materialise.

Indeed, there are signs that global growth has plateaued. It is becoming less synchronized, with fewer countries participating in the expansion.

In July, we projected 3.9 percent global growth for 2018 and 2019. The outlook has since become less bright, as you will see from our updated forecast next week.

A key ssue is that rhetoric is morphing into a new reality of actual trade barriers. This is hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise.

For now, the United States is growing strongly, supported by a procyclical fiscal expansion and still easy financial conditions—which can become a risk in a maturing business cycle.

In other advanced economies, however, there are signs of slowing, especially in the euro area and, to some extent, in Japan.

Emerging Asia continues to grow at higher rates than other regions, but we see indicators of moderation in China, which will be exacerbated by the trade disputes.

Meanwhile, challenges have been mounting in a number of other emerging market and low- income countries—including in Latin America, the Middle East, and Sub-Saharan Africa.

Many of these economies are facing pressures from a stronger U.S. dollar and a tightening of financial market conditions. Some of them are now facing capital outflows.


1 New World Bank analysis shows that extreme poverty dropped to 10 percent in 2015, the latest year for comprehensive data, and the Bank estimates that the decline has continued over the past three years.

To be clear, we are not seeing broader financial contagion—so far—but we also know that conditions can change rapidly.

If the current trade disputes were to escalate further, they could deliver a shock to a broader range of emerging and developing economies.

So what should be done?

At times like these, policymakers might take inspiration from the great American poet,

Oliver Wendell Holmes Sr., who once said: “To reach a port, we must sail sometimes with the wind and sometimes against it—but we must sail, and not drift, nor lie at anchor.”

My key message today is that we need to manage the risks, step up reforms, and modernise the multilateral system.

Or, to put it in shipping terms, we need to steer the boat, not drift!

Steer the Boat, Don’t Drift

This means, above all, seizing the opportunity now—while growth remains relatively strong—to implement the bold policy reforms needed to support the economic momentum and sustain it.

As I have said, “We should fix the roof”—now more than ever it is the right thing to do.

How can that be done in practice? By addressing the three challenges I mentioned at the outset—trade, turbulence, and trust.

Build a Better Global Trade System

First, trade. Simply put, countries need to work together to build a global trade system that is stronger, fairer, and fit for the future.

The stakes are high because the fracturing of global value chains could have a devastating effect on many countries, including advanced economies. It could also prevent emerging and low-income countries from reaching their full potential.

The stakes are high because import restrictions prevent trade from playing its essential role in boosting productivity, spreading new technologies, and reducing poverty.

That is why we need to work together to de-escalate and resolve the current trade disputes.

History shows that, while it is tempting to sail alone, countries must resist the siren call of self-sufficiency—because as the Greek legends tell us, that leads to shipwreck.

Going forward, what we need are “smarter rules” for trade that ensure all can gain. We need to fix the system, not destroy it.

The immediate challenge is to strengthen the rules. This includes looking at the distortionary effects of state subsidies, preventing abuses of dominant positions, and improving the enforcement of intellectual property rights.

On these issues, we can be encouraged by the growing number of discussions and proposals, most recently from Canada and the European Union. These are positive steps, and there is further work to be done.

For example, if agreement among all countries cannot be achieved, governments could use more flexible trade deals—where like-minded countries agree to work within the framework of the World Trade Organization.

Of course, fixing the system also means making it fit for the future. Here again, we could use flexible trade agreements to unlock the full potential of e-commerce and other tradeable services, such as engineering, communications, and transportation.

Our latest analysis2 shows that by reducing trading costs for services by 15 percent, we could boost total GDP of G20 countries by more than USD 350 billion this year. That would be the equivalent of adding another South Africa to the G20.

These are the kinds of gains that are within reach—if we work together, if we focus on creating a better global trade system. There is a clear appetite to improve and expand trade. The recent African trade agreement, and the flurry of bilateral negotiations evidence that determination. 

Guarding Against Fiscal and Financial Turbulence

My second challenge is guarding against fiscal and financial turbulence.

Here’s the question: ten years after the global financial crisis, are we any safer? My answer is “Yes”…but not safe enough. We must push on with the financial regulatory agenda—and resist backsliding.

Moreover, after a decade of relatively easy financial conditions, debt levels have reached new highs in advanced, emerging, and low-income countries.

In fact, global debt—both public and private—has reached an all-time high

of USD 182 trillion—almost 60 percent higher than in 2007.


2 IMF Paper (November 2018): G20 Report on Strong, Sustainable, Balanced, and Inclusive Growth.


This build-up has left governments and companies more vulnerable to a tightening of financial conditions.

Emerging and developing economies are already feeling the pinch as they adjust to monetary normalization in the advanced world.

That process could become even more challenging if it were to accelerate suddenly. It could lead to market corrections, sharp exchange rate movements, and further weakening of capital flows.

We estimate3 that emerging economies—excluding China—could potentially face debt portfolio outflows of up to USD 100 billion—which would broadly match outflows during the global financial crisis.

This should serve as a wake-up call.

We are not there yet, by any means. But, some countries are already facing rough waters. The IMF is deeply engaged in these economies through analysis and advice, and by providing financial assistance where needed. We will continue to do so.

For most countries, however, steering the boat means creating more room to act when the next downturn inevitably comes.

Emerging economies can create this room by reducing risks from high corporate debt, while greater efforts are needed to make government borrowing4 more sustainable in low-income countries.

In many cases, creating more room means allowing flexible exchange rates to absorb some of the pressures from capital flow reversals.

On that point, IMF analysis5 shows that countries with greater exchange rate flexibility experienced smaller output losses after the global financial crisis. We also found that economies are more resilient when their monetary policy is more trusted and when their independent central banks communicate clearly.6

Advanced economies need to act as well. They can create the room they need by reducing government deficits and placing public debt on a gradual downward path. This should be done in a fair and growth-friendly way—through more efficient spending and by ensuring that the burden of adjustment is shared by all.


3 October 2018 Global Financial Stability Report.
4 New IMF estimate: the median public debt level among low-income countries increased from 33 percent of GDP in 2013 to 47 percent.
5  October 2018 World Economic Outlook, Chapter 2.
6 October 2018 World Economic Outlook, Chapter 3.

At the same time, countries should not overlook another aspect of their balance sheets—the public wealth that is tied up in government financial assets, public companies, and natural resources.

Here we have new IMF analysis7 of 31 countries showing total public assets of more than USD 100 trillion, well over twice their GDP.

Improving the management of these public assets could deliver additional revenues of about 3 percent of GDP per year—which is significant. In fact, that is equal to what advanced economies collect in corporate tax in a year.

Again, it is not about sailing alone, with each country responding only to national concerns. Guarding against potential turbulence will require countries working together in a cohesive and collaborative manner.

As an example of this, we know that governments can make their economies less vulnerable to disruptive capital flows by reducing current account imbalances. How? By increasing public investment where fiscal positions are healthy and by lowering fiscal deficits elsewhere. These policy actions at the national level complement each other at the global level.

Guarding against turbulence also requires a strong global financial safety net, which in turn means a well-equipped and well-resourced IMF at its center. This is key to ensure that the Fund can play its unique role in helping countries deal with future crises.

This is a top priority for me—combined with further adjustment to the governance of the Fund to better reflect the changing economic dynamics of our membership.

Rebuild Trust in Institutions and Policymaking

Let me now turn to my third challenge—rebuilding trust in institutions and policymaking. This is essential for durable and more widely shared growth.

The causes of the decline in trust are many. First and foremost, far too many people remain on the margins.

In too many countries, growth has failed to lift the prospects and livelihoods of ordinary people. In too many cases, workers and families are now convinced that the system is somehow rigged, that the odds are stacked against them.

This is not hard to understand: since 1980, the top one percent globally has captured twice as much of the gains from growth as the bottom 50 percent.


7 October 2018 Fiscal Monitor

Over that period, many advanced economies saw rising income inequality and limited growth in wages—partly due to technology, partly due to global integration, and partly due to policies that favoured capital over labour.

A related source of dissatisfaction comes from raw memories of the global financial crisis. Many people saw this as the ultimate breach of public trust—because of the widely-shared perception that those who caused the crisis did not face consequences, while ordinary people paid a heavy price.

A third factor is corruption—an economic and social plague that makes it hard for countries to take the right collective decisions. This is bound to inhibit economic dynamism, which further undermines trust and sets in motion a vicious cycle.

And, of course, in an age of rapid technological change—where digitalization and artificial intelligence are sweeping across industries—we will need even higher levels of public trust.

There are various estimates of how many jobs may be gained or lost due to technology. A striking finding from our recent analysis indicates that women could be especially hard hit — with 26 million of their jobs at risk in OECD countries alone.

Why? Because women often have to do more of the routine tasks than men — precisely the kinds of jobs more likely to be affected by automation.

That is why governments will need to take more responsibility for the human cost of disruption, whether from technology, trade, or economic reform.

So what can be done? A key priority must be to invest in people—in health and education, in social protection systems.

These improvements in human, social, and physical capital are especially important in low- income countries, where significant new spending is needed to achieve the Sustainable Development Goals—we have recently estimated this additional spending amounts to about USD 520 billion per year by 2030.8

We certainly need a 21st-century education system—to reduce inequality of opportunity and help everyone thrive in the digital age.

We need scaled-up investment in training and social safety nets—so that workers can upgrade their skills, transition to higher-quality jobs, and earn more.


8 New IMF research: across 49 low-income developing countries, additional spending needs amount to about USUSD 520 billion a year.

Wherever feasible, we need more progressive taxation and higher minimum wages. And across the globe, we need smarter taxation of multinational corporations to ensure that all pay their fair share.9

Fairer policies should also make it easier to balance work and family, where burdens too often fall on women: these policies range from well-designed parental leave, to affordable high-quality childcare, to tax systems that do not penalize second earners.

Another element critical to restoring trust is to implement policies and reforms that not only boost growth, but do so in a manner that is inclusive and sustainable.

This means that all countries must join hands to tame the menace of climate change. If we care about the well-being of future generations; if we care about the plight of climate refugees, we must be serious about pricing carbon emissions to account for their social costs.

The IMF is supporting its members on this and many other pressing issues through policy advice and capacity development, and by providing a platform for sharing best practices and fresh ideas.

This includes helping our members navigate the rapidly shifting currents of the fintech world.

Together with the World Bank and other partners, we have developed what we call the “Bali Fintech Agenda,” to be released at our Annual Meetings next week. This is a blueprint for policymakers who are seeking to manage new risks, while harnessing fintech potential for the benefit of all—not just the wealthy or the well-connected.

This is another example of how we can foster international cooperation that is more inclusive, more open and representative, and more effective in delivering for people.

I call this the “new multilateralism.” And, I believe we need it more than ever to address the challenges of trade, turbulence, and trust.


Let me conclude by thanking the Executive Board of the Fund and our talented and diverse staff, who embody the highest aspirations of international cooperation.

This is, in my view, beautifully captured in the official motto of Indonesia: “Bhinneka Tunggal Ika,” “Unity in Diversity.”

When we sail together, we are stronger, nimbler, better able to steer the ship through rough waters and avoid the rocks of shipwreck.


9 By one recent estimate, close to 40 percent of multinational profits are shifted to low-tax countries each year.

So now, as we set sail on our Voyage to Indonesia, let us work together—so we can steer our economies in the right direction and bring all people whether on big or small boats to a new and better port.

Thank you.”