christine lagarde_ emerging market nations will get more power in the imf

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30/12/12ne Lagarde: Emerging Market Nations Will Get More Power in the IMF

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Christine Lagarde: Emerging Market Nations Will Get More Power in

the IMFPubli shed : April 03, 2012 in Knowledge@Wharton

Christine Lagarde, managing director of the International MonetaryFund (IMF), sees no alternative to the strict austerity policies beingimposed on many peripheral European countries, says the double diprecessions in Italy and Ireland just announced come as no surprise, andnotes that IMF reforms will shift 6% of current quotas to dynamicemerging and developing countries. Lagarde's comments came in anexclusive interview with Knowledge@Wharton and mediapartnerParisTech Review late last week, as BRIC countries demandedmore voting power in return for the larger financial contributions beingrequested by the IMF. "Clearly, the BRICs will be among the recipientsof these additional quotas," which cover voting power and financialcontributions, Lagarde says. Additionally, the IMF will release a newmodel for assessing the world's exchange rates later this year, and sheconfirmed that the fund will probably raise U.S. GDP growth estimatesfor 2012 "a little bit," up from the current 1.8%, at the IMF WorldBank spring meeting starting April 16.

After a distinguished legal and consulting career, Lagarde was named France's Minister for ForeignTrade and then became the first woman to hold the post of Finance and Economy Minister of a G-7country. Forbes ranks her as the 9th most powerful woman in the world (right behind Michelle

Obama) and the 39th most powerful person on the combined men's and women's list.

An editedtranscript of the interview appears below.

Knowledge@Wharton: We learned in the last week that Italy and Ireland are both returning to recession.Do you see any fallout from that? Is it a sign that the world outlook, which was improving, is getting shakyagain?

Christine Lagarde: As part of this fragile recovery that we have been seeing since January, we havealways considered that Europe and the euro zone in particular would go through a mild recession. Thecountries that are driving the recession at the moment are clearly countries like Ireland, Greece, Portugal andItaly. So this doesn't come as a surprise. It's part of a process that we had anticipated and were forecasting

for 2012.

Knowledge@Wharton: Related to that, austerity has been one of the chief policy levers Europe has beenusing to deal with the crisis. Do you think European leaders have focused on austerity too much and gonetoo far with it? Should a better balance be struck between austerity and stimulus?

Lagarde: If everybody goes at the same pace with austerity measures, it puts the whole region at risk.What we have advocated consistently now for at least the last six months is that there should be a properbalance within the zone, particularly within the advanced economies. We also need a proper balancebetween the austerity measures that are necessary and the growth-facilitating measures. So, obviously, it'snot a one-size-fits-all.

Some countries can afford to relax a little bit the austerity policy that they had embarked on. Others cannotrelax the austerity measures. For instance, Greece is one country that certainly should not relax its measures.Italy is another one.

Knowledge@Wharton: You're giving a little latitude to Spain.
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Lagarde: I'm not really thinking in terms of latitude. Some countries have to be very, very brutal, in terms ofreducing their deficit and bringing sanity to their public finances. The periphery of the core of the euro zone isclearly at stake in that regard. Then you have countries that are pretty much balanced and where you canjust let the automatic stabilizers play out. They can let increased expenditures in the welfare system comeinto play and not compensate [for] the reduced revenues that result from their economic situation. Still othercountries -- not many, unfortunately -- can slow the pace, relax, and let the recovery pick up. A couple oflarge European countries could probably look at that [approach].

Knowledge@Wharton: Are you saying that you're in agreement with the way that balances at the

moment?

Lagarde: In terms of diagnosis, I agree that austerity should not be the exclusive focus of attention. Itshould not be the underlying general theme across the region in terms of economic policy. I also agree thatgrowth is a key factor to try to not only kickstart, but maintain the recovery that is beginning to take hold insome countries. Otherwise, it makes the whole exercise extremely difficult.

Knowledge@Wharton: Can you have too much austerity in the short term rather than it being spread outmore evenly towards the medium and long term?

Lagarde: It depends on the situation. There are some countries in which sharp adjustment is needed in

order to be able to bounce back from that situation.Knowledge@Wharton: You have said that Europe needs deeper integration and bigger firewalls.

Lagarde: I said that when nobody was yet at the table. And now...

Knowledge@Wharton: They're there.

Lagarde: Almost.

Knowledge@Wharton: The question is, what does deeper integration look like? What would be somemedium- and long-term goals for integration?

Lagarde: Deep integration is a recent development. It was much needed in order to consolidate thecurrency zone. We've seen things recently that were totally unexpected and almost unimaginable only 18months ago. What is important for better integration is a combination of solid fiscal coordination with realdiscipline imposed upon the partners, including sanctions that are not only applicable, but are also applied ifthe rules are violated.

Knowledge@Wharton: Would that give the GDP ratios that need to be met in terms of deficits and overalldebts?

Lagarde: Yes. They have added to what was already planned in the growth and stability pact but at thatstage with very little by way of teeth and measures to make sure that it was implemented. What they've

added as well is a preventive aspect to the pact, where they anticipate and can actually be helpful tomembers that are going down a trend that is going to lead them to violate the rules, [such as] the 3% deficitand the 60% debt-to-GDP ratio. So that's a good thing.

In terms of better integration, one institution has played a much better and very significant role lately -- theEuropean Central Bank. Number one, [it has] reduced the level of collateral to make sure that it's of betterservice to the members. And number two, the ECB has provided much more liquidity to the banks, so thatthey can not only finance themselves, but also provide credit to the markets and avoid the negativedeleveraging that nobody wants.

The ultimate integration that would be desirable would be to have some sort of joint liability. That couldcome from something like euro bonds or a joint instrument that would pool the countries together in terms oftheir borrowing. Now, they're not there yet. I think some of the member states will have to improve theirsituation and their competitiveness. They will have to catch up with the delays they suffered from, that theyinflicted upon themselves, by doing the wrong thing or simply by not doing anything. Once that hashappened, then one might hope that this sort of fiscal integration and joint liability would be in place.


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Knowledge@Wharton: There has been a lot of resistance to that.

Lagarde: Yes, absolutely.

Knowledge@Wharton: The idea of Euro bonds raises hackles in a lot of quarters. But your point is that ifthe euro zone members can cooperate on these measures, that would help.

Lagarde: Even on that front, there has been huge progress. If you look back 18 months ago, to the timewhen [Luxembourg Prime Minister Jean-Claude] Juncker and [Italian finance minister Giulio] Tremonti

proposed issuing Euro bonds in a joint paper in theFinancial Times, at that time German ChancellorAngela Merkel was absolutely dead set against it. Now her position has evolved. She -- or her minister offinance -- is saying, "Well, not now, but in the future, why not?" And the five wise economists of Germanyhave themselves put together a proposal that could go a long way toward bringing some joint responsibilityamong the members.

Knowledge@Wharton: That's a big shift.

Lagarde: Yes, it's a huge shift.

Knowledge@Wharton: Is there a role for the IMF in helping increased integration move forward? Or is

this something the Europeans do on their own?Lagarde: It has to belong to them. It has to be theirs. They should have ownership of all of that. All we cando is identify, demonstrate with the team of great experts, that we have in this institution, the benefits ofdoing so and the drawbacks of not doing it.

Knowledge@Wharton: And perhaps contributing to the stability fund that might allow integration to gomore smoothly?

Lagarde: Well, we will be part of the firewall at some stage. And the firewall is not just going to be aboutEurope. They are all going to have to build their firewall, and I hope that we will be seeing developmentsvery shortly. [On Friday, as this interview was being conducted, finance ministers from the euro zone finally

agreed to increase the size of the firewall to 700 billion euros.]

The IMF is a multilateral institution. We'll have to develop more firepower in order to be able to assist notonly the euro zone but also any country outside the euro zone that could be a collateral victim of anyresurgence of the crisis.

Knowledge@Wharton: Is it possible in the medium and long term for the euro zone to keep the commoncurrency without more political integration?

Lagarde: It's difficult to read into the future. But what we can say is that it would certainly strengthen andmake the currency zone much more sustainable and safe. I don't know whether to call it political integration,but certainly we need much deeper economic and fiscal integration.

Knowledge@Wharton: In Spain, youth unemployment is about 50%. You've spoken about this, and it'svery important to you. Are there any specific policies that can help to redress this situation, apart from thosethat would stimulate the economy in general and help it recover?

Lagarde: We all wish there were some magician's wand we could wave to create jobs. At the end of theday, that is what everybody wants to do. It's not just about growth in and of itself ... it's about jobs. It'sabout keeping people off the street. It's making sure that they have a chance to express themselves on thejob market and have dignity through work. But apart from stimulating growth, apart from an economicsituation that warrants the creation of jobs, there is no magical recipe for that. But it's a key issue.

We keep talking about growth. We have seen, in the past, occasions where growth was actually generatedbut without jobs. It was growth exclusively directed at a very small, elite portion of society. When you thinkof a country like Spain, and many other countries as well, it has to be growth that actually creates jobs. Itshould be growth that is sufficiently inclusive that it actually helps keep the chemistry of society together.

Knowledge@Wharton: It can't just be growth in one sector, such as the finance sector, for example.
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Lagarde: Absolutely. Yes.

Knowledge@Wharton: How do you see the role of the IMF evolving in dealing with global economicissues during the next few years?

Lagarde: My constant concern and ambition is to make sure that the IMF continues to be relevant to itsmembership. For the IMF to be relevant, it has to be representative of the membership and thereforecredible from an institutional point of view, and it has to be relevant from a quality point of view. We need toboth represent our membership, and we need to provide the quality of advice, the quality of service, the

quality of technical assistance, the quality of surveillance, that will make us constantly relevant. It's acombination of quality and credibility that will continue to make us relevant.

The role of the IMF is evolving, and we have to be sufficiently agile so that we actually pick up the [lessons]from the crisis. If I could give an example, the traditional exercise of the IMF was to conduct what we callthe Article Four consultation. These were bilateral exercises that consisted of going under the skin of acountry and finding out whether the economic policies were the right mix and whether we could recommendbetter solutions and options. Now, on the occasion of the financial crisis, we went much further intomultilateral surveillance and into studying the spillover effects. The financial crisis may have hit a particularcountry, but it also affects many other countries. How did that contagion occur? How fast did it contaminatethe rest? Why was it so fast through those particular segments?

These are questions on which the IMF can offer added value compared with others because we have thishuge database of knowledge and information about 187 members of the institution. We are in this sort ofsurveillance position, which is very privileged, because we have access. We can analyze, and then we canshow to the members what will be helpful for them. So, our role has evolved to include much more of aneffective, more holistic surveillance of the economic situation.

And I think we need more money [laughs].

Knowledge@Wharton: How can the IMF build more credibility and quality?

Lagarde: Credibility is a matter of being representative of the institution, and that is a factor of our quota

allocation, a factor of our governance. Does the executive board actually reflect the membership? We haveto represent our membership and we have to look like our membership. That calls for diversity of the staff interms of gender, geographical origin, ways of thinking and cultural background. That can help buildcredibility.

Quality is not a subset, but it's closely linked to the issue of diversity. [The IMF must] have the ability tobring together people with different backgrounds, from different regions of the world to confront issues. Ithink that's a big test of the relevance of the institution.

Knowledge@Wharton: Historically the IMF has been dominated by the industrialized Western countries.How do you see the role of the BRIC nations, especially China and India, in the IMF?

Lagarde: Their role is significantly evolving. It reflects, as I was telling you for the credibility issue, theeconomic evolution of those countries. It is best manifested in three areas. One is the staff. How many staffdo we have in the institution who come from India or from China? This applies throughout the institution butalso at the top level. How many people in the management originate from China or India? We have quite anumber of them. I've just recently appointed the Secretary of the Board, who is a Chinese national. One ofmy deputy managing directors is a Chinese national. Among the key leaders of this institution, we have manyvery talented Indian economists who lead key departments like the strategic department. So, that's one level.

Then you have a second level, which is quota and voice. That is an evolving phenomenon, because we areright in the middle of the quota reform, which is going to shift 6% of current quota to dynamic emergingmarket and developing countries, while protecting the quota shares and voting power of the poorestmembers. Clearly, the BRICs will be among the recipients of these additional quotas, and as a result of thereform, all of them will be within the top 10 countries of this institution in terms of quotas.

The third level, which I don't think is as relevant but it matters, is whether they sit at the board of theinstitution. As it happens, they do. Brazil sits at the table, Russia sits at the table, India sits at the table. Chinadoes as well.


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Knowledge@Wharton: What role could the IMF play in bringing about a better balance between rates ofexchange, for example, for a possible re-valuation of the yuan versus the U.S. dollar and the euro?

Lagarde: It's funny that you would focus exclusively on these currencies, because our job is to assess theappropriate exchange rate -- and to actually say what we think of it -- for all 187 members of the institution.We do that through appropriate modeling, gathering of data and comparing and taking into account multipledata, including the current account. It's a daunting task because we don't make anybody happy. Everybodysees himself either higher or lower and our assessment is not necessarily always welcome or well-received.But we do it on the basis of what we know, what we observe, what we can compile and model. We are in

the process of refining and updating our methodology. Probably later in 2012, we'll be able to come up witha new methodology and model of assessing exchange rates.

Knowledge@Wharton: I'm wondering if the IMF will be raising its projected growth for the U.S. at thespring meeting. Right now I think it's projected 1.8% growth.

Lagarde: Maybe a little bit, but you'll have to be patient, because the meeting is not until three weeks fromnow. But maybe a little bit. There have been good signs, let's face it. There have been good numbers comingout, particularly on the unemployment front and on some high-frequency indicators as well. There aremeasures taken at the moment, particularly on the housing markets, that might turn out some significantlyimproved results.

Knowledge@Wharton: Of all the things that you do here, what are you most passionate about? Whatwould you really like to make sure happens? It could be a small thing, it could be a large thing. What is itthat really has your heart?

Lagarde: That's complicated. I think it's this issue of relevance ... that is of real concern to me. You see,this is a very fascinating institution because it's completely counter-cyclical. When the world around the IMFgoes downhill, we thrive. We become extremely active because we lend money, we earn interest andcharges and all the rest of it, and the institution does well. When the world goes well and we've had years ofgrowth, as was the case back in 2006 and 2007, the IMF doesn't do so well both financially and otherwise.

For this institution, which is a fascinating mix of almost all countries of the world with a single objective that

should transcend all their respective individual policies and strategies, for it to be sustainable, we need to bevery agile, very in touch with our membership, with our client base, if you will. We need to be able to inventand reinvent ourselves in many ways. So, as I was explaining about going from bilateral to multilateralsurveillance, from a narrow focus to something that is more holistic, that is exactly what is at stake.

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