The future global economy

The second milestone is a better global financial system. We need to move beyond the system that gave us the crisis, a financial sector in which some, as the ancient Greeks might say, toyed with hubris and unleashed nemesis. Of course, there has been important progress, especially on the Basel III agenda to create more resilient capital and liquidity buffers. But momentum is flagging, both on implementing the agreed reforms and on progress in areas like derivatives and shadow banking.

As a result, the system as a whole is not yet much safer than it was in September 2008, when Lehman Brothers collapsed. It is still too complex; activities are still too concentrated in large institutions; and the specter of "too big to fail" remains. Continuing excesses and repeated scandals show that the culture of finance has not really changed.

Many in the financial-services industry are concerned about the costs of new regulations. A recent IMF study shows that better regulation would indeed nudge banks' lending rates up, but by relatively little. We also found that increasing capital buffers to appropriate levels helps, rather than hurts, economic growth. Reforming financial-sector taxation would also help to reduce excessive risk-taking and leverage.

The bottom line is that the costs of reform are affordable. The costs of complacency are not.

The third milestone relates to the quality and inclusiveness of growth. While growth is essential for the future global economy, it must be a different kind of growth, inclusive and not simply the fallout of unfettered globalization.

The policy implications of such a reorientation are profound. It requires a fiscal policy that focuses not only on efficiency, but also on equity, particularly on fairness in sharing the burden of adjustment, and on protecting the weak and vulnerable. It means expanding access to credit and financial services everywhere. And it means more transparency and better governance.

Achieving these milestones presupposes greater global cooperation. A world that is bound closely together must be a world that works closely together if it is to prosper together. There is simply no other choice. We are multiple players, but we are engaged in a single game, a game that must be cooperative, not simply competitive. In such a world, multilateral institutions like the International Monetary Fund play a vital role in boosting economic cooperation.

The year 2013 offers the chance to put the economic crisis behind us and to shape the world for the better. Policymakers must seize this chance. The IMF will support them in building a fairer and more prosperous future.

The author is managing director of International Monetary Fund.

Project Syndicate

(China Daily 12/28/2012 page9)

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