As Prepared for Delivery
Thank you, Josh, for your kind introduction, and to the Atlantic Council for having me. It is a pleasure to be here today.
In ten days, we’re going to have nearly the entire global financial policymaking apparatus descend on Washington, D.C. for the IMF and World Bank Annual Meetings. Gatherings like these are a good reminder of the various times policymakers have come together for a big cause. And, while international economic policy can be a contentious space, allow me to start with something we can all agree on: it’s important to remember your anniversary.
The anniversary I’d like us to remember today is of a previous gathering of finance ministers and financial policymakers: the anniversary of Bretton Woods. Eighty-years ago, a group of 730 delegates representing 44 countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire to hash out the future of the global economy. This was remarkably bold. The end of World War II was more than a year away. Paris was still under the grip of the Nazis. Yet even as they remained squarely focused on winning the war, the delegates at Bretton Woods understood that without planning, without reimagining the global economy and international system, they risked losing the peace.
So today I’d like to reflect on the importance of the Bretton Woods institutions (The International Monetary Fund and the World Bank) and the international financial institutions writ large to U.S. economic security: that is, how they have lifted up the global economy and supported American strength and prosperity since their founding, how they stepped up through the crises of the past four years, and how we see their role in driving growth and prosperity in the years to come.
Why the Global Economy Matters to US Growth
When U.S. policymakers led in the creation of the Bretton Woods institutions, there was an altruistic motive to be sure. Helping ensure robust global growth would be good for billions of people. And that is still true. Global growth has been the greatest anti-poverty program ever. As the world economy grew more than 250% over the last four decades, global extreme poverty rates fell from over 40% of the population to under 10%. But there was clearly a self-interested rationale as well. By supporting growth and helping fight crises, these institutions would help generate a more stable world. The hope was they could help prevent the economic collapse that came in the decades after World War I that many believe contributed to the rise of fascism and the start of World War II.
And, a strong and stable global economy was seen as essential for a strong U.S. economy. The U.S. economy is the largest in the world. It is broad and diverse and can provide many of its needs – for example food and energy – domestically. But even the U.S. economy is not an island.
Time and time again, the decades since Bretton Woods have corroborated this basic intuition of our predecessors at that conference about the importance of the global economy for U.S. growth. U.S. export growth, for example, has tracked growth in foreign GDP quite closely for many decades. This macroeconomic pattern reflects an existential imperative for U.S. businesses with significant exposures to global growth. This includes our largest firms, with for instance as much as 40 percent of all S&P 500 firms’ revenues derived from foreign markets in recent years. Workers at these firms benefit from this
exposure: jobs in export industries have been shown to pay a wage premium of as high as 20 percent.
It is not just trade or foreign investment that depends on what happens in the rest of the world. Our own investment levels are in many ways affected by global growth. There is strong empirical evidence that business investment follows an “accelerator” model in which increases in investment depend on increases in the rate of economic growth. To the extent that U.S. firms depend on the rest of the world for much of their revenues, their investment levels will depend on what they see as potential growth abroad. And the evidence is that this effect of global growth on investment dynamics is significant (OECD 2015).
The U.S. is roughly 16% of the global economy in purchasing power parity (PPP) terms and contributed 0.4 percentage points to real global growth in 2023. The strength of the U.S. economy was an upside surprise last year and helped drive global growth forward. But, even in that circumstance, we comprised less than one seventh of total global growth. In addition, over the next half century, the UN estimates that virtually all population growth will occur in countries that are currently low- or lower-middle-income countries. It is essential that the global economy generate jobs and incomes where people are living.
We have also come to understand quite viscerally how crises that begin by threatening economies overseas ultimately impact American workers, families, and businesses. With the COVID-19 pandemic, a viral outbreak across the globe led to the sharpest drop to GDP since the Great Depression. It left many economies around the world smaller than they would have been on their pre-crisis growth trajectories – particularly when compounded by the effects of Russia’s unlawful war against Ukraine on global food and energy prices. Without a strong rebound in growth, we could simply be left poorer going forward than expected prior to these shocks. It is essential that we have institutions able to help the global economy rebound when a slowdown strikes.
Global financial markets are also obviously linked. A shock in the British bond market or yen borrowing or the near failure of a Swiss bank have all reverberated through global markets in the last two years. And, financial crises with major global impacts have begun on nearly every continent over the last four decades at one time or another.
The Global Economic Landscape
While the global economy has shown resilience over the last two years, it faces numerous challenges. There are geopolitical risks, changing demographics, and slow productivity growth in many economies. The United States has seen productivity growth rebound – even slightly above its pre-COVID rates – but that is an atypical experience across richer economies. The Biden-Harris Administration has placed an emphasis both on trying to recover from the COVID recession rapidly – generating a return to pre-recession trends faster than in previous recessions and faster than other major economies. It has also emphasized growth over the medium term. Secretary Yellen has referred to this strand of policymaking as modern supply side economics, focusing on the ways in which proactive government policy can boost long run growth through investments, including in labor supply, human capital, public infrastructure, R&D, and sustainability.
The world also faces a challenge coming from China’s current economic model. Having a very large economy with such high savings can cause spillovers unless there are domestic uses for much of that savings. Recently, China has been directing large sums towards investment in manufacturing, despite already being over 30% of global manufacturing. And, there appears to be a lack of domestic demand driving growth, potentially leading to a return to a reliance on exports for growth. A very large economy growing above the global growth rate based on exports is both unlikely to be successful and likely to cause spillovers to others. By focusing on manufacturing via nonmarket tools and subsidies despite China’s already outsized role, this also means China may be closing what has been a typical development path to many other countries eyeing low-cost manufacturing as the next stage of their development. And by channeling the saving to particular sectors, this increases the likelihood of overcapacity and spillovers to other countries.
It is critical that we use all the tools we have to combat forces that might be pushing the global economy towards slower growth. Global economic growth and stability are essential to our economic security, and the Bretton Woods institutions have played an important role in supporting these since their inception.
Historic, Conventional Role of the IFIs
The International Monetary Fund has earned the moniker of the world’s “financial firefighter,” stepping in to offer financing and policy advice to countries in times of economic crises. It is easy to look back and debate the Fund’s successes or missteps, but unquestionably, the global economic system we have today would have an IMF-shaped vacuum in its absence. If it did not exist today, we would create something just like it. It is worth recognizing how an institution initially charged with maintaining a system of fixed exchange rates has evolved to respond to generation-defining events, from the international debt crisis of the 1980s, the fall of the communist bloc and Asian financial crisis in the 1990s, to the global financial crisis and Eurozone crisis in recent decades. Beyond these global shocks, however, the Fund has also stepped in to help individual member countries at pivotal times – as they emerged from conflict or looked to respond to economic downturns, instability, and other shocks.
And the Fund’s role in the international monetary system goes far beyond responding in times of crisis. Through economic surveillance, technical assistance, and precautionary lending facilities, the Fund has also helped promote stability within the international monetary system, offered growth-catalyzing policy guidance, and bolstered countries’ resilience to shocks.
Similarly, The World Bank, initially established to support postwar reconstruction, has evolved to become an essential partner for countries. The World Bank Group’s constituent institutions have emerged as key sources of development finance. Its International Bank for Reconstruction and Development (IBRD) is a key provider of financing, policy advice and technical assistance to middle-income countries across the globe. Its International Development Association (IDA) is the largest source of critical concessional financing and grants for low-income countries, including those affected by fragility and conflict. And the Bank’s International Finance Corporation (IFC) is a critical investor in developing country private sectors, and key player – along with the Bank’s insurance arm, the Multilateral Investment Guarantee Agency (MIGA) – in mobilizing private investment in those countries.
Often working complementarily with the IMF, the World Bank is also a key purveyor of policy advice and technical assistance to help reduce poverty and advance sustainable and inclusive development. World Bank funding and support has translated into material quality of life improvements for billions of people across the globe, with just those projects currently underway at the Bank yielding improved educational and job opportunities for 280 million people, stronger food and nutrition security for 156 million, and more inclusive access to electricity for 100 million people, just to name a few. Their advice is likely just as important. A finance minister once said to me, “I need the financing, but the most important thing, I need to know where to spend the money and how to grow.”
And although they are not officially Bretton Woods institutions, the regional development banks – primarily founded in the 1950s and 1960s – have become critical sister institutions to the World Bank and the IMF, complementing and deepening the impact of the Bretton Woods system.
The Last Four Years at the IFIs: Health, IMF, MDBs, Debt
The importance of the IFIs to U.S. interests and U.S. economy continues, of course, today. There are those who have suggested the U.S. withdraw from these institutions; this would be a step backward for our economic security. Without U.S. leadership at the IFIs, we would have less influence and we would weaken these institutions. We cannot afford that. Consider how the IMF and World Bank sprung into action during the two crises that have defined the global economy the past four years – COVID-19 and Russia’s criminal war on Ukraine.
Without the urgent work of the IFIs in responding to the pandemic and preparing for future ones, I am certain that the outcomes of the COVID-19 pandemic would have been even more terrible and the economic aftershocks worse.
The World Bank made over $275 billion in new commitments between mid-2020 to mid-2024, with more than half of those going to the poorest countries in the form of highly concessional loans or grants. As part of this effort, the Bank made available $10.1 billion specifically for the purpose of getting vaccines to those who needed them. The urgent work of the World Bank also drew attention to the need to establish a permanent body that could respond to the world’s health crises the way financial authorities respond to the world’s financial crises. With our partners in Italy, Indonesia, and elsewhere, we answered that call by seeding this fund – the Pandemic Fund. As of today, the Pandemic Fund has approved over $450 million in funding for more than 40 countries.
The IMF’s Poverty Reduction and Growth Trust (PRGT), which lends to the world’s poorest countries, has provided $30 billion in zero-interest loans to 50 countries over the past four years alone. This funding helped stabilize vulnerable countries as the global economy was grinding to a halt due to the pandemic, and as inflation and interest rates spiked following Russia’s invasion of Ukraine. The PRGT also helped make sure that even as other creditors withdrew from the developing world, and as private creditors pulled out too, the IMF was there to help. Today’s financing pressures for developing economies would have likely been much worse absent the extraordinary financing support that IFIs extended since the onset of the pandemic. From 2020 to 2022, this collective support accounted for nearly 60 percent of the total net debt inflows to developing countries.
Earlier this year, Congress authorized us to lend to the PRGT at very little cost to taxpayers, and that loan will help this critical work continue in the years ahead.
The IMF has also innovated in the last four years, creating the Resilience and Sustainability Trust (RST) to help countries deal with balance of payments shocks that can stem from longer-term challenges such as climate change and pandemic preparedness. We are encouraged that the IMF, World Bank, and World Health Organization recently announced principles of cooperation for supporting country RSF[1] programs for pandemic preparedness, and we look forward to them operationalizing these quickly. The IMF also created the temporary food shock window in the wake of Russia’s invasion of Ukraine and the subsequent spike in food insecurity around the globe.
These institutions play an essential role that world governments on their own could not fill in a timely way.
Recent Innovations Still Underway
Another essential innovation at these institutions in the last four years has come from the “MDB Evolution” agenda to make the world’s leading providers of development finance – i.e., the multilateral development banks (MDBs), bigger and better. In just two years, there has been substantial progress. The World Bank has declared a new mission – eliminating extreme poverty and boosting shared prosperity on a livable planet – that recognizes the global challenges we face together and the way the MDBs must be at the forefront of meeting these challenges. MDBs have been hard at work on reforms to their visions, incentives, operations, and financial capacity, all of which are essential to responding to global challenges with sufficient speed and scale, and the G20 has estimated that reforms already identified could enable over $350 billion more in additional lending over the next decade across the MDB system.
There is still much to be done, particularly in creating institutional incentives for realizing the Bank’s updated mission; improving pandemic prevention, preparedness, and response; addressing fragility and conflict; and boosting private capital mobilization, among other priorities. An additional important ongoing step in Evolution is deepening the work of MDBs as a system.
Another important change in the international financial architecture in the last few years comes in the form of a new way to handle debt restructuring. The Common Framework, launched by the G20 in November of 2020, is intended to be a method to bring together creditors across the range of official bilateral and private creditors to finalize debt restructurings for low-income countries. The process has been frustratingly slow, especially at the start. Extensive effort has continued to work on the technical details of debt restructurings to make the process more transparent and swift. From our perspective, it would be helpful to have even more explicit timelines and procedures – so countries in distress know how they will be treated – as well as debt service suspensions during negotiations to avoid having delays lead to growing burdens. All creditors need to do their part in making sure a restructuring can occur in the timeliest and fairest manner possible. The World Bank and IMF play important roles both in anchoring the process with their debt sustainability analyses as well as providing crucial financial support to countries going through restructuring.
The Work Ahead
As noted above, there are many risks to global growth going forward. As countries look to chart paths for their economies, it will be important for the World Bank and IMF to provide the critical advice countries need as to how they can navigate the near term, but also how they can take the steps they need to boost their long run potential. The IMF and World Bank will also need to provide deft policy surveillance and advice to address spillovers from China’s current economic policies.
An urgent issue we at the Treasury Department have been working with our partners to address is the financing challenges facing low- and middle-income countries. We see this work as being urgent: there are pressing needs for investment in these countries to support sustainable development, but recently, funds have been flowing out of – not towards – far too many countries.
Low-income countries’ average annual spending on debt service has jumped from $20 billion between 2010 and 2020, to $60 billion today. As some of these countries face significant principal repayments in the months ahead, they – and the global debt architecture – may be put under significant strain.
That’s why we think it’s critical for the international community to establish a new Pathway for Sustainable Growth, a process for managing liquidity pressures as they arise. To be clear: if a country needs to restructure its debt, it should. But for the countries that are struggling under temporary financing challenges but for whom debt is sustainable over time, we are working with partners and the international financial institutions to find a better path. If you are a country committed to sustainable development and if you are willing to engage with the IMF and MDBs to unlock significant financing alongside significant reform measures, there needs to be a financing package from bilateral, multilateral, and private sector sources to bridge your liquidity needs in a way that is supportive of your sustainable long-run development. Some creditors may provide net present value-neutral reprofilings, other partners may provide new liquid budget support. We can also use the many tools at the MDBs or at many bilateral development finance institutions to encourage the private sector to stay invested on sustainable terms. It will be important for countries to step up with their own financing by mobilizing domestic resources. The World Bank and IMF can also help with domestic resource mobilization in important ways, as can technical assistance from many countries including Treasury’s Office of Technical Assistance.
For a plan like this to work, it will require hard work and innovation at the International Financial Institutions, and it is encouraging that the institutions have been thinking through these topics lately and putting out papers and blogposts on the ideas. The Annual Meetings represents a real opportunity to make concrete progress. It will be important for countries to have a better understanding of the tools that exist to help them through liquidity challenges, essentially a decision tree that lets countries and creditors understand what is available to countries under different conditions.
The IFIs will need to design their programs in a way that avoids having temporary fiscal adjustments lead to permanent harm due to cuts to important investments. Countries and IFI country teams need to be clear about what investments need to be protected, and they need to be confident the international financial system will step up and provide the required funding. It will be important for the IMF to emphasize when financing assurances are needed from creditors to smooth through a temporary financing challenge even when debt is sustainable. Creditors need to do their part, but in today’s complex sovereign debt landscape, the IMF plays the critical role of guide, and sometimes referee and air traffic controller. The World Bank, other MDBs, and the IMF will also need to use their new financing headroom to aggressively but responsibly support countries.
The responsibility will also fall to the shareholders of these institutions to support them. Many countries – including the United States – need to finalize domestic passage of the 16th general review of quotas that puts the IMF’s resources on a more durable footing. The IMF and its shareholders must also come together to return the PRGT subsidy account to a self-sustaining model. Utilizing the earned income of the IMF above what is needed for precautionary balances presents a real opportunity to make sure that low-income countries have access to critical financing when they need it.
At the World Bank, countries need to follow through on commitments to boost the concessional lending capacity of the Bank. This fall, a crucial task will be securing a robust and impactful replenishment of IDA, the World Bank’s financing arm for low-income countries. The challenges of the past few years – particularly COVID and the spillovers from Russia’s invasion of Ukraine – have put tremendous pressure on IDA’s borrowers. IDA has risen to this occasion, successfully scaling up disbursements by over 70% over the past four years and providing nearly $20bn in net positive financing flows last year. But all of this has also put pressure on IDA, too. It will take both donors stepping up and financial creativity to optimize the balance sheet to make sure we can deliver on this important goal.
Conclusion
The United States benefits immensely from growth abroad. We have an array of tools we use, from USAID’s direct support and programs, to DFC’s investments, to the Millenium Challenge Corporation’s large grants, to State Department engagement, and to technical assistance from Treasury and other agencies that help propel that growth. We use multilateral settings like the G7 and G20 to work with other countries to navigate crises and support policies that drive growth over time. We also help propel world economic growth through our trade and investment relationships with other countries and by pursuing strong economic policy in the United States as well.
But, the institutions created 80 years ago at a meeting in the mountains of New Hampshire remain essential to the mission of seeing living standards rise around the world. These institutions cost the United States very little in budgetary terms, especially relative to spending on defense or other global spending. Yet, they deliver immense value to the United States and to the world. One reason they are still so relevant is the constant re-invention – or evolution – of these institutions. They have made important strides in the last four years, and now we need to continue to challenge them and ourselves to create a better international financial architecture going forward.
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[1] Resilience and Sustainability Facility.