(Archived Content)
TG-431
Organized by the NATO Parliamentary Assembly, the Atlantic Council of the United States, and the Institute for National Strategic Studies of the National Defense University
December 8, 2009
Introduction
Thank you. It is a pleasure to join you today to discuss America's global strategy for economic growth.
Over the past day, you have heard from leading experts on the critical regional challenges facing the United States. I would like to discuss an equally important global challenge--promoting economic growth. Growth is essential for sustaining global prosperity and security. Yet our growth strategy today must be different than in the past. Following the booms and busts of previous years, the international community is now focused on achieving more sustainable and balanced growth for the future in order to avoid past excesses, promote better long-term prospects and strengthen opportunities for development.
Today I'd like to address how the United States is working with countries around the world to help foster strong, balanced, and sustainable global growth.
Securing Economic Recovery
To begin, it is important to put the need for a new growth agenda in context by taking stock of recent history.
Over the past year-and-a-half, we witnessed the deepest economic downturn in decades. But in contrast to the Great Depression, when the downturn persisted for a decade, only a year after the tumultuous events of last autumn, financial markets have stabilized and a modest recovery is underway. However, we cannot be complacent--unemployment remains unacceptably high and financial stresses abound.
But the response to the crisis has been extraordinary. Seven decades ago, countries chose the path of bilateralism and isolationism, encapsulated in the protectionist beggar-thy-neighbor policies of the 1930s. In the current crisis, countries chose the path of multilateralism, avoided recourse to protectionism, and instead worked together to undertake enormous and cooperative macroeconomic stimulus and financial repair efforts.
In the United States, we did our part--through the strong efforts of the Federal Reserve; through the bold financial stabilization initiatives of the current and prior Administrations, including this Administration's Financial Stability Plan and the transparent stress tests under the Supervisory Capital Assistance Program; and through fiscal stimulus pursuant to the $787 billion American Recovery and Reinvestment Act.
Others did their part as well. Data from the International Monetary Fund show that in the fourth quarter of 2008 and first quarter of 2009, when global GDP fell at a 6.7 percent annual rate, the G-20 countries undertook massive discretionary fiscal stimulus equal to 2 percent of their GDP to support demand. Monetary policy became increasingly and highly accommodative, while countries recapitalized financial institutions, and provided liquidity support to unclog markets and guarantee inter-bank flows.
In a world of nation-states, it is up to the sovereign to act. But the immense challenges posed to all in this crisis required a concerted global response. Just as the cooperation of G-20 Finance Ministers, Central Bank Governors and Leaders, developed this unprecedented response, so will their cooperation remain essential to achieve the new global economic agenda.
While the United States bears considerable responsibility for our role in the crisis, this crisis was global in scope and revealed fundamental systemic weaknesses in the global financial system. The United States has been working with its partners to fix these weaknesses, and considerable progress is being made. Let me briefly note a few specific areas of recent effort--establishing a growth agenda, enacting financial regulation, and reforming the international financial architecture.
The Growth Agenda
On the growth agenda, our challenge now is to build a bridge to long-term economic growth based on sound economic fundamentals and a better distribution of global demand.
In the near-term, the United States and its partners have agreed that sustaining growth is our dominant policy imperative, and we are committed to continued policy support. While we need to be prepared to remove the extraordinary governmental support provided to overcome the crisis, as Secretary Geithner has noted, we cannot make the mistake of putting on the brakes too early or withdrawing support prematurely.
At the same time, we need to build a bridge to a healthier future global economy that is less prone to crisis. As U.S. consumers save more and as our government embarks on a path of fiscal consolidation, economies with large and sustained surpluses must shift growth towards domestic demand and reduce reliance on exports. Otherwise, global growth will simply be lower. It would neither be healthy nor realistic for the global economy to rely on a single engine of import demand going forward.
Building that bridge requires the cooperation of many nations, which is why G-20 Leaders agreed at the Pittsburgh Summit to adopt the Framework for Strong, Sustainable, and Balanced Growth. Since then, G-20 Ministers have set out a detailed process and timeframe for achieving the Framework's goals, and launched a new consultative mutual assessment process to evaluate whether individual country policies will collectively deliver our agreed objectives.
As part of the Framework, G-20 members with sustained, significant external deficits pledged to undertake policies to support private savings and fiscal consolidation while maintaining open markets. G-20 members with sustained, significant external surpluses pledged to strengthen domestic sources of growth. In this context, the United States will also continue to urge G20 countries to pursue market-oriented exchange rates that reflect underlying fundamentals. For large emerging market economies increasingly integrated into the global economy, such exchange rate policies are essential for strengthening management of monetary policy in line with domestic objectives, and allowing pricing signals to allocate resources between the domestic and external sectors. The G-20 and other forums, such as APEC, have underscored in recent statements that exchange rate policies are integral to balanced global growth, and the United States is addressing the need for market-oriented exchange rates at the most senior levels around the world.
Additionally, we must continue to maintain open trade and investment policies in the United States and around the world. Trade will be critical to creating jobs, and ensuring economic dynamism and vibrancy. At home, we will also work to strengthen the competitiveness of the American economy and foster growth by providing substantial incentives for basic science, research and development, job training and education, and new energy technologies.
The United States is serious about preserving the strong U.S. leadership role in the global economic system, and we will enact policies consistent with this commitment.
Financial Regulation
Second, let me turn to our efforts to create a stronger and more resilient financial system. Financial regulation continues to be essentially a national activity and the responsibility for sound regulation begins at home. But firms and markets are now global in scope, and benefits are derived by all from open financial markets and financial innovation that rapidly crosses markets. Additionally, different national standards open the possibility for regulatory arbitrage and gaps in oversight, which can undermine the stability of the system with negative consequences for the real economy. That is why we are pursuing a vigorous agenda of regulatory reform at home and abroad through the G-20.
Much has already been done to strengthen prudential oversight, improve risk management, increase transparency, and extend the perimeter of regulation. Further, countries are working together to tackle some of the most difficult challenges--improving the quantity and quality of bank capital and developing a non-risk based leverage ratio; overhauling the oversight regime for over-the-counter derivatives markets; making progress on strengthened resolution regimes, including cooperation at the international level; and ensuring that compensation practices are better aligned with long-term value and risk management.
The United States is pursuing a vigorous regulatory reform agenda at home. Congress and the Administration are working actively together to put in place a much stronger regulatory framework for our country's financial system. Our efforts and those around the world are closely aligned. Collectively, the G20 countries are seeking to build a stronger global financial system to prevent and mitigate financial instability wherever it emanates in the international system and to promote adoption of high standards by all.
International Financial Architecture
Third, the international financial architecture must be reformed to reflect the 21st century global economy. The international financial institutions must reflect the greater dispersion of global economic weight and the increasing role many dynamic emerging markets and developing countries are playing in the management of the global economic and financial system.
A strengthened and modernized IMF is central to the equation. The United States initially underscored its commitment to the international financial institutions at the outset of the crisis by calling for a substantial increase in resources to backstop the IMF. The increase in resources available to the IMF through the New Arrangements to Borrow helped restore global financial market confidence and stopped a capital drain facing emerging markets. Congress approved a $100 billion commitment to the New Arrangements to Borrow, allowing the United States to play a leadership role in expanding the IMF's supplemental resources, and in the end generating more than $500 billion in commitments. The IMF also created a Flexible Credit Line to provide support to strong performing countries facing contagion.
For the IMF to effectively carry out its surveillance mandate and act as a crisis responder, its governance structure needs to evolve to reflect the relative weights and changing dynamics of the world economy. The G-20 took a critical step in this direction by agreeing to a shift in quota share to dynamic emerging market and developing countries of at least five percent. Similarly, the G-20 has agreed to support a shift of at least three percent of the World Bank's voting power to developing and transitioning countries.
We have also strengthened the role of the Financial Stability Board (FSB) and expanded it to include all G-20 countries. Not only is the FSB playing a key role in loosely coordinating the efforts by international standard setters to strengthen regulation and supervision across the globe and enhance its consistency, the enlargement of the FSB and the group's common perspective means that prospects for regulatory gaps and arbitrage are substantially diminished.
Finally, at the Pittsburgh Summit, the Leaders designated the G-20 as the premier forum for international economic cooperation. This is a major change, given that for the past decades, Leaders have met among the G-8.
Conclusion
Through this illustration of our efforts over the past year, you are seeing America's agenda in action. As we look ahead to building a 21st century economy, the United States remains tightly focused on establishing a solid foundation for sustained and strong economic growth.
While the Administration's actions are grounded in achieving the best outcome for the United States, achieving our economic goals and objectives requires closely working with our global partners. In implementing our economic agenda you will see the United States continue to pursue a multilateral approach. It is not enough to say that the world has changed but maintain old approaches. Those words instead must be met with new actions that match the vision of our interconnected global economy. The multilateral approach taken by the United States and its partners during the crisis will also strengthen attainment of our other economic imperatives, including reducing global poverty, addressing climate change, and enhancing global security.
In conclusion, America's global strategy for economic growth is premised on the need to leverage our leading role in the global economy by preserving the strong international cooperation and convergence of the last year. As President Obama has stated, we do have a choice in the legacy the financial crisis leaves behind. Our objective is to ensure that legacy is strong and sustainable global economic growth. Growth will ensure we can address the multilateral challenges facing our nations, and help create a more prosperous and dynamic world.
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