John Lipsky—Acting Managing Director, International Monetary Fund
Annual Meeting of the Bretton Woods Committee
For nearly three decades, the Bretton Woods Committee has played an invaluable role in supporting the work of the IMF and of other international institutions. With the Bretton Woods institutions adapting to meet new global realities, your efforts to promote understanding of our mandate and our work remain essential for us to be effective. You also provide valued feedback and commentary on how we can better fulfill our unique global role.
Today, I’d like to focus on how we can build a stronger global economy. My principal point is straightforward: The prospective contribution of greater policy cooperation in enhancing systemic stability and in preventing crises—and in containing their costs when they occur—is more important today than ever.
Supporting this cooperation lies at the heart of the IMF’s mandate. In the wake of the crisis, we undertook important reforms to our surveillance and lending tools. But as the world continues to change, we must do so as well.
In particular, I will focus my remarks today on the steps we are taking to enhance the framework for our unique surveillance activities. For example, we are seeking to deepen our understanding of the complex and growing interlinkages across the world, with an emphasis on the drivers of capital flows. We also are looking to sharpen our awareness of the quality of growth within countries—including such considerations as income distribution and unemployment—and its relation to macroeconomic stability.
As part of our efforts to enhance systemic stability, we are examining how the global financial safety net can be made more effective. We’ve made progress since the crisis hit in force in 2008. Nonetheless, we are far from the point where countries can be confident that they will have secure access to international liquidity at times of systemic crises. At the same time, we have to remain alert to the need to create proper incentives in designing safety net tools, in order to insure that the results of our efforts aren’t paradoxical.
Before explaining the strategic changes currently underway at the IMF in greater detail, let me briefly outline the economic backdrop against which they are taking place.
A strengthening, yet fragile recovery
Overall, the global recovery is gaining strength. But it remains fragile and uneven, and beset by uncertainties. So there is no room for complacency in dealing with the challenges that still threaten the recovery. These challenges fall into two camps.
First, countries are still dealing with the aftermath of the crisis.
In the financial sector, substantial progress has been made already to re-build buffers and strengthen regulation. But the work is far from over, especially when it comes to supervision and cross-border resolution. Fiscal reform is another pressing issue. At the end of 2010, government debt was as much as 25-30 percentage points of GDP above the pre-crisis level for several advanced economies—and is projected to continue rising, in the absence of bold measures to rein it in. Credible solutions will be required for the serious fiscal challenges facing many advanced economies, notably in the European periphery, but also in the United States and Japan.
Turning to Europe, several peripheral euro area countries today remain in critical situations. And there is no easy solution. Without any doubt, the primary responsibility for restoring their economic health lies with the peripheral countries themselves. Difficult and demanding measures will be required in order to avoid an even more serious crisis and to restore economic health. At the same time, there are compelling reasons for their European neighbors and the global community—operating through the IMF—to support these countries’ reform efforts. The only viable option for Europe today is a solution that is comprehensive and consistent—and that is also cooperative and shared. Such a solution inevitably will include: (i) strengthening area-wide crisis management frameworks; (ii) accelerating financial sector repair; (iii) improving fiscal and macroeconomic coordination; and (iv) promoting high-quality growth.
For our part, the IMF is supporting our European members as they seek to put their economies back on a sustainable footing. Last week, we agreed on a joint IMF-EU financing package for Portugal worth €78 billion, aimed at reigniting growth and employment. This week, we completed the first and second reviews of Ireland’s program. And in Greece, a mission is currently in the field, working closely with the authorities to identify the policies needed to underpin the adjustment program going forward.
The second challenge to the global recovery reflects its unevenness.
In many advanced economies, we are experiencing a moderate recovery. Unemployment remains stubbornly high in most of these countries, raising the risk of higher structural unemployment. Only in a few advanced economies that have improved their competitiveness through structural reforms, such as Germany, is growth notably above-trend, thus reducing the margin of excess capacity.
In the emerging economies, by contrast, the recovery has been quite robust—and in some, overheating is an increasing concern. That is why we have welcomed recent steps in many of these countries to tighten macroeconomic conditions—though further action likely will be warranted. This strong recovery in the emerging economies has been associated with a run-up in commodity prices and a rise in headline inflation rates. Increasing food prices—that recently eclipsed the highs set in 2008—have particularly difficult implications for low-income countries.
The uneven global recovery also is affecting international policy cooperation. During the crisis, most countries faced similar economic challenges. This made it easy to agree on the policy solutions. Today, countries are at different stages of recovery—thus making cooperation more challenging. But as we learned from the crisis, global problems require global solutions. In our increasingly interconnected world, we need policies that are right for the national interest and right for the global interest.
The IMF—with its near-universal membership of 187 countries—has a vital role to play in promoting international cooperation. Let me explain in more detail how we are changing to achieve this.
A new surveillance for an interconnected world
Modernizing IMF surveillance remains critical to increasing our effectiveness. We have already done a lot since the crisis to strengthen our ability to identify potential vulnerabilities. Let me give just two examples. Since its inception in 2008, the Early Warning Exercise has become firmly established, and provides timely warnings to global policymakers. And last year, the Financial Sector Assessment Program (or FSAP) was made mandatory for countries with systemic financial sectors.
The ongoing Trilateral Surveillance Review—which should be completed this fall—will provide an important opportunity to take stock of recent initiatives and recommend further steps. In particular, it will consider how well the Fund is positioned to detect and warn about risks, and the effectiveness, candor, and evenhandedness of our surveillance. But we are already moving forward in a number of areas. I’ll focus on three in particular: spillovers, capital flows, and the quality of growth.
The first is the issue of spillovers. Over the last decades, we have witnessed a tremendous increase in the interlinkages among countries—of trade but especially of finance. These interlinkages have provided great opportunities for investment and growth. But rising interlinkages also make each country more exposed to spillovers from policy decisions and economic developments in other countries.
With this in mind, we are now focusing on how an improved understanding of interlinkages can support better policy collaboration. This year, we are undertaking in-depth analysis of the outward spillovers from the five largest economies in the world—China, the Euro Area, Japan, the United Kingdom, and the United States. The results of our experimental work will be presented in a series of Spillover Reports, to be discussed by our Board, alongside each country’s Article IV report, this July. By shedding light on the impact of one country—or region’s—polices on others, we hope to facilitate the process of finding policies that serve both the national and the global interest.
We also are supporting the G-20’s efforts to increase policy collaboration, with the goal of securing strong, sustainable and balanced global growth. The G-20’s Mutual Assessment Process—or MAP—already has made substantial progress in creating a forum for productive policy dialogue. During the current phase, the MAP is focusing on the internal and external imbalances that are most problematic for global growth and stability. With analytical support from the IMF, the G-20 is analyzing impediments to adjustment, and the measures that might address them.
As we all know, capital flows have grown to dominate international transactions for many countries. While capital flows confer many benefits, their size and volatility can exacerbate macroeconomic and financial stability risks. Understanding these risks is especially important, given that it is only reasonable to expect cross-border capital flows to increase in size for years to come, reflecting the emerging economies’ impressive growth potential. Recipient country authorities typically are concerned with coping with the volatility of net capital flows. Our analysis suggests that the first line of defense in dealing with surging capital inflows should be macroeconomic policies, though capital flow management measures could be useful in certain circumstances. More generally, countries are advised to adopt structural reforms—including the deepening of domestic financial markets—that increase their capacity to absorb capital inflows efficiently, and prudential measures that strengthen their financial system’s resilience.
In the period ahead, we will be working to gain a better understanding of the drivers behind capital flows—in supplier and recipient countries. We also are exploring how a voluntary and cooperative approach to global capital flows—perhaps through an agreed reference framework for individual country policies—could help make them less volatile, and hence less costly. By bringing together the views of both importers and exporters of capital, the Fund can play a constructive role in the discussion.
A third issue is the quality of growth, and its impact on macroeconomic sustainability. Recent developments in the Middle East and North Africa show that we must deepen our understanding of the broader factors that may affect macroeconomic stability. This applies to many advanced economies as well, where high unemployment remains a serious threat to the recovery. At the Fund, we are working to gain a better appreciation of the social factors that affect macroeconomic stability, drawing on outside experts in this field. These factors must play a bigger role in our analysis and in our policy advice.
A strengthened global financial safety net
Turning briefly to the developments regarding the global financial safety net, we’ve already taken significant steps to enhance the provision of liquidity in times of extreme volatility. The IMF’s financial resources have been increased notably, and we have created insurance-like instruments intended for crisis prevention, rather than crisis resolution. These include the Flexible Credit Line for members whose policies already are deemed to be appropriate, and the Precautionary Credit Line for members implementing policy adjustments. However, doubts remain about whether the global financial safety net adequately reflects potential risks, in view of rising trade and financial linkages
Ensuring that we have the right tools can help to prevent future crises, and to reduce their costs when they do occur. To gain a better appreciation of the need for global liquidity at times of stress, we are now looking more carefully at the causes of systemic crises—drawing in particular on our work on cross-border linkages across different types of economies, and on analysis of past systemic crises and policy responses.
We also continue discussing possible ways to provide short-term liquidity at times of systemic stress, including via collaboration with institutions such as major central banks, systemic risk boards, and regional financial arrangements. In the recent crisis, emergency short-term liquidity was provided through ad hoc arrangements deployed on a one-off basis by central banks. Clearly, there are lessons to be learned from this experience. Ongoing work on the role and composition of the SDR also holds the potential to improve mechanisms to provide global liquidity.
As the global recovery strengthens, it might be expected that policymakers will focus more on domestic priorities, and worry less about global issues. But in our increasingly interconnected world, the two cannot be separated. The recent crisis demonstrated that even the largest economies cannot effectively set their policies in a vacuum, and that effective international cooperation can improve economic prospects for all.
How best to sustain collaboration? For our part, the IMF can:
– Increase our understanding about global economic interlinkages;
– Demonstrate analytically the benefits of enhanced policy collaboration; and
– Facilitate the international dialogue needed to find global solutions.
And you, the Bretton Woods Committee, also play an important part in summoning the will of policymakers to act. By advocating for international cooperation, you remind leaders that by acting in the global interest, they are acting most directly in their national interest.
Seven lessons from 2020
Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President
Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?
Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.
As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.
So, what are the main lessons from 2020?
- Humans are enormously adaptive. This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.
- No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.
- Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.
- Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.
- There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.
- Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.
- Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
Data after Brexit: How does the end of the transition affect GDPR?
By John Flynn, Principal Security Consultant at Conosco
The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.
Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.
The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.
We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:
1 – Update your privacy notice
Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.
The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.
This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers. The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.
2 – Data privacy assessments
Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.
For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.
3 – Review local legislation
Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.
4 – Cyber Security health check
The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.
A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.
It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.
It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.
2020 reflections and 2021 outlook
By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man
Reflections on the most surreal year
The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.
The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.
The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.
Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.
Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.
Looking ahead to the future
We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.
The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.
The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.
Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”
We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.
No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.
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