Watch the full event
Speaker
Jay Shambaugh
Under Secretary for International Affairs, US Department of the Treasury
Moderator
Greg Ip
Chief Economics Commentator, the Wall Street Journal
Introduction
Josh Lipsky
Senior Director, GeoEconomics Center, Atlantic Council
Event transcript
Uncorrected transcript: Check against delivery
JOSH LIPSKY: Good morning. Welcome to the Atlantic Council. I am Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. On behalf of the Center and the entire Council, we are so pleased today to welcome US Treasury Undersecretary for International Affairs Jay Shambaugh for a speech and conversation on the future of the international financial institutions.
In just over one week, the world’s finance ministers and central bank governors will convene here in Washington for the annual meetings of the IMF and World Bank. We will host many of them right here at the Atlantic Council and at the IMF for a special series of events.
These leaders face a range of challenges confronting the global economy: faltering growth in China, the risk of wider conflict in the Middle East, the economic fallout from Putin’s war of aggression in Ukraine.
But they are also facing internal challenges. The Bretton Woods institutions turn eighty this year, and there are critical steps both the IMF and World Bank must take to ensure they are fit for purpose for the future.
Standing in this very spot two-and-a-half years ago, Treasury Secretary Janet Yellen, in what is now known as the friendshoring speech, reminded us that these institutions were critical engines of prosperity both here in the US and around the world. She called for imagination and vision in crafting their next chapter.
We took that call seriously here at the GeoEconomics Center. We launched our Bretton Woods 2.0 Project. We focused on delivering a blueprint for the next era of the IMF and World Bank. Our work on digital currencies, cross-border payments, China’s economy, sanctions, and economic statecraft all came together to make an important point: economic security and national security are deeply interconnected.
That was a lesson the founders of this system knew all too well in 1944. And while over time it may have faded from our memories, in this decade that lesson has come roaring back. So we built our program not only to write and research and convene, but also through our Bretton Woods Fellowship to bring new leaders and new ideas to the international financial system.
We weren’t the only ones who listened closely to the secretary on that day. The entire Biden administration, in particular our guest today, has made it a central focus to invest time and energy in the health of both the IMF and World Bank because they understand the importance of these institutions and how they can deliver prosperity not just around the world, but also right here in the United States.
That is why we are honored to hear from Undersecretary Shambaugh this morning ahead of the annual meetings. He is uniquely qualified to speak about the future of these institutions. He previously served as a member of the White House Council of Economic Advisers and chief economist at the CEA. His areas of research have focused on exchange rate policy, capital flows, and reserve holdings. It is not surprise, then, that his speeches on international economics—including last year’s ahead of the annual meetings in Marrakesh and his recent speech on China’s imbalances—have become important markers of US policy. No pressure for today, Mr. Undersecretary.
Following his remarks, he will join a conversation with the chief economics commentator of the Wall Street Journal, Greg Ip. But first, Mr. Undersecretary, the floor is yours.
JAY SHAMBAUGH: Well, thank you, Josh, for your very kind introduction, and to the Atlantic Council for having me here today.
So, as Josh mentioned, in ten days we’re going to have, basically, the entire international financial policymaking apparatus descend on Washington, DC for the World Bank-IMF annual meetings. And I think gatherings like these are an opportunity—a good reminder of the various other times these types of policymakers have come together for a big cause. And while international economic policy can be a contentious space at times, allow me to start with something I think we can all agree on, which is it’s important to remember your anniversary.
And the anniversary I’d like us to remember today is of a particular gathering of previous ministers and financial policymakers. That’s the anniversary of Bretton Woods. Eighty years ago, a group of 730 delegates representing forty-four countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to hash out the future of the global economy. And this was remarkably bold. World War II still had another year to go. The Nazis were still in Paris. And 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 the international system, they risked losing the peace.
So today I’d like to reflect on the importance of the Bretton Woods institutions—the IMF and the World Bank—and how important they are to US economic security: how they have lifted up the global economy and supported American strength and prosperity since their founding, and how they stepped up through crises of the past four years, and how we see their role in driving growth and prosperity in the years to come.
So when US 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 antipoverty program ever. As the world economy grew more than 250 percent over the last four decades, global extreme poverty rates fell from over 40 percent of the population to under 10 percent.
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 US economy. The US economy is, obviously, the largest in the world. It is broad and diverse, and can provide many of its own needs—energy and food—domestically. But even the US 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 US growth.
US export growth, for example, has tracked growth in foreign GDP quite closely for many decades. And this macroeconomic pattern really reflects an existential imperative for US businesses with significant exposure 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. And workers at these firms benefit from this exposure; jobs in export industries have been shown to pay a wage premium as high as 20 percent.
And it’s 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’s strong empirical evidence that business investment follows an accelerator model, which is increases in investment depend on increases in the rate of economic growth. To the extent that US 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.
So the US is roughly 16 percent of the global economy in PPP terms, more in—at market exchange rates, and contributed about 0.4 percentage points to real GDP growth in 2023. Strength of the US economy was an upside surprise last year, and it helped drive global growth forward. But even in that circumstance, we comprised of less than one-seventh of total growth, and I think about a quarter of growth at market exchange rates.
So, in addition, over the next half-century the UN estimates that virtually all population growth will occur in countries that are currently low- or middle-income countries, and so it’s essential that the global economy generate jobs and incomes where people are living.
Now, we’ve 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 in GDP since the Great Depression. It left many economies around the world smaller than they would have been on their pre-crisis—pre-crisis growth trends, and 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.
And then, obviously, global financial markets are linked as well. A shock in a 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.
So, while the global economy has shown resilience over the last two years, it also faces numerous challenges. There are geopolitical risks, changing demographics, and slow productivity growth in many countries. The United States has actually seen productivity growth rebound, even slightly above its pre-COVID rates, but that is an atypical experience across richer countries.
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, though, emphasized growth over the medium term. Secretary Yellen has referred to this strand of policymaking as modern supply-side economics, focusing on 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 a high savings rate can cause spillovers unless there are domestic uses for much of that savings. Now, recently China has been directing large sums towards investment in manufacturing, despite already being over 30 percent of global manufacturing. And there appears to be a lack of domestic demand driving growth, potentially leading to a reliance on exports for growth.
A very large economy growing above the global growth rate based on exports is both unlikely to succeed 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 that China may be closing what has been a typical development path to many other countries eyeing low-cost manufacturing as essentially the next stage of their development. And by channeling the savings to particular sectors, this increases the likelihood of overcapacity and spillovers to other countries.
It’s critical that we use all the tools we have to combat forces that might be pushing the 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.
So the IMF 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’s 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 if it—in its absence. And if it did not exist today, we would wind up creating something very similar to it right now.
It’s worth recognizing how an institution initially charged with maintaining a system of global fixed exchange rates has evolved to respond to generation-defining events. And beyond these global shocks, the Fund has also stepped in to help individual member countries at pivotal times—as they emerge from conflict, or look to respond to economic downturns and instability, or other shocks.
And similarly, the World Bank, initially established to support postwar reconstruction, has evolved to become an essential partner for countries. Its International Bank for Reconstruction and Development, or IBRD, is a key provider of financing and policy advice and technical assistance to middle-income countries across the globe. And IDA is the largest source of critical concessional financing and grants for low-income countries, including those affected by fragility and conflict.
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 outcomes for 280 million people, stronger food and nutrition security for 156 million, and more inclusive access to electricity for a hundred million people, just to name a few of the effects.
And their advice is likely just as important. A finance minister once said to me, “I need the financing, but it’s—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 IMF, complementing and deepening the impacts of the Bretton Woods system.
The importance of the IFIs to US interests and US economy continues, of course, today. There are those who have suggested the US withdraw from these institutions. This would be a step backward for our economic security. Without US 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 COVID-19 pandemic would have been even more terrible and the economic aftershocks even worse.
The World Bank made over $275 billion in new commitments between mid-2020 and mid-2024, with more than half of those going to the poorest countries in the form of highly concessional loans or grants. And as part of this effort, the Bank made available ten billion dollars 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 global financial crises. With our partners in Italy, in 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 to more than forty countries.
The IMF’s Poverty Reduction and Growth Trust, or PRGT, which lends to the world’s poorest, has provided thirty billion dollars in zero-interest-rate loans to fifty 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 of the IFIs since the pandemic. From 2020 to 2022, this collective support accounted for nearly 60 percent of the net debt inflows to developing economies. So, 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 to help countries deal with balance-of-payments shocks that can stem from longer-term challenges such as climate change and pandemic preparedness. We’re encouraged that the IMF, the World Bank, and the WHO recently announced principles of cooperation for supporting country RSF programs for pandemic preparedness, and we look forward to them operationalizing these quickly. The IMF also created a 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 simply play an essential role that world governments on their own cannot fill in a timely way.
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, the 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. MDBs have been hard at work on reforms to their visions, and to their incentives and 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.
Another important change in the international financial architecture in the last few years comes in the new—in the form of a new way of handling debt restructuring. The Common Framework, launched by the G20 in November of 2020, is intended to be a method to bring together creditors across a range of official bilateral and other creditors to finalize debt restructuring for low-income countries. The process has been frustratingly slow, especially at the start, but extensive efforts 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’ll be treated, as well as debt-service suspension during negotiations to avoid having delays lead to growing burdens. The World Bank and IMF play an important role in anchoring the process with their debt sustainability analysis, as well as with providing crucial financial support to countries going through a restructuring.
So, 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 the IMF to provide the critical advice to countries about 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 the World Bank will also need to provide deft policy surveillance and advice to address spillovers from China’s current economic policies.
An urgent issue that we at the Treasury Department have been working with our partners to address is the financing challenges faced by 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 and not towards far too many countries.
Low-income countries’ average annual spending on debt service has jumped from about twenty billion dollars between 2010 and 2020 to around sixty billion dollars today. As some of these countries face significant principal repayments in the month ahead, they and the global debt architecture may be put under significant strain.
And that’s why we think it’s critical for the international community to establish a new Pathway to 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’re working with partners and the international financial institutions to find a better path. If you are a country committed to sustainable development, and you’re willing to engage with the IMF and the MDBs to unlock significant financing alongside significant reform, there needs to be a financing package from bilateral and multilateral and private 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 liquidity support. We can also use the many tools of the MDBs or at the bilateral development financial institutions to encourage the private sector to stay invested on sustainable terms. It’ll be important for countries to step up with their own financing by mobilizing domestic resources, as well. And this is somewhere where the World Bank and the IMF can also help in important ways with technical assistance, as well as technical assistance coming 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 IFIs, and it’s encouraging that these institutions have been thinking through these topics lately and putting out papers and blogposts on the ideas. And 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.
And the IFIs will need to design their programs in ways that avoid having temporary fiscal adjustments lead to permanent harm due to cuts in important investments. Countries and IFI country teams need to be clear about what investments need to be protected, and they need to be confident that 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 a 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 shareholders of these institutions to support them. Many countries, including the United States, still need to finalize domestic passage of the sixteenth General Review of Quotas that puts the IMF 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. And 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. And 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 have put tremendous pressure on IDA’s borrowers. And IDA has risen to this occasion, successfully scaling up disbursements by over 70 percent over the past four years and providing nearly 20 billion in net positive financing flows the last—the last year—couple years. 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.
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. And 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. And we also help propel world economic growth through our trade and investment relationships with other countries and by pursuing strong economic policies in the United States as well.
But the institutions created eighty 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. And one reason they are still so relevant is the constant reinvention 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.
Thank you.
GREG IP: Jay, thanks very much for coming and speaking, for those remarks, which were incredibly helpful and thorough. And thank you, everybody, for coming here.
Before I start, we will be—there will be an opportunity to ask questions later on. If you go to AskAC.org, there will be a place there where you can file questions and I can see them here, and we’ll see if we can find some time to get to them.
But, Jay, let me just start with a really basic question. As you say, it’s the eightieth anniversary of the IMF and the World Bank. Not everybody thinks they’re a great idea. Project 2025, you know, which represents some of the views of people associated with former President Donald Trump, has called for the United States to withdraw from the IMF. They say this is an organization that repeatedly lends to countries whose policies are inimical to ours, that is always giving us advice like raise taxes. So what’s the case for staying in these organizations? Why is it so important that we be part of these organizations?
JAY SHAMBAUGH: Sure. Greg, thanks for that question, and thanks very much for having this conversation.
So, first, I will just say as an official bound by the Hatch Act I will not comment on anything remotely near to electoral politics.
What I will say is that to the extent that over the last few decades you do occasionally see people—whether it’s columnists or think tanks or politicians—say that we don’t need these organizations anymore and we’re better off without them, I would just say I think the evidence suggests that’s entirely inaccurate. And I think that if you look, as I noted in the speech, at crisis after crisis, there is simply no way the United States can suddenly on the fly marshal a bunch of other countries to help us respond to these crises. You need these institutions to do what they’re doing, is one thing.
The other thing is across a whole range of countries around the world where we would like to see those countries doing well, we’d like to see them having robust and good growth that’s good for them, obviously—it’s good for us in terms of our exports, it’s good for us in terms of reducing immigration flows in some cases, where you don’t want people fleeing a country out of panic because of a crisis or things like that—I think it’s clear that having organizations that can go and work in countries to support them with money on the one hand, but crucially with advice and conditions on the other to drive them towards better growth. You look at the IMF; literally, no one else can do what they do in terms of on the one hand providing money, but on the other hand kind of policy advice and direction, to bring countries in the direction they are.
And you know, without IDA I just don’t think we could imagine how much worse off the poorest countries would be. And without the World Bank lending to key countries, we would really struggle. So I just think it’s not just that they are essential to the world, but they give us an incredible tool in American foreign policy and economic policy that we have key leadership roles in these institutions. We’re the largest shareholder. We can go in and help make sure they are driving the global economy in a way that we think makes sense. So from my perspective, they really are the essential institutions that we have to work with.
GREG IP: There have, of course, been time through history with the US and the Treasury and the IMF have disagreed, right? What are those conflicts like? And how do they resolve? And, like, do they come out our way all the time?
JAY SHAMBAUGH: So, you know, I don’t think any multilateral setting comes out your way all the time. I’ll just stipulate that. And I do want to be clear, and I tried to flag, you know, I’m not saying we agree with everything the IMF or the World Bank has ever done. And I think there are times we are relatively pointed in our comments around that. And I think a year ago I gave a speech leading into the annual meetings where I was trying to push the IMF on a number of things. And Assistant Secretary Brent Neiman just gave a speech a couple weeks ago that, similarly, was encouraging the IMF in particular directions. And Secretary Yellen laid out the call for MDB Evolution because she felt like we needed to see the MDBs change, and we needed to see them do something different.
So I don’t want to say that, you know, these are perfect places that always do what we want on their own. But on the other hand, I think when we do try to challenge them—and in particular, when we try to challenge them along with ourselves—we are able to help drive change. And I think the MDB Evolution process is a great example. We marshaled a set of allies who had similar views and brought them together, and pushed at the board, and pushed with management. We’re lucky Ajay Banga’s a terrific president of the World Bank and has taken up this charge and has really been trying to make change there. And we’ve seen the regional MDBs make really important steps too. So I think when we try and we when we seriously engage these institutions, we can make a real difference.
GREG IP: So, as you say in your remarks, I mean, the world has changed a lot in the last eighty years. And the role of the IMF has changed with it. You know, it originally was conceived as to help in an era of fixed exchange rates, limited international capital flows. And it was there to essentially police balance of payments, and so on. We get into the 1970s, and 1980s, and the 1990s, era of flexible exchange rates, growing international capital flows. In the 1980s and the 1990s a lot of its job was helping a lot of countries, developing countries, work through debt crises. And even as recently as 2009, with respect to Greece, it once again had that role. But is that still the—has that changed? Are the debt crises of old like the debt crises of today? And do the IFIs, and the fund in particular, have to adjust their approach to recognize that fact?
JAY SHAMBAUGH: I think they do. I think—and I think they are, to some extent. So one thing I would say is one of the biggest differences, the creditors are different. So you used to have a group of creditors, and they created a club. They called it the Paris Club, right? And so it actually was kind of easy. The IMF could call the Paris Club and say, hey, we need to work this out. And the creditor landscape is just more complicated now. So you have China as a major lender, but not just China. You know, whether it’s India, Saudi Arabia, a number of other countries. And so now the landscape is more complicated.
It’s also private credit plays a huge role. So whether it’s euro bonds or direct loans from banks. And so I think there was a realization that we needed a better way to do debt workouts. And so that’s what the common framework was intended to be. It, as I noted, has been frustratingly slow. I think there has been a lot of work to try to improve it. And I think sequentially the countries that have entered more recently have been moving through faster, and that’s important. It’s important to keep improving it.
But I think—what we’ve argued, as I noted in the speech, is that there needs to be something beyond that. We can’t look at financing challenges or issues with debt strictly from a restructuring debt crisis perspective. We have to think about the fact that for a wide swath of countries, actually, net flows are negative. So poor countries are sending more money out than is coming in. And any economist will tell you, that’s backwards. That doesn’t make sense to us. And so we really need to try to take steps that will shift that. And what we’re seeing is lots of countries who borrowed money five, eight years ago, assuming they could refinance as loans come due, suddenly finding—whether it’s bilateral creditors, sometimes China, or the private sector through bonds—not interested in re-extending credit, necessarily. And that’s a problem.
And I think this is what we’ve called for changes on. President Biden, alongside President Ruto talked about the Nairobi-Washington vision, trying to call attention to this back in May. I did a speech back in April trying to talk about it. And the IMF and the World Bank are recognizing this. And I actually think this annual meeting is a real opportunity for them to put forward how they’re thinking about this. They’ve got something they refer to as a three-pillar approach to try to change how we deal with this.
GREG IP: So I want to drill down a little bit on common framework here. And certainly, the journalistic narrative has been that there’s been a real just division of views between China and the rest of the G20 on how to approach this, partly because of the unusual nature of China’s financing system. You know, there are bilateral flows to these countries. They’re not simply, like, you know, through concessional lending facilities. Some of them are through policy banks. Some of them are through commercial banks, right? And at times, they’ve taken the view, for example, that if they were to take haircuts, the World Bank should as well.
Talk to me a little bit about how the unusual nature of China’s creditor position has complicated that? And, like, what progress have you made talking to your Chinese counterparts to try and resolve that? Because I think—correct me if I’m wrong—that is one of the reasons why common framework has been slower than a lot of folks hoped to make progress.
JAY SHAMBAUGH: I think it’s fair to say that China figuring out how it wanted to approach debt restructuring was something that took some time to work through. I think when we try to be fair, especially when I talk to the terrific longtime civil servants at the Treasury Department, they’ll talk about how when we were first going through some debt restructuring, because it took us a little time to figure out procedurally, how do you do it, and things like that. But we’ve kind of gone through that. And, frankly, we’ve largely got out of the business of extending loans to very poor countries. We do grants now. You know, so I think we’ve done—you know, we’ve loaned very little money to sub-Saharan Africa in the last five years, but I think we’ve done through grants almost seventy billion dollars to those countries. So we can provide substantial flows. And we think it would be better if more countries were doing it in that way.
On the other hand, with regards to China, China’s initial view was, well, if we’re taking haircuts, everyone else should too. And, honestly, I think this is somewhere where dialog really did help. They said to us, well, hey, look, back in the 1980s and 1990s you did things where the MDBs took some haircuts. Why can’t we do that? And we said, well, just to be clear, when that happened, we took 100 percent haircuts. Like, we wrote everything off. Do you guys want to do that first? No. No, that’s not what we want to do. And so—but I think, honestly, it took some work of working through, look, this is why it’s different.
And then talking through, look, the MDBs aren’t just collecting money back from these countries. The net flows are always positive. They are providing new grants and new money to keep these countries alive. And they have a different business model, where they’re effectively taking the haircut ex ante, right? They’re lending at a loss to begin with. And I think working through that with the Chinese helped us get to a place where they could see what type of terms they could cut deals on. A lot was technical stuff around what does it mean to have comparable treatment across creditors when you’ve made different types of loans. And I think this is somewhere where really technical, detailed, hard staff work of working through the details actually did matter. And now what we’re hoping is that we can continue to improve on that.
GREG IP: All right. Well, let’s stick with the China question for a while, because I know this is something you’ve been giving a lot of time and thought and travel to. So you went to China last month. And you repeated some of the concerns that Secretary Yellen made, which is effectively that their industrial policies and excess production are having severe and negative spillovers to the rest of the world. How serious is the problem? Does it impair the Biden administration’s own efforts to, like, revive American manufacturing in certain sectors?
JAY SHAMBAUGH: So I think the problem’s serious. And I think there is a real risk of spillovers, not just to us but really across the world. And I think that’s one reason you’ve seen the concerns and policy responses coming not just from us, but from a whole range of countries—whether it’s Europe talking about countervailing duties on electric vehicles. You’ve seen India talk about solar panels. Brazil, I think Turkey, a number of other countries on steel. Lots of countries are taking action because they are worried about what China’s policies are doing.
And so, you know, our concern is, in a nutshell, this. That they have this huge amount of savings. There was a stretch of time they ran massive current account surpluses when—but they were a smaller country when they did that. There was a lot of pressure on them that that wasn’t OK. They actually did quit running the huge current account surpluses for a while. They channeled all the money into the property sector and infrastructure. Both of those have effectively played out. And now what we’re seeing is massive channeling of money towards manufacturing. They’re already 30 percent of global manufacturing. You can’t grow at a massive rate when you start from 30 percent of the world without displacing not just us, but lots of countries. And so I think that’s the conversation we’ve been trying to have.
And one of the things, going back to when I was there in February, especially when Secretary Yellen was there in April, she really pushed very hard this notion that you have agency. That it is your policy choices. If we take action, it’s going to be defensive. And you need to recognize that and not view it as anti-China if a whole bunch of countries are doing this. We’re not ganging up on you. We’re responding to something you’re doing.
GREG IP: You saw the stimulus measures that the Chinese authorities have mentioned, primarily in the monetary field but also some hints that something in the fiscal field is coming along. What’s your impression of it so far? And will this go some ways to resolving the concerns that you have?
JAY SHAMBAUGH: So, thus far what I would say is I’ve been encouraged by some of the statements about intent. So going back, as long ago as July, that the State Council—you know, the Politburo came out with a statement saying we need more domestic demand. This has been our core point. You need more domestic demand. They’ve then followed up that with a number of statements.
And then finally in the last three weeks, I think after September 23rd, they’ve started a whole raft of announcements. Of saying we’re going to do things to try to drive growth. As you noted, it’s been more on the monetary side and not quite as much on the fiscal. And I think our view is they probably need more direct actions to lift domestic demand with fiscal policy, both in a temporary sense but also, frankly, in a more structural sense of trying to shift more money to households and consumption, and not exclusively rely on exports and investment.
GREG IP: Jay, are you familiar with the work of Michael Pettis, a finance professor at Peking University?
JAY SHAMBAUGH: Yeah.
GREG IP: So he’s associated with Carnegie. And he recently came out with a report. And I was. like, you know, privileged to, like, hear him present it a week ago, actually, not far from here. And this is what he writes. He said—his basic view is that global surpluses and deficits—current account surpluses and deficits—have to sum to zero. And so those two things interact. And so you cannot talk about our surplus or deficit in isolation from those surplus countries, like China. And he writes: In the current global trading system, the purpose of exports is not to maximize the value of imports, but instead to externalize the consequences of suppressed domestic demand. Are you familiar with this theory? And what do you think about it?
JAY SHAMBAUGH: So I’m familiar with Michael’s work over the last decade. That most recent sentence is something I did read, but I don’t know if I’ve thought as much about that in particular. What I would say is—I don’t know if the word purpose—where it’s the purpose of exports. The impact of exports, maybe. And I think that—I think his point, that I have always agreed with and it’s something that a number of economists—I’m an international macro economist, so I kind of come from the same direction as Michael. Which is to say that, at the end of the day, we often talk about trade, but it’s the fundamental macro imbalances that are driving things. And that really in China for a very long time, there’s just been an incredibly high savings rate and low levels of household consumption.
And that when China was a small, open economy and growing 30 years ago, maybe that has spillovers to the world but they’re smaller. China’s not small anymore. It’s the second-largest economy in the world. It’s a really important economy to the globe. And when it has policy shifts, they affect everybody else. In particular, if it doesn’t have enough domestic demand, that affects everybody else. And I think that’s where I find myself very much in line with the types of things Michael’s talked about, which is that it is important to see major economies drive enough of demand internally, or they’re relying on somebody else for that demand.
GREG IP: Let’s talk a little bit about how the IMF sees this. So in a recent blog post, IMF research staff, led by their research chief economist, wrote that the contribution of the Chinese saving shock to the US current account deficit is small, and so is the effect of the US dis-saving shock to China’s surplus. External surpluses and deficits in both the US and China are mostly homegrown. Agree, disagree?
JAY SHAMBAUGH: So I think the fundamental point, that your own macro imbalances drive your external imbalances, is true. I think where we have tried to make an emphasis is what we’ve been concerned with. And this is—Secretary Yellen really tried to drive this home. You can have concerns about the macro imbalance, but what we’ve seen in China is directing that excess savings towards particular sectors. And when that happens, you get even bigger spillovers.
And so if you say you’re going to kind of flood the world with products in a narrow set of sectors, manufacturing writ large but especially some parts, you know, if your firms are being supported in ways that they can lose money for five years on end, my firms can’t, right? At which point my firms all go out of business. And so you get these huge spillovers to other countries. And so I think that’s where, yes, our own domestic policies have a big impact on current account imbalances. But what those current account imbalances mean and how they get channeled can have a lot to do with domestic policies. And I think China’s subsidies, and especially their nonmarket policies and practices, have really had big impacts on the US and other countries.
GREG IP: I’m going to push you on part of this discussion, Jay, though. And that is the IMF, specifically. The IMF was founded basically to police the balance of payments of different countries. Now, as we just talked a minute ago, it’s a different world of, like, free capital flows and flexible exchange rates, so the mission changes. But nonetheless, there is a view that that ought still to be something that they dwell a lot. And there are those who feel that they’ve kind of lost sight of that.
You know, Brad Setser—I’m sure you know Brad. He’s at Council on Foreign Relations. He’s made the following critique: When it looks at China, it basically says—his view is that the—you know the old joke, IMF stands for it’s mostly fiscal, right? And so they dwell inordinately on fiscal balance and not sufficiently on external imbalance. And so they look at China, and their advice is ease monetary policy, tighten fiscal policy, even though the external consequence of such a common policy combination is clear. I will actually aggravate the external surpluses that you have just been talking about are causing these spillover effects. I want you to address very specifically, is the IMF getting it wrong? Has the IMF lost sight a little bit of its core mission?
JAY SHAMBAUGH: So I don’t know if it’s lost sight of its core mission, in the sense that in some countries in crisis they’re going in, and in some cases it is mostly fiscal for those countries. I think in its surveillance role, especially of major economies, I think keeping a very clear focus on external imbalances and what is driving those external imbalances is a key role of the IMF. And I would like to see even more attention there. I would say in the IMF’s last article four—which is where they evaluate a country’s economy—last article four of China they did put a big emphasis on China’s industrial policy and nonmarket policies and practices. And said, these are having big spillovers around the world.
I think that was important. I think that’s important for that to come from the IMF. We can say it, but it came from the IMF. Where I would like to see them pay more attention is to the aggregate external imbalance. I think in part because during COVID China’s imbalance actually did get much lower, I think it made them say, well, look, the current account surplus is less than 3 percent. All is well. I would say all is not well. I think we’re seeing risks of them relying on export-led growth in a way that, for a very large country, can have big spillovers. And I think that does require more attention.
GREG IP: And, in general, would you like to see external sustainability become a more important part of the IMF’s overall monitoring framework?
JAY SHAMBAUGH: I think it needs to be an important part. I think the fund does have an annual external balances surveillance report. And I think trying to make sure that that is—really focuses on what the big countries are doing to the rest of the world would be important.
GREG IP: Sticking with the IMF mission for a moment, I’m going to quote from a blog post that Martin Mühleisen, who is a nonresident senior fellow here at the Atlantic Council and was formerly with the IMF. And he wrote the following, “The IMF is neither a climate nor a development institution, nor is it a fund for geopolitically convenient bailouts.” And the context of this was that—the implication was that it’s become a little bit too much of all those things. What’s your reaction to that?
JAY SHAMBAUGH: So I think a year ago when I did a speech that was all about the IMF, I certainly had some lines in there that the IMF needs to stick to its core mission. I don’t think that means it has nothing to do with climate. I think I’m a big—I believe very strongly that climate has serious macro and financial impacts, and so it makes sense that the IMF is thinking about it. In particular, countries trying to adjust to climate has big macro impacts for them. And it becomes macro critical. And therefore, the IMF needs to deal with that in that way. It’s why they created the Resilience and Sustainability Trust.
I think sometimes when you hear people say things like that, what they’re worried about is that the IMF is going to try to staff itself up with a mass number of climate scientists and program people. And there, I agree. That’s not what you need the IMF to do. The IMF needs to be focused on the macro side of this. And I actually think in the last year or so, they’ve done some important work of partnering with the World Bank to kind of figure out, how do we divide this up? That the World Bank should be doing the programmatic side and the climate evaluation side. The IMF needs to be thinking about the balance of payments implications and the financing implications. And that they can work together. And, you know, they’re across the street, but the distance sometimes seems large. Lately, they’ve tried to narrow that gap.
GREG IP: There’s a question here. This person asks—actually, he said—he or she says: Is there room for coordination with other countries that are also concerned about a surge in Chinese exports? Now, you’ve already talked that there’s almost been this, like, ad hoc response of various countries complaining and introducing measures to deal with these sorts of things. Is there a case to be doing that in a more coordinated way?
JAY SHAMBAUGH: So I guess what I’d say is it hasn’t been entirely ad hoc. You know, we all talk. The G7 gets together. The G20 gets together. I meet with lots of people from lots of countries. And, not surprisingly, how are China’s policy spilling over towards you is a pretty major topic of conversation. And so there are challenges sometimes, because every country has different tools and trade tools and different laws of how to apply them.
And so we might not do exactly the same thing in exactly the same way, but as we’re talking about what we need—and I think, frankly, what is crucial is that we’re talking to China in a similar way, to explain to them, like, this is what we’re talking about. This is the concern. When they hear it only—they hear us. And, you know, one of the great things about having Janet Yellen as my boss is, as a very highly respected global economist, when she goes to talk to other countries, they take her seriously. And that’s helpful. And she can go and meet with, you know, the premier of China, and go talk to him directly on these issues, as she has. But it is helpful if they are also hearing from other countries. And so that’s what we’re trying to do.
GREG IP: And certainly, one of the policy responses you’ve seen in the United States, and to some extent other countries, and even prior to this year’s concerns, is taking measures to try and, like, you know, impose tariffs, provide domestic subsidies to industries that we consider important—whether it’s, for example, the renewable energy space. But this has been met by the IMF and some others with concerns that it’s leading—that it’s breaking down the global—the world trading system. That the word they talk about is “geoeconomic fragmentation,” a tendency of countries to migrate to their geopolitical allied blocs. And this is damaging to the welfare of the world as a whole, especially the poorest countries. What are your thoughts? Is geoeconomic fragmentation, as they describe it, a problem?
JAY SHAMBAUGH: So I think when they describe it as a theoretical risk, I have no problem with that because I think, sure, lots of things are theoretical risks. And as economic policymakers, we should be worried about all the ones that could be big. I don’t think there’s a great amount of evidence that this is driving things a lot right now. I think when you look around—and I especially don’t think there’s a lot of evidence it’s bad for the poorest countries. If anything, I think what you see is attempts by the United States to diversify its trading relationships. As noted earlier, Secretary Yellen has talked about friendshoring. And we like say, we have lots of friends. Like, this doesn’t mean shoring to a handful of countries. It’s to a lot of countries.
And what we’re really talking about is diversification. So I don’t think it’s been bad for, say, Vietnam, or India, or Mexico to see some production rotate out of China. I also think that’s a part of natural economics. China’s getting richer. It’s not the last stop on the production chain anymore. The same thing happened with Japan, where instead of exporting directly to us they were doing a lot of the work and then exporting to the newly industrializing countries in Asia to do kind of the last turn of the screw. So you’re going to see the trading relationship shift in some ways. And I don’t think we should overinterpret that.
I think both the United States and China—we’ve had it in statements we put out together, we talk about it a lot—have been very clear we are not interested in decoupling our economies. And so I think that—if someone said, boy, I think decoupling would be bad for the world economy, I am very happy to agree with that statement. It would be bad for the world economy. I think, as the secretary has said, it would also be entirely impractical. And so we’re not trying to do that.
What we’re trying to say is that we think, especially in critical industries, we’re not comfortable importing 100 percent of what we need from one country, especially, frankly, when sometimes it’s, like, one province and one port in one country. I think we’ve learned, both from geopolitical shocks and from supply chain issues during COVID, that that’s not a very well-structured supply chain. And you’d like to see more diversification. I don’t think that’s fragmentation. And I don’t think it’s bad for the rest of the world.
GREG IP: A question here: What are US priorities for the sixteenth Quota Review? And just to step back a little bit, the issue of quota—which is essentially IMF’s word for capital, right?
JAY SHAMBAUGH: Yeah.
GREG IP: So capital subscription. I think there’s a consensus they need more capital. But I think there’s been an inability to come to a consensus on how that capital is provided and allocated. Bring us up to date on where that stands.
JAY SHAMBAUGH: So we actually got to an agreement on this to do what, in technical terms, is an equiproportional increase in capital, so everyone keeps the same share they have but we’re going to go up by 50 percent, all of us. And so we’ll all have the same shares. And I think that was a hard-fought battle to get to, but I think everyone realized, as you said, it’s important to put the IMF on a more durable financial footing. It’s not that it increases its lending that much. It’s just the IMF has been relying on tools like borrowing arrangements from other countries, or things like that that we thought it would be useful to get away from and get back to pure capital. And so that has been agreed.
And now what’s really crucial, frankly, is that the US Congress needs to pass domestic law that says we’re bringing this into force. And so a lot of other countries still need to do it also, but it’s a crucial thing because the deal that was cut, frankly, is a very good deal for us. It preserves our role at the IMF, which is the leading shareholder and a critical role. And we really should pass that as soon as we can.
GREG IP: Question from Michael Stopford, UM6P University, Morocco.
Let’s look at the Global South. Can you respond to resentment on the part of Global South at their underrepresentation in the IFI decision making processes?
JAY SHAMBAUGH: So I think the IFI landscape is a broad one. And so I think it’s hard to sum it up into one situation, because there are some IFIs that have leaders from one country, others that have it from other countries. I think when people are talking about, in particular, the Bretton Woods institutions we’ve been talking about today, I think we’ve tried to take a lot of steps to make sure that there is representation. One of the things, in fact, that the US championed a year ago at the annual meetings, and we’ve been taking steps to finalize, is to have a twenty-fifth board chair. There were only twenty-four. We thought there needed to be one more because we thought sub-Saharan Africa needed more representation. And so we pushed with a number of allies, including allies in Africa, to say let’s get another seat at the board for sub-Saharan Africa, and we’ve gotten that done.
So I think we are trying to listen where countries are saying they need things and really try to adjust.
GREG IP: Yeah. I feel like I spend way too much time on the IMF and not enough on the World Bank, so I do want to touch on that a little bit.
JAY SHAMBAUGH: Sure.
GREG IP: And you talked in your speech about how reforms at the multilateral development banks could unlock an additional 350 billion dollars in lending resources. And I know that one of the priorities of the new president, Ajay Banga, was to find ways to look at the Bank’s sort of like capital or asset-equity ratio and sort of find ways to increase its leverage and increase those resources. Give us a report card on how that’s going and how much further we have to go.
JAY SHAMBAUGH: So I think it’s going well is the shortest answer. So the—it’s not just at the World Bank; it’s the MDB system as a whole.
So there was a report within the G20 called the Capital Adequacy Framework Report that was trying to push on these types of ideas, and then we’ve really been pushing that through the MDB Evolution process. If I recall off the top of my head, which is always dangerous, the Bank has done—unlocked about seventy billion dollars in things they’ve done so far—this is measured over what could you do over ten years of lending—with another seventy billion dollars, roughly, where they’ve got the ideas that they are working on but they’re not necessarily passed yet. Other banks have done a lot more. So, as you noted, the system as whole, we think, has about 350 billion dollars that it has either unlocked or is unlocking, and the individual MDBs, I think, are making great progress.
The Asian Development Bank, I think it just turned out when you look at their balance sheet, had a lot of room to be more ambitious. And up to, I believe, around a hundred billion dollars of that 350 billion dollars is just can the Asian Development Bank make the right steps, and it’s in the process of doing so.
So one part of this is unlock the balance sheet. The next part, obviously, is you’ve got to use it. And so I think that’s the second step, is making sure these institutions are nimble enough and their operations models are working in ways to get the money to the countries that need it.
GREG IP: You’re the undersecretary of the treasury for international affairs, so you can’t expect to escape this without a question about the dollar.
JAY SHAMBAUGH: Sure.
GREG IP: We have two questions, and I’m just going to sort of meld them. You know, President Trump has said the future of the dollar as the world’s reserve currency would end if Vice President Harris is elected. How do you see the role of the dollar and its long-term health as a reserve currency?
Related question: How do you view the international role of the dollar? Are you concerned at all that the dollar is ceding its role to other currencies?
JAY SHAMBAUGH: So, first, again, not commenting on the first part of the first question.
What I would say is I think the role of the dollar is always under question. People are always wondering, well, is this change in the economy—in the global economy going to mean something for the dollar? Is this change? And I think what we know is that at the end of the day it is a combination of our financial markets being liquid and deep and well-run, crucially our rule of law, our legal and regulatory framework and governance structures of our financial institutions, those are the fundamental things that support the role of the dollar. They make the dollar’s role, frankly, quite good for us.
I think we have a national interest in maintaining it. But it makes it very good for other countries because you have strong anti-money laundering and counter-financing of terrorism rules in place. You have strong transparency rules in place that make the system work better.
I think people wonder anytime there’s either a geopolitical or geoeconomic shift, what does that mean for the dollar? I don’t think I’m seeing the dollar under siege in any way or anything like that. What I see is the dollar maintaining a very important role in the global economy that benefits us and others.
GREG IP: Is the dollar too strong right now?
JAY SHAMBAUGH: That’s a question I can’t answer.
GREG IP: OK.
JAY SHAMBAUGH: You’d have to ask my boss.
GREG IP: I will. When we get her up here, I will make sure we ask that.
Jay, you’ve been very generous with your time. Excellent insights and answers. Thank you very much.
JAY SHAMBAUGH: Thanks a lot.
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Image: View of the US Treasury Department. Photo by Valerie Plesch/dpa via Reuters Connect.