En Garde, Lagarde: a conversation with IMF's head (WSJ)

En Garde!

By DAVID WESSEL

The Wall Street Journal, May 18, 2013

Photography by Platon

Christine Lagarde

IT IS NO EASY JOB, being the grand negotiator at almost every financial crisis in the world in these troubled times. But as head of the International Monetary Fund, or IMF,Christine Lagarde has played a role in dealing with everything from the Cyprus bank scare to Chinese exchange rates.

A lawyer by training, she came to the post after a six-year stint in the French cabinet. She is described as warm, informal—and highly disciplined. She was, after all, a member of the French national synchronized swim team in her youth, and still hits the gym almost every day.

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Rumors persist that Lagarde may someday return to France and run for president. But these days, her focus is on repairing battered markets and an ailing global economy, a task that requires diplomacy and stamina. She recently sat down in her Washington, D.C., office with David Wessel, the Journal's economics editor, to talk about the state of the world. Her edited remarks follow:

Q: We've come through a devastating financial crisis. Are we out of this?

A: We avoided a collapse in 2012. We have to guard against a relapse, and we certainly do not have the luxury of relaxing. I think 2013 is going to be a critical year.

Q: In what sense?

A: A lot of the advanced economies' leaders, thinkers, decision-makers are tired with crisis management. They want out of it. In a way, that's good; but there is still work to be done. About 80 percent of the decisions have been made, for instance, in the strengthening of the European Union—a lot of the financial sector is better governed, better capitalized, better supervised. But if you don't do 100 percent of it, you're at risk again.

Q: There seems to be an unfortunate but understandable tension, particularly in Europe. When things start to get a little better complacency sets in. It's almost as if we need another crisis in order to get things moving again.

A: I don't think it's Europe specific. I think it's also true in other economies, including in the U.S. The fiscal cliff is dealt with, and yet there is more to be done. The moment yesterday's crisis is dealt with, you want to forget about tomorrow's issues. The central banks have been very helpful in that respect. They've accommodated a degree of slow-paced reforms and gradual fiscal consolidation.

Q: Have we done enough to renovate the financial system so we don't have another crisis, or is there still more work to do? Are we safe from the banks yet?

A: No, not yet. It's my 80/20 rule: I think 80 percent of the job has been done—liquidity ratios, identifying the systemically important international financial institutions—but if you turn to the over-the-counter derivative markets, for instance, it hasn't been done. It's still very obscure and not transparent at all. Plenty of work has been done, but international cooperation is going to be critically important, because otherwise you'll have people having done what they think is their job in their respective corner but it will not be consistent with what others will have done. Bankers, traders, financiers are very smart and astute people; they will find out what is the right channel to optimize the system—which is fine, as long as risks are taken care of and as long as, at the end of the day, it's not the taxpayer who picks up the bill.

There's another issue, which is much on my mind: the rapid growth and development of emerging-market economies. For the moment, they have been quite sheltered because they are not financially sophisticated. It sounds a little patronizing to say that, but when you look at the development of their financial sector, the size of their financial sector relative to total [GDP], it is not that mature. It will develop, it will increase, it will be more interconnected and, as a result, there will be crises arising. The last crisis was in the advanced economies, but there will be one in emerging markets as well.

Q: Do you think democracy is up to the challenges we face?

A: In the short run, it's a hurdle. You need to comply with the parliamentary rules, you need to communicate and you need to be transparent, which are the attributes of democracy. But in the long run, it's a win-win because if there is ownership, there is appreciation of what each and every one in the system has to do.

“The last financial crisis was in the advanced economies, but there will be one in the emerging markets as well.”

Q: Asia is about 60 percent of the world's population, and it will be about two-thirds by 2025. It's obviously a growing share of the world economy. What challenges do you see in that?

A: One of the key challenges will be aging. Whichever corner you look at, with a few exceptions, you have rapidly aging populations, and that will have consequences in terms of consumption patterns, saving patterns, productivity and general development—which these populations, governments and international institutions, including the IMF, will have to be cautious about. That will be the case for Japan and China. India is going to be a different story. But you take Japan and China, and you have the second- and third-largest economies of the world.

Q: And it comes at the same time as we have similar trends in the U.S. and Europe. So what's the problem? What are the tensions?

A: I think we need to be very open-minded about this, because typically the norm would be for aging people to actually save less. This is not what we are seeing in Japan. What we'll see in China will be interesting—a country where pension schemes, health benefits and welfare systems are certainly not as developed as they are in the advanced economies. How will people behave? How will they save? How will they consume? Will they rely on the next generation?

Q: Look at the other side of the coin: the youth bulge in the Middle East and Africa. What about that?

A: Big challenges. This youth bulge is located in countries that have a pretty high growth level, much higher than in many other places in the world. Starting from such a low base, the per-capita growth of those countries will very likely progress, and that will cause frustration, backlash, possibly social unrest, certainly population migrations. And again, from an economy point of view, things have to be thought through in advance. These big trends will not materialize in the next two or three years. You're talking not just 10 to 20 years, you're talking 10 to 50 years. But they should be anticipated now.

Q: What kind of things do you think we should be doing to get ready for that? Is it a question of research, taxes, fiscal policy or immigration policy?

A: All of it.

Q: When you talk to leaders of governments, do they talk about these long-term demographic things?

A: They're more focused on the short term because that's where they have to make decisions, that's where their own personal future lies. And you tend to stand where you sit.

Q: How big an economic risk do you think climate change is?

A: It's a massive risk and it's a huge opportunity, and for the moment we are ignoring both risk and opportunities associated with it. At the IMF, we look at it from a narrow lens—energy-subsidy reform, the price of carbon, a market for carbon. You know about half a trillion dollars is actually spent directly on subsidies for fuel, gas and electricity. To engage governments to change that and to make sure they can encourage better spending—not encourage massive consumption of fossil energy—it's very difficult. Yet it's a risk and an opportunity. The risk is excessive consumption. The opportunities are huge, with the spending that is saved reoriented toward infrastructure, education, health, you name it.

Q: What are the risks of not addressing climate change?

A: Our kids will be grilled, fried, toasted and roasted.

Q: You have said economists and policy makers have unwisely downplayed inequality. Why does that concern you?

A: Point No. 1: What we see from just looking at the numbers is a massive unequal distribution of wealth around the world—and not just in advanced economies, pretty much everywhere. Point No. 2: We now have research that demonstrates more equal distribution of wealth is conducive to more sustainable growth. So if we all take the view that solid balance and sustainable growth is adequate, necessary for a more balanced world with less unemployment and less risk of social unrest, the conclusion is fairly straightforward. We must pay, and governments must pay, more attention to a more equal distribution of wealth. I'm not a communist, but the reality is there.

Q: I'm curious, what's at the top of your worry list when you go home at night?

A: Climate change is one for sure. So is the education of women. I know it's a little bit farfetched relative to the core business of the IMF and its mandate. But I'm personally convinced that it is the answer to many, many, many issues. Whatever we can do to encourage and facilitate the education of young girls, access to financing for women, I think will go a long way in the development and better stability of economies around the world. Those are sort of long-term goals. I go to bed at night thinking about more short-term issues: countries facing difficulties; the U-turn by the Japanese authorities and whether it's going to work; the U.S. challenge of coming up with a credible plan to reduce the deficit and to change the trend of debt.

Q: Do we have global governance that's adequate for the globalization of markets and corporations and for issues like climate change?

A: No, I don't think so. But I think that it is going to be difficult to achieve what would be desirable. Look at financial-market supervision, or the definition of norms and standards in all sectors and areas, or the organization of a carbon-emission market. It would be a good occasion to design a new system—or global economic and financial surveillance around the world—in order to anticipate a potential crisis. All these functions will be even more necessary in the future. But global governance is resented by governments, who have their own sovereignty.

Q: I sense a great deal of excitement about Africa at the moment. Is it justified and, more importantly, what has to happen for this momentum to continue?

A: I sense the same thing, particularly in the corporate world. I think it's partly caused by the richness of all sorts of commodities that lie out there underground. It's also prompted by the population size and the fact that there will be so many people between the ages of 16 and 40 who will be an available workforce. What will keep the momentum? I would say two things: peace and education of women, because if the education of women is not tackled promptly, then I think we will be heading for very difficult demographic challenges in Africa.

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Q: Besides Europe and North America, you've been to Algeria, Brazil, Chile, China, Colombia, Egypt, Germany, India, Indonesia, Japan, Latvia, Malawi, Mauritius, Mexico, Malaysia, Niger, Nigeria, Peru, Philippines, Russia, Saudi Arabia, South Africa, Thailand, Tunisia and Turkey. If you were to go back and visit some places as a tourist—leaving out France and the United States—where would you most like to go?

A: I think I'd like to go back to Peru and to Tunisia.

Q: Why?

A: Peru because there's such a mixture of coastline, extraordinary colors, historical remains or sights that I haven't seen, and extremely gentle people that I've met. As for Tunisia, it's the warmth, and I want to see how changes are taking place. And you also have a mixture of beautiful sea. I think in a previous life I must have been a dolphin, so anything that has this attracts me.

Q: How do you manage the jetlag of all these trips?

A: First of all, I can sleep on a plane. I don't drink. I don't smoke. I don't eat meat. I think I have a healthy schedule that helps me cope with different time zones. I think it helps. I used to fight against my own body and tell myself don't doze, don't give up, you're on daylight. I don't fight with my body anymore. When I sense that it needs a 10-minute doze, I let myself doze. I might sit in the back of a car and tell the person next to me just give me a break, don't talk to me, I'm going to sleep.