The Power of Partnership - IMF eLibrary...The Power of Partnership SELECTED SPEECHES BY Christine...

I N T E R N A T I O N A L M O N E T A R Y F U N D

The Power of PartnershipSELECTED SPEECHES BY

Christine Lagarde2011– 2019

©International Monetary Fund. Not for Redistribution

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I N T E R N A T I O N A L M O N E T A R Y F U N DWashington, DC

The Power of PartnershipSELECTED SPEECHES BY

Christine Lagarde2011– 2019


Copyright © 2011-2019International Monetary Fund

Washington, D.C. 20090, U.S.A.All Rights Reserved

ISBN: 978-151350990-7 (paper)

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www.elibrary.imf.org

Cover photo by Karla Chaman. Christine Lagarde met Maximiliana Taco during a visit to Ayacucho, Peru in 2014.

Maximiliana Taco is featured in the speech “Brothers and Sisters, There is Much to Do” on page 115.


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ContentsForeword ............................................................................................................................................................v

Forging a Stronger Social Contract: The IMF’s Approach to Social Spending ..........................1

The Financial Sector: Defining a Broader Sense of Purpose ...........................................................9

Age of Ingenuity: Reimagining 21st Century International Cooperation ............................... 23

Winds of Change: The Case for New Digital Currency .................................................................. 37

A Compass to Prosperity: The Next Steps of Euro Area Economic Integration .................... 47

A Time to Repair the Roof ......................................................................................................................... 57

Central Banking and Fintech: A Brave New World? ....................................................................... 67

Making Globalization Work for All ....................................................................................................... 77

Addressing Corruption Openly ................................................................................................................ 87

Demographic Change and Economic Well-Being: The Role of Fiscal Policy ........................101

Brothers and Sisters, There Is Much to Do ........................................................................................115

Lifting the Small Boats ..............................................................................................................................125

The IMF at 70: Making the Right Choices—Yesterday, Today, and Tomorrow ...................139

Economic Inclusion and Financial Integrity ....................................................................................149

Daring the Difference: The Three L’s of Women’s Empowerment ...............................................159

A New Multilateralism for the 21st Century ....................................................................................169

The Global Calculus of Unconventional Monetary Policies .......................................................183

Global Risks Are Rising, but There Is a Path to Recovery ............................................................195

Complete List of Speeches, Blog Posts, and Articles ..................................................................205

About Christine Lagarde ........................................................................................................................221


Underline

F O R E W O R D v

Inside this compilation of selected speeches by Christine Lagarde, Managing Director of the International Monetary Fund from 2011 through 2019, you will find both the breadth and depth of the insights that she brought to the Fund and shared more broadly with the global economic community.

Her speeches cover some of the most pressing fiscal, monetary, and financial issues facing the world today: from focusing on excessive inequality to strengthening the global trading system; from showing the enormous growth potential of raising female labor force participation to high-lighting the gaps in financial stability.

As you read these speeches, you quickly appreciate that this is a leader with a clear sense of the world she wants to help improve and, more importantly, one who provides direction on how to get there. The lodestar through this journey is multilateralism and the need for more interna-tional cooperation.

Known affectionately inside the Fund as “MD,” we, her current and previous management team—David Lipton, Mitsuhiro Furusawa, Tao Zhang, Carla Grasso, Min Zhu, Naoyuki Shinohara, and Minouche Shafik—and Directors of the departments and offices at the IMF, wish through this volume to pay tribute to her extraordinary ability to inspire.

The MD is both the candle and the mirror. She knows when to provide that guiding light of ideas, which can lead us to an effective solution. Yet, as an exceptional leader, she also helped each of us shine bright. We are truly indebted to her leadership, her vision, and her kindness.

IMF Management Team and Heads of Departments and Offices September 2019

“There are two ways of spreading light:

to be the candle or the mirror that reflects it.”

EDITH WHARTON

Foreword


Delivered at the International Labour Conference

of the International Labour Organization in Geneva

on June 14, 2019

Forging a Stronger Social ContractThe IMF’s Approach to Social Spending


F O R G I N G A S T R O N G E R S O C I A L C O N T R A C T 3

Good afternoon. It is an immense privilege to address you today in this magnificent Palais des Nations, which stands as an enduring emblem of multilateralism. Let me thank my most gracious host, my dear friend Guy Ryder, who himself stands as a towering pillar of the global common good.

To my friends at the International Labour Organization [ILO]: congratulations on your centennial! For a hundred years now, you have served the noble cause of social partnership and social justice.

When you think about it, the founding of the ILO has a lot in common with the founding of the IMF.

You were founded after the First World War, on the premise that lasting peace is founded on social justice. We were founded after the Second World War, on the premise that last-ing peace is founded on economic coopera-tion between nations.

You bring together the social partners in the service of ensuring decent work for all—knowing that decent work is not only about a paycheck, but is also a source of meaning, purpose, and dignity. We bring together the nations of the world—189 of them—in the service of promoting financial stability and sustainable and inclusive economic growth—knowing that this is a precondition for true human flourishing.

In this context, my topic this afternoon—social spending—could not be more relevant. Relevant to both of our institutions. Relevant to the challenges facing our global economy.

Social Spending— A Key Policy Lever

Let me begin by defining my terms. By social spending, we mean social insurance, social assistance, as well as public spending on health and education. Hence social spending is a broader concept than social protection as it includes spending on health and educa-tion—which are especially critical in low-in-come and developing countries.

There is no doubt that these programs are vital to promoting the well-being of citizens and social cohesion. Public pensions can make all the difference between poverty and a dignified life for our elderly loved ones. Health care does not just save lives; it extends them and improves their quality. Primary and second-ary education give our youngest citizens the opportunity to reach their full potential and contribute to society.

At a deeper level, I would argue that social spending is a core component of the social contract needed to fulfill the missions of our respective institutions.

This is not a new insight. The importance of providing financial security to citizens to keep the peace and foster harmonious social relations is a lesson that goes all the way back to the ancient civilizations.

It is a lesson learned during the industrial revolution, as politicians responded to new social and political challenges with different forms of social protection—think of the Bismarckian reforms in Germany.


I N T E R N A T I O N A L M O N E T A R Y F U N D4

“ ”It is a lesson learned after the darkest days of the 1930s. Economic historian Barry Eichengreen makes a convincing case that the vastly different political paths taken by Germany and the UK over that decade were at least partly due to the UK’s better-function-ing unemployment insurance scheme in the face of crippling unemployment.

And it is a lesson learned in the postwar era, when the three decades of strong and shared growth in the advanced economies—les trente glorieuses—were underpinned by an accompa-nying social contract with broad participation and widespread social and political support.

What this tells us is that for economies to be resilient and growth to be sustainable, this growth needs to be inclusive—which calls for social spending. This in turn provides the social and political buy-in for growth-support-ing policies—and in doing so, builds trust.

The bottom line: social spending matters. It matters today as we are bombarded by new challenges. More retirees, fewer workers. The effects of technology on work and wages. Rising inequality and demands for greater fairness. Barriers to women participating in the economy and realizing their full poten-tial. The existential threat of climate change. Diminishing trust, rising discontent, and a turn away from global cooperation.

There is no simple policy response to these complex challenges. Yet while social spending is not the only lever in such a response, it is undoubtedly one of the most important. It is no surprise that surveys indicate rising public support for income redistribution policies in many countries.

Social spending must take its rightful place at the center of macroeconomic policy discussions.

Social spending must take its rightful place

at the center of macroeconomic policy discussions.



The IMF’s Strategy on Social Spending With this in mind, let me now address the IMF’s new strategy on engaging in social spend-ing issues, which is being published today.

As social spending issues have become increas-ingly important for our members over the past decade, we have significantly stepped up our engagement on inclusive growth and social spending.

For instance, our analysis has found that high inequality can undermine sustained growth. Research has also found that public invest-ment in health and education boosts pro-ductivity and growth, and reduces inequality of opportunity and income. Likewise, social spending programs that redistribute from higher-income to lower-income groups can decrease poverty and inequality. They can also increase the resilience of lower-income house-holds to economic shocks—including from demographics, technology, and climate—which are expected to become more frequent and disruptive.

At the country level, we found that four out of five IMF mission chiefs—the people who lead our engagement on the ground—view social spending as “macro-critical” in their countries. This is important, because mac-ro-criticality is the quintessential trigger for IMF engagement on all structural issues. And nearly half view social spending as essential to sociopolitical stability and investing in people.

For all these reasons, we have stepped up our engagement on social spending at the country level. For example, we helped Ghana create the fiscal space to increase spending on public education—so that it can achieve its goal of universal secondary education.

We helped Japan develop options for pension reform, so necessary in an aging society. In Cyprus, we helped the government strengthen the social safety net during a time of severe crisis—including with the introduction of a new guaranteed minimum income program. Likewise, in Jamaica we supported the expan-sion of social assistance programs during a period of belt-tightening.

In all of our programs, protecting the poor and vulnerable is now, and will continue to be, a core objective.

At the same time, we are providing technical assistance to countries to help them raise more domestic revenue—support in this area nearly doubled between 2010 and 2018. And we estimated the additional spending needed to finance core SDGs—health, education, and priority infrastructure. We found that this requires an extra 15 percentage points of GDP on average for low-income developing countries in 2030.

It is clear, then, that social spending is not just an expense, but rather the wisest of investments in the well-being of our societies. Expansion of access to education and health generates broader productivity gains across the population, allowing all citizens to flourish. To reap the rewards of a stronger global econ-omy tomorrow, we must begin by strengthen-ing social programs today.

But at the same time, we cannot play the role of Pangloss. In the real world, the best of intentions run up against the firmest budget constraints.



“ ”…social spending is not

just an expense, but rather the wisest of investments in the well-being

of our societies.

So, how do we move forward? We must start from the premise that social spending needs to be adequate, yet also efficient and financed sustainably. Spending adequacy. Spending efficiency. Fiscal sustainability. These are the yardsticks we will use to assess the macro-criti-cality of social spending.

We expect this new strategy to lead to more effective IMF engagement on social spending issues, and to strengthen the quality and con-sistency of our policy advice. It collects best practices gleaned from years of engagement on social spending issues and lays out a clear road map for consistently applying these best practices to our engagement.

Over the next year and a half, we will flesh out the strategy by providing more specific guid-ance to our staff underpinned by augmented tools and databases; ongoing analytical work; and background notes on issues such as pen-sions, social assistance, education, and health.

Our strategy should ensure that our engage-ment is more consistent and hopefully more effective—and also better tailored to our members’ specific preferences and circumstances.

A Partnership for Success Doing things better, however, will require a little help from our friends—and this brings me to my final point today: the need for a “partnership for success,” a key pillar of our strategy.

That means all of us working together—inter-national organizations, academics, country authorities, civil society, and the private sector. This is why we undertook a broad consulta-tion process when developing the strategy. I believe it has greatly benefited from this engagement—and here, a big “thank you” goes to the ILO.



This experience has shown clearly that close engagement between the IMF and organiza-tions like the ILO can prove highly valuable. You have significant expertise on social spend-ing that can help IMF teams. And we can help by raising the profile of social spending issues in the broader economic policy dis-course surrounding stability and growth.

We would also benefit from closer collabo-ration with other stakeholders. Civil society, academics, think tanks, and labor unions all offer unique perspectives on social spending—and these perspectives can enrich the IMF’s view, help us to resist any temptation toward groupthink, and enable us to better appreciate country-specific circumstances.

Of course, there is no one-size-fits-all when it comes to designing social spending pro-grams to reduce poverty, boost inclusion, and protect vulnerable households. Countries have different preferences, face different challenges, and hold different long-term aspirations. But by working together, we can

ask the right questions and hopefully find the right answers.

At the end of the day, we have an obligation to the poor and vulnerable; to those facing financial insecurity and poor health; to those left behind with few opportunities, including women and girls; and to future generations. We have an obligation to help countries achieve the Sustainable Development Goals by 2030.

As Franklin D. Roosevelt—a great friend and supporter of the ILO—once wisely noted, “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

This is not just ethically right; it is economi-cally sound. Let us work together to develop social spending policies that are both smart and compassionate.

Thank you very much.

“ ”Let us work together

to develop social spending policies that are both smart and

compassionate.


Delivered at Guildhall as part of the World Traders’ Tacitus

Lecture series in London on February 28, 2019

The Financial SectorDefining a Broader Sense of Purpose


T H E F I N A N C I A L S E C T O R 11

I am honored to have been invited to deliver the Tacitus lecture in this mag-nificent Guildhall. I am also fortunate to be among so many friends, including former colleagues, who know that I have a weakness for good stories.

Let me start with a Hollywood story. As you may know, Disney was recently faced with the challenge of creating a sequel to the original Mary Poppins movie, which has delighted chil-dren and adults for more than half a century.

The producers of the new film recreated the magical nanny from P.L. Travers’ books, but they also featured a new cast of characters—including a villain who could give everybody a good scare. That villain—yes, you guessed

it—is a slick banker who is cheating his way to fortune. In the end, of course, the villain is defeated with a touch of magic.

So here is the question: why is the banker the villain? After all, a healthy economy requires a healthy financial sector that is at the service of people as they pursue better lives for them-selves and their children.

You might call it the “everyday magic” of finance: helping families buy a home or save for retirement, helping businesses raise capital to support growth and employment, and helping ordinary people manage risks and prepare for a rainy day. That is what most financial professionals do every day, with dedication and a sense of pride.

“ ”

A healthy economy requires a healthy financial sector that is at the service of people … helping families buy a home or save for retirement; helping businesses raise capital to

support growth and employment …



“ ”

And yet, despite these good aspects, the cari-cature of the “bad banker” has resonated with audiences since the dawn of civilization. And its latest version—seen by millions of children around the world—is telling us something about the deeply felt sense of unease about the role of finance in today’s world.

It does not take magic to trace much of this most recent frustration back to the global financial crisis, which has left painful eco-nomic and psychological scars on millions of people. We know also that many people are angry about the steady drip-drip of financial scandals and misconduct that have occurred all over the world.

Indeed, financial globalization has been one of the key drivers of what Theodore Roosevelt called the “swollen fortunes for the few.”1 It seems we may now be in a new Gilded Age, with high economic inequality and low social mobility. On Wall Street, for example, overall compensation levels have been reaching record highs,2 and there is a similar trend of moving back to precrisis pay levels in other financial centers.

No wonder that growing concerns about finance can be heard across the political spec-trum—and not just about the issues of the day, but about the fundamental purpose of this industry. In too many cases, the financial sector has strayed from its original, noble purpose. And too often, it has worked hard to serve itself rather than serve people and the economy at large.

Surely, there must be a better way forward—which brings me to my theme:

I believe that we can build a better financial sector—one that is safer, more sustainable, and ethically sound. A financial industry with a broader sense of purpose.

In this vein, the United Kingdom has launched a national conversation on how to enhance the social impact of investing—fur-thering the goal of doing good while making a return.

In too many cases, the financial sector has strayed from

its original, noble purpose.



This goal is not just morally just; it is econom-ically right. Why? Because a better financial sector is more important than ever to help deliver on what our 21st century so badly needs: higher employment, greener growth, and good living standards for all.

The key to achieving this goal is to reshape finance into something that is more aligned with societal values and more connected to the interests of all stakeholders: from cus-tomers, to workers, to shareholders, to local communities and future generations.

To do this, we will need more than just a touch of Mary’s famous brolly [umbrella]. So let me propose two questions:

• First, how can we make the financial sys-tem safer—to encourage the good, not the bad, side of finance?

• Second, how can the financial sector support long-term growth that is more sustainable and more inclusive?

How Can We Make the System Safer? Let me begin with a simple observation: if finance is to become safer and more trust-worthy, it will need to harness good innova-tion, better regulation, and a broader sense of responsibility.

GOOD INNOVATION

Students of history will tell us that these issues have resonated through the ages. For one, it is remarkable just how much influence financial innovation has had on human progress. Think of its instrumental role in the development of writing, mathematics, accounting, and probability theory.

Consider Chinese paper money introduced in the ninth century, or the thirteenth century Venetians who eagerly bought prestiti, the first true government bonds.3 And think of how we can draw a line from the first stock exchanges—in Antwerp and Amsterdam—to our modern investment apps that put the global financial markets at our fingertips.

“ ”I believe that we can build

a better financial sector—one that is safer, more sustainable, and

ethically sound.



At the same time, history tells us about unsus-tainable credit booms and speculative bubbles that were driven by bright new financial ideas.

In ancient Rome—in the year 33 AD—land prices crashed after noble families took out loans to bet on ever rising land prices. Ultimately the government of Emperor Tiberius bailed out the investors by extend-ing three-year, interest-free budgetary loans. How do we know this? Tacitus himself briefly described this financial crisis in his final works.4

But this is only one of many examples. In the 17th century Tulip Mania, it was a new market for futures contracts. In the 18th century South Sea Bubble, it was the promise of a mythical new land. In the 19th and 20th century, it was often new technology, from the Railway Mania to the dot com bubble.5

And of course, in the run-up to the global financial crisis, it was financial engineering that helped drive a frenzy of reckless risk taking. So, when Lehman Brothers collapsed, policymakers were facing what I once referred to as a “holy cow moment.”

The most striking thing for all of us back then was the incredible fragility of so many advanced-economy banks. At their very core, these firms had been weakened by inadequate equity capital, flawed business models, and the blindness of powerful men—a toxic com-bination that left taxpayers on the hook for massive bank bailouts.

Fast-forward to the present, and the question is whether financial systems are safer today. The short answer is that they are safer, but not safe enough.

BE T TER REGULATION

The good news is that, over the past decade, countries have worked together to reform global financial regulations to help rebuild trust and restore financial health. This ambi-tious effort—in which the IMF, the Financial Stability Board, the G20 and many others have been involved—has made a substantial difference.

Banks have much higher capital and liquidity positions. Big banks face tighter regulation, and their leverage is lower. Winding down failing banks has become much easier in all major jurisdictions and in many emerging economies. And a big chunk of the deriva-tives market has become significantly more transparent.

This is all good, but still not good enough.

We need further efforts to address the potential dangers of “too big to fail” as banks become even bigger and more complex. In the United States, for example, the top five banks now hold about 45 percent of total banking assets, compared with about 40 percent in 2007.6

Meanwhile, leading economists and industry experts have been calling for further increases in equity funding—beyond the current capital requirements—to ensure that banks can with-stand a potential storm.7

Others are not so sure—because further increases in equity funding might come with negative side effects, such as reduced lending. So far, the evidence points to relatively small costs of higher capital.8

Above all, we must be concerned about increasing efforts to roll back some post-crisis regulations. Countries need to resist



these pressures. Indeed, they need to push on because more work and political will are required to fully implement the existing reforms.

And even as policymakers are still internaliz-ing the lessons from the last crisis, they need to be vigilant about new risks. For example, the IMF has recently estimated that cyber- attacks could potentially lead to net income losses in the global banking system of up to $350 billion.9

Or think of a sharp adjustment in asset prices that could affect the fast-growing shadow banking sector. That part of the financial world comes with many regulatory blind spots that should be addressed. For instance, we believe that countries need to regulate under-writing standards in high-risk debt markets, including leveraged loans.

Of course, making finance safer and more trustworthy is not just about good innova-tion and better regulation. It is also about a broader sense of individual and collective responsibility.

BROADER RESPONSIBILTIY

Responsible behavior has a lot to do with incentives, especially monetary incentives. There is no question that remuneration poli-cies in the banking sector were driving reckless risk-taking before the financial crisis.

As one analyst10 put it: “Employ as little equity as one can; promise a high return on equity; link bonuses to the achievement of this return target in the short term; and ensure that as few as possible of those rewards are clawed back in the event of catastrophe.”

We know how that story ended. And we know that there is a widely-shared perception that those who caused the crisis did not face the consequences, while ordinary people paid a heavy price. Many people actually saw this as the ultimate breach of public trust.

So what has changed since then? For one, postcrisis reforms have significantly moved the needle by better aligning individual pay with the health of the firm.

“ ”

Making finance safer and more trustworthy is not just about good innovation and better regulation. It is also about a broader sense of

individual and collective responsibility.



If you are a senior banker here in the City, 40 to 60 percent of your variable remuneration is deferred over 3–7 years.11 And it can be reduced, cancelled, or clawed back in case of poor performance and misconduct.

In other words, bankers have more skin in the game. In the United Kingdom, senior bankers and traders also have to comply with the so-called Senior Manager and Certification Regime, which has increased accountability and is helping firms to set a better “tone at the top.”

Here I would like to commend my former IMF colleague, Minouche Shafik, who in her role as deputy governor of the Bank of England did so much to promote codes of conduct for financial markets.

Certainly, more can be done: from making claw-backs more consistent across countries, to enhancing the disclosure of disciplinary actions within firms, to creating a global code of conduct.

And let us not forget the power of criminal and civil liability. In major financial centers, we see a more forceful pursuit of individual wrongdoing. But the brunt of legal action—amounting to billions of dollars in fines—is borne by financial firms, where it is too often perceived simply as a cost of doing business.

VALUES AND E THICS

The reality is that even the toughest legal sanctions, and the smartest compensation and governance rules, cannot be substitutes for a strong individual responsibility that is grounded in values and ethics. For it is not just the “tone at the top” but the “response

from the bottom” that creates a better and more trusted corporate culture.

That is why the financial industry needs what I call an “ethics upgrade.” What do I mean? For financial professionals, it simply means doing the right thing—even when nobody is watching. It sounds so simple, and yet it is perhaps the hardest thing to do.

Remember: the word “credit” comes from the Latin word for “trust,” which is the lifeblood of the financial system. But trust itself cannot be manufactured or mandated. It must be earned through virtuous behavior that is intrinsically motivated—again, done even when nobody is watching.

Here one could draw inspiration from Aristotle, who argued that we are all driven by a sense of purpose. We can achieve our purpose by developing virtues, such as justice, courage, self-control, prudence, generosity, and honesty. Aristotle believed that this was the key to genuine happiness.

That spirit can also help achieve a purposeful banking career and a safer and more trusted financial system. But this is not the whole story. Aristotle also believed that individual purpose must always be linked to social pur-pose, to the common good.

This applies to all aspects of our life—includ-ing corporations and financial firms. The “goal” of a corporation cannot be just about its own narrow financial interest. It must also encompass a broader common responsibility.

It is not surprising, therefore, to see growing debates about the nature of modern corpora-tions and the concept of maximizing share-holder value.



As the British economist Colin Mayer12 put it: “For nearly all of its 2,000-year history, the corporation has combined a public purpose with its commercial activities. It is only over the last 60 years that the idea that profit is the only purpose of business has emerged.”

I believe that encouraging a broader common responsibility is now more important than ever—not just for today’s stakeholders, but for future generations.

Which brings me to my second question: how can the financial sector support long-term growth that is more sustainable and more inclusive?

How Can Finance Support Sustainable and Inclusive Growth? Let me start with a data point. Over the next 15 years, $24 trillion of wealth will be inher-ited by millennials—and they are more than twice as likely as other generations to invest

in companies or funds that target social or environmental outcomes.13

The financial industry has seized this oppor-tunity by offering various forms of impact investing, green bonds, and a panoply of fund products that take account of ESG—environ-mental, social, and governance issues.

Clearly, sustainable investing is booming. But it also points to a deeper issue: whether you are a banker, fund manager, or fintech entre-preneur, you are probably wondering how to take a more sustainable approach that is both economically and ethically right.

This offers us a huge opportunity to redefine the magic of finance, to pursue a broader sense of purpose.

FINTECH

The immediate priority should be to foster cutting-edge financial technology. This means creating fintech products that are substantially cheaper and more accessible. It means serving

“ ”The financial industry needs what I call an ‘ethics upgrade.’

It simply means doing the right thing—even when nobody is watching.



customers and communities in new and better ways. It also means rethinking the economics of the financial industry itself.

In the United States, for example, the unit cost of financial intermediation has remained largely unchanged over the past century, while income from finance has risen and fallen with the value of financial assets.14 That suggests a significant amount of rent extraction.

The fintech response is to increase competi-tion, reduce inefficiencies, and provide better value for money to individuals and small businesses. In doing so, fintech can help drive an “inclusion revolution.”

In Kenya and China, mobile payment sys-tems have brought millions of previously “unbanked” people into the financial system. In Latvia, Brazil, and elsewhere, peer-to-peer lend-ing has opened up new sources of credit for small businesses. Around the world, blockchain enables faster and cheaper transactions—from trading securities to sending money to relatives abroad. And this is just the beginning.

Let us not forget that 1.5 million15 adults in the United Kingdom still have no bank accounts, and about 33 million United States households are under-or unbanked16—and

those numbers are multiplied in emerging markets and developing countries.

So there is a huge opportunity to boost finan-cial inclusion which—as we know—leads to stronger growth and higher employment. This in turn requires vibrant digital ecosystems, such as London—which is home to the big-gest cluster of fintech startups in Europe.

But fintech cannot do it alone. We also need better regulation and smarter supervision to ensure that fresh sources of credit do not encourage people to overborrow and that personal data is protected against prying eyes and criminals.

In other words, banking-type fintech services should be subject to banking regulations, especially when it comes to consumer protec-tion. For new firms, this means working with regulators to unlock the immense potential of fintech, while managing the risks.

That is the goal of the Bali Fintech Agenda launched by the IMF and World Bank last October.17 It provides key principles—includ-ing on promoting competition and consumer choice, and fighting money laundering—which can help guide our joint endeavors in the period ahead.

“ ”Fintech can help drive an inclusion revolution.



FEMALE LEADERSHIP

Of course, the inclusion revolution goes beyond fintech. It also encompasses the need for more diverse leadership in finance.

I say this for two reasons. First, greater diver-sity always sharpens thinking, while reducing the potential for groupthink. And second, diversity also leads to more prudence and better decision-making.

Our own research18 bears this out: a higher share of women on the boards of banks and financial supervision agencies is associated with greater financial stability—which under-pins stronger and more durable growth.

There is a long way to go here. Across the globe, only 2 percent of bank CEOs are women; and less than a fifth of bank board members are women.19 Here in the United Kingdom, the Hampton-Alexander Review has been urging the largest listed companies to increase the proportion of women on boards to at least one-third by 2020.20

Would quotas make a difference? The answer is yes, so long as they are properly designed and implemented. A good example is Norway where, over five years, mandatory quotas sup-ported a fourfold increase in the proportion of women on corporate boards.21

Clearly, more female leadership is critical—and not just at the top, but as consumers of financial services. Women all over the world are making their voices increasingly heard when it comes to investing their own money.

For example, recent surveys22 show that women are far more likely to engage in

sustainable investing than men. And they are driving demand for new products, such as funds targeting gender equality in corporations.

That spirit is beautifully captured by the Fearless Girl statue on Wall Street—which brings me to my final point.

INVESTING FOR THE GLOBAL PUBLIC GOOD

I believe that fearless action and fresh ideas are needed more than ever to invest for the global common good.

Think about it: trillions of dollars in pri-vate-sector investments will need to be mobilized to tackle climate change and to achieve the Sustainable Development Goals (SDGs)—which are aimed at eliminating poverty by 2030 and, more than this, making the planet a better place for our children and grand-children.

These goals—endorsed by the global commu-nity—constitute a daunting challenge. But they are also a huge opportunity—especially for the financial sector.

Only a few years ago, the financial industry perceived climate risk as a distant threat. Governor Mark Carney famously called it the “tragedy of the horizon.”23

That time horizon has since shifted much closer to the present.

Major hurricanes in the Caribbean, wildfires in California, severe flooding in parts of the United Kingdom: these are but a few of the



powerful reminders of an economic threat that is already affecting the livelihoods of too many individuals and communities.

And there are now growing economic debates over the likely effects of climate change on productivity, incomes, financial stability—even monetary policy, not to mention migra-tion pressures.

What does it mean for the financial sector? It means shifting to a more sustainable form of finance that is grounded in better risk management and longer-term thinking. It also means mobilizing more finance for investment opportunities in people and infrastructure.

For example, the IMF recently estimated that the additional spending needed by low-income countries to achieve the SDGs—in key sectors such as health, education, and low-carbon infrastructure—is about $520 billion per year in 2030.24

That gap can only be filled through a combi-nation of public and private resources: from

bank lending, to project finance, to so-called “blended finance”—which brings together grants, concessional financing, and commer-cial funding.

The key is for public and private investments to be complements, not substitutes. They must go hand-in-hand to create the right con-ditions for investment. This includes sound economic policies, strong legal frameworks, good governance, and zero tolerance for corruption—whether in the public or private sector.

And remember: the SDGs are not just about developing economies. They are designed to promote global growth that is stronger, fairer, and environmentally friendly.

If the SDGs are to deliver on that promise, we will also need to harness the momentum of the sustainable investing sector—which already accounts for $23 trillion, or 26 per-cent of global assets under management.25

“ ”Fearless action and fresh ideas are

needed more than ever to invest for the global common good.



How might this be done? Fund managers could, for example, launch new investment products that encourage corporations to align their business model with the SDGs. They could also work with policymakers to create global standards for sustainability accounting and reporting—this would boost transparency and strengthen the credibility of sustainable investing.

As I said: this is the moment when fearless action is absolutely critical; when fresh ideas can help us break the mold; when we join hands to foster the global common good.

ConclusionLet me conclude by returning to Mary Poppins. Remember the scene where the “good banker” teaches his children a lesson about purpose. He argues that they should follow in his footsteps, and he sings the following lines:

“A British bank is run with precision. A British home requires nothing less! Tradition, discipline, and rules must be the tools. Without them—disorder! Chaos! Moral disintegration! In short, you have a ghastly mess!”26

Well, that is one way of putting it. But the question is whether young people today should consider joining the financial industry. For many of them, the answer comes down to finding a broader sense of purpose—much like Mary Poppins.

The genius of her character is that she is serving others—with dignity, with a kind heart, with honesty, and with a wicked sense of humor. I think this is a good description of what the financial industry should be all about.

Serving others, not yourself—that is the real magic of finance.

Thank you.

“ ”Serving others, not yourself—

that is the real magic of finance.



ENDNOTES

1 Theodore Roosevelt, “The New Nationalism” (speech, Osawatomie, KS, August 31, 1910). Almanac of Theodore Roosevelt.

2 “Wall Street Salaries Reach Average $422,500, Highest in a Decade,” Bloomberg News, September 17, 2018.

3 William Goetzmann, Money Changes Everything: How Finance Made Civilization Possible (Princeton: Princeton University Press, 2016).

4 Cornelius Tacitus, The Annals of Tacitus, Book XIV (London: Methuen & Co. Ltd., 1939).

5 Gillian Tett, “Have We Learnt the Lessons of the Financial Crisis?” Financial Times, August 31, 2018.

6 IMF staff calculations.

7 John Vickers, “Safer, But not Safe Enough,” (speech, Abu Dhabi, November 29, 2018). Bank for International Settlements.

8 The IMF and standard setters are currently assessing the unintended consequences of higher bank capital.

9 Christine Lagarde, “Estimating Cyber Risk for the Financial Sector,” IMF Blog. June 22, 2018.

10 Martin Wolf, “Financial Reform: Call to Arms,” Financial Times, September 3, 2014.

11 United Kingdom Financial Conduct Authority.

12 Colin Mayer, “Why Paying Taxes Can Be Good News for Companies,” OUP Blog. Oxford University Press, December 7, 2018.

13 “Are Millennials Democratizing Sustainable Investing?” Morgan Stanley, 2017 and Val Srinivas and Urval Goradia. “The Future of Wealth in the United States: Mapping trends in generational wealth.” Deloitte, 2015.

14 Andrew Haldane, “Finance Version 2.0?” (speech, London, Bank of England, March 7, 2016).

15 Karen Rowlingson and Stephen McKay, Financial Inclusion: Annual Monitoring Report 2014 (Birmingham, UK: University of Birmingham, 2014).

16 Federal Deposit Insurance Corporation. National Survey of Unbanked and Underbanked Households. 2017.

17 “The Bali Fintech Agenda.” International Monetary Fund, 2018.

18 Ratna Sahay and Martin Cihak, “Women in Finance: A Case for Closing Gaps” (IMF Discussion Paper, International Monetary Fund, Washington, DC, 2018).

19 ibid.

20 Sarah Gordon, “Shareholders Hold the Key to Unlocking Boardrooms for Women,” Financial Times, November 13, 2018.

21 In Norway, the proportion of women on boards was 9 percent in 2003, and nearly 40 percent five years later.

22 “Sustainable Signals: New data from the individual investor.” Morgan Stanley, 2017 and “Investment by Women, and in Them, Is Growing,” The Economist, March 8, 2018.

23 Mark Carney, “Breaking the Tragedy of the Horizon–Climate change and financial stability” (speech, London, Bank of England, September 29, 2015).

24 Christine Lagarde and Vitor Gaspar. “Give Today’s Children a Chance.” IMF Blog. September 24, 2018.

25 Global Sustainable Investment Alliance and “The EU Wants to Make Finance More Environmentally Friendly,” The Economist, March 22, 2018.

26 Mary Poppins, directed by Robert Stevenson (1964; United States: Walt Disney Studios Home Entertainment).


Delivered at the Library of Congress as part of the Library’s

Henry A. Kissinger Lecture Series in Washington, DC,

on December 4, 2018

Age of IngenuityReimagining 21st Century International Cooperation


A G E O F I N G E N U I T Y 25

It is an honor to be with all of you tonight. Although he cannot be here this evening, I know we are all profoundly grateful to Dr. Kissinger for launching this important lecture series nearly 20 years ago.

Also very much in our thoughts this eve-ning is, of course, former President George H.W. Bush and his family. We all mourn his passing, but celebrate the arc of his life: the pilot who bravely fought in World War II; the President who helped heal divisions after the Cold War; and the statesman who believed in the power of international cooperation. I hope to honor his spirit tonight.

Tonight, December 4th is actually an import-ant date for another reason. I will not tell you why just yet. You will have to wait until the end of my remarks.

When I walked into the Great Hall this evening I immediately thought about two things. The first are my sons, one of whom is an architect. He would love this magnifi-cent space. The second is my native country, France, as well the country I was just in two days ago for the G20 Summit, Argentina. Why?

When this structure was completed in 1897, the chief engineer remarked that the Palais Garnier—the Paris Opera House—was the “prime suggestion” for the new Library of Congress. That makes sense, since the Paris Opera House was completed 20 years earlier, in 1875. Now I think the French may have borrowed a bit themselves. Perhaps from the original Teatro Colón, the Opera House in Buenos Aires, which was finished in 1857.

What does this tell us? Well, first of all, that valuable intellectual property was of great interest across borders, even back then, at least among architects who happily borrowed from each other, learned from one another, and became inspired. Second, it reminds us that they understood that building something lasting means linking the solid foundations of the past with a spark of imagination.

That kind of creativity and long-term vision, rooted in history and informed by our successes and failures from the past, is my theme this evening. First, where have we been? How has creativity in international economic cooperation helped bring pros-perity and peace to the world. And second, where can we travel together? How can creativity and informed visionary thinking help adapt the international system to our current challenges?

Seventy-Five Years of Creativity and vision in International Economic Cooperation

Let me begin with the shared history of the United States and the IMF over the past 75 years.

In the first half of the 20th century, the domi-nant economic and military powers used force to assert their self-interests at enormous cost in terms of human life and physical destruc-tion. The tragic results compelled nations to find a better way. In 1944, they found it.



“ ”The United States decided to use

its power in the service of cooperation. It was an experiment that would shape

our modern world.

The United States emerged as the major global power and did something unprece-dented. Informed by the devastating ultimate outcome of the Versailles Treaty at the end of World War I, the United States decided to use its power in the service of cooperation. It was an experiment that would shape our modern world. In his inaugural lecture in 2001, Dr. Kissinger called the innovations of the postwar period, “a great burst of creativ-ity that brought security to the world.”

How did the United States do it? With gen-erosity, with consideration for its self-inter-est, and with a little help from some friends. Let us look at some of the turning points over the last 75 years.

Think first of the creation of the Bretton Woods system itself.

The principal architects, John Maynard Keynes of the United Kingdom and Harry Dexter White of the United States, were deeply influenced by the period between the great wars. They witnessed a moment in his-tory when flawed domestic policies poisoned international relationships, which themselves were built on troubled foundations.

The result was protectionism and competitive currency devaluations. Imploding world trade deepened the Great Depression and caused massive economic, financial, and social upheaval. Ultimately, these pressures gave rise to nationalist and populist movements and, eventually, catastrophe.



“ ”The genius of this collaborative system was that it was designed

to adapt and change.

Emerging from the Second World War, the United States and some 40 other countries gathered in Bretton Woods, New Hampshire and decided to create the International Monetary Fund and the World Bank. They charged the Fund with three critical mis-sions: promoting international monetary cooperation, supporting the expansion of trade and economic growth, and discourag-ing policies that would harm prosperity.

It was revolutionary. It was visionary....And it worked.

From the very beginning, the IMF helped countries address major new challenges through collaboration. Complementing the Marshall Plan, we helped Europe rebuild from the rubble of war. Our loans gave countries breathing space to stabilize their economies in difficult times and implement policies to promote growth. It is a mission that we continue to this day—as you may have seen recently in countries as diverse as Argentina, Egypt, and Ukraine.

The genius of this collaborative system was that it was designed to adapt and change.

In the early 1970s that change arrived. In his landmark speech, “The Challenge of Peace,” President Nixon suspended the US dollar’s convertibility into gold. The decision shocked the world and forced a year-long negotiation that led to the modern floating exchange rate structure.

At the time, some thought that this particular change would mean the end of the IMF. But all our members, including the United States, knew that the goals of stability and pros-perity extended well beyond fixed exchange rates. They recognized the benefits of a global financial firefighter that could help countries in times of need.

They built on what worked, changed what did not, and adapted.



“ ”Solidarity is self-interest.

That principle endures in our changing world.

In response to the oil crisis of 1973, the IMF created new tools to help countries facing an energy emergency in line with the Fund’s role to help smooth shocks and prevent harmful spillovers. As a debt crisis hit Latin America in the 1980s, the IMF, with creative ideas and support from the United States, stepped in to calm the waters. After the fall of the Berlin Wall, we took on a new challenge: helping nations in the former Soviet bloc transform themselves from centrally planned to free mar-ket economies. In the 1990s, the IMF assisted countries in overcoming, first, the Mexican peso crisis, and then the Asian financial crisis.

Throughout all of these challenges we contin-ued to help countries around the world with their economic fundamentals—their fiscal, monetary, and exchange rate policies—and with steps to build stronger economic institu-tions. These efforts enabled better policies that opened markets, boosted trade, created jobs, and unleashed economic potential.

Then came 2008 and the global financial crisis. The ensuing great recession reminded us that international cooperation is essential, not optional. As the French Finance Minister, I was part of that international response. G20 nations and the Federal Reserve took extraordinary steps to save the system. The IMF deployed its own firepower, committing over $500 billion to help secure the global economy. In the decade since, we supported economic programs in over 90 countries and adapted our lending instruments, includ-ing zero-interest loans to help low-income countries.

But the global economy needed more than liquidity and stimulus. We worked with our membership to craft stronger financial sector regulations so that, together, we could pre-vent the next crisis.

We learned from the past, got creative, and changed for the better.



None of this would have been possible with-out the United States. This country challenged the international economic order when it needed challenging. It forged compromise when compromise was necessary. Why?

Because a stronger and more stable world paid dividends for the United States. It enabled the United States to enjoy some of the longest runs of sustained economic growth the modern world has ever known. Since that meeting at Bretton Woods nearly 75 years ago, real US GDP increased by a factor of eight. The average American’s real income has quadrupled.1 This success did not come at the expense of other nations. On the contrary. This country’s collaborative leadership paved the way not only for decades of opportunity here in America, but also for growth that spread across the world.

Today, the landscape has shifted again. Part of this change is driven by geopolitics and the shift in some economic power from west to east. Part of it by the rise of non-state actors, including multi-national companies. And part of it is driven by technology and the rapid acceleration of everything in our lives. As I am sure the curators of this library are well aware, 90 percent of the world’s data was created just over the last two years. As a daughter of two classics professors, I know my parents would find this fact very hard to believe. But the truth is all things—from information, to money, to disease—travel more quickly in our modern world.

These transformations can bring enormous opportunities, but also unprecedented risks. Why?

Because more than ever before, what happens in one nation can impact all nations. Think about it: From weapons of mass destruction, to cyber-security, to the interconnected finan-cial system, many of our current challenges do not recognize borders. So, when support for international cooperation falters, we must remember the lesson the United States and its allies taught the world over the last 75 years: Solidarity is self-interest.

That principle endures in our changing world.

Our challenge now is to adapt and reform once more.



“ ”

This next year, 2019, can be another turning point…a moment when the world delivers a new burst

of creativity in solving our shared challenges.

The Next Chapter: How to Reimagine International Cooperation I believe that this next year, 2019, can be another turning point in our journey—a moment when the world delivers a new burst of creativity in solving our shared challenges.

We can draw inspiration from our surround-ings. Inscribed on the walls above us are the words of the poet Edward Young, “Too low they build, who build beneath the stars.”

Imagine what the world might look like if we fail to build and adapt: We could live in an Age of Anger.

By 2040, inequality could surpass the levels of the Gilded Age. Strong tech monopolies and weak governments with ineffective domestic policies could make it impossible for start-ups and entrepreneurs to succeed. Health breakthroughs could allow the richest to live past 120, while millions of others suffer from extreme poverty and disease. Social media

would bombard the “left-behind” population, underscoring the disparity between their reality and the possibility of a better life. The aspiration gap fuels resentment and anger. Trust between nations breaks down. The world would be more interconnected digi-tally, but less connected in every other way. International cooperation for mutual benefit would be a concept studied in libraries like this one, but rarely practiced on the world stage, due to the supremacy of national inter-ests and a singular focus on domestic policies. To borrow from Dr. Kissinger in his book World Order, we might be, “facing a period in which forces beyond the restraints of any order determine the future.”

That is a very dystopian scenario, isn’t it? But I do not believe it is our destiny. Neither does Dr. Kissinger, by the way. We have overcome existential threats before and can do so again. Think of the world if we make 2019 the start of a different kind of “AI”—an Age of Ingenuity. This would be a future fueled by creativity and cooperation.



By 2040, we would see flourishing economies predominantly running on renewable energy. Women would be fully empowered in the workforce, proving to be an economic and social game-changer. New pension systems and health care portability would reflect the changing nature of work in the digital economy. Corporations would embrace social responsibility as part of their business models. Technological wizardry could save lives and create millions of jobs. We would see an end to mass migration. Trade would expand across the world and peaceful co-existence between nations would prevail.

Am I being too optimistic? I have to be optimistic. I am thinking of the world my grandchildren will inherit. But it does present us with a fundamental choice: stand still and watch discord and discontent bubble over into conflict; or move forward, reimagine the way nations work together, and build prosperity and peace.

What does this mean in practice? It means countries working together to put people at the center of all of our efforts—focusing on real results that improve lives. It also means governments and institutions being more transparent and accountable—which includes listening to more diverse voices. It means ensuring that economic benefits of globaliza-tion are shared by the many, not just the few.

I have called this the “new multilateralism.” You might call it common sense.

Let me be very clear here: Good interna-tional cooperation cannot substitute for good domestic policy. Of course, individual countries have a responsibility for the well-be-ing of their citizens. In fact, strong domestic policies can form the foundation for effective international cooperation. And in our modern world, there are some issues that can only be addressed through international cooperation.

I want to discuss four such issues in that respect, tonight. To be successful in each, we will need the creativity and vision of the IMF’s 189 member countries, including our founding member—the United States.

“ ”Think of the world if we make

2019 the start of a different kind of “AI”— an Age of Ingenuity.



“ ”

It means ensuring that economic benefits of globalization are shared

by the many, not just the few…I have called this the ‘new multilateralism.’

You might call it common sense.

KE YS TO THE AGE OF INGENUIT Y

First, trade. I have been saying for some time now that we need to “fix the system.” More recently I have been urging countries to “de-escalate” trade tensions. It was encourag-ing to see progress on this front at the G20 over the weekend. Now we must continue the de-escalation, while at the same time improving the trading system for the future. This would include eliminating distortionary subsidies, whichever form and color they take. It would also mean protecting intellectual property rights without stifling innovation and getting rid of rents. New trade agreements could unleash the potential of e-commerce and trade in services. I should stress that better macroeconomic policies would reduce the external imbalances—including trade surpluses and deficits—that have been the backdrop for rising trade tensions. All of this is critical because trade lifts productivity and accelerates innovation.

My second issue where we need more cooper-ation: international taxation. Companies now have a world-wide presence, but governments have not figured out a world-wide answer on tax. Right now, too many tax dollars are left on the table thanks to tax optimization and the bad kind of creativity. So countries need to work closely together to collect what is owed and avoid a tax race to the bottom. They can close the loopholes that lead to what is called base erosion and profit shifting. The IMF is working with our partners, so our members can share best practices and devise regulations for a digital economy in which many companies have no single established base of operations. Why the need for this rev-enue? Because all countries should be invest-ing in their future. Public and private funding working together can strengthen infrastruc-ture, improve education, and prepare all of us to adjust to the technological transformation on our doorstep.



“ ”

My third issue: our climate. From the recent major hurricanes in the Caribbean to the wildfires in California, the dangerous effects of climate change are becoming more tangible by the day. A new US government study shows that the economic impact from climate change could significantly reduce America’s GDP in the coming decades. The collabo-rative agreement reached in Paris in 2015 is the best toolbox we have to start fixing this planetary challenge and move toward a zero-carbon economy. It also reflects the ideas that I have highlighted tonight—creativity, visionary thinking, and a global commitment to the common good that serves self-interest. This is a matter of survival for our children and grandchildren.

Now each of these issues—trade, tax, cli-mate—is worthy of its own Kissinger Lecture. But there is one issue that I believe is the bedrock for progress nearly everywhere else. That is why the fourth and final area I want to discuss is good governance, free from the shackles of corruption. The simple fact is that without confidence in our institutions, none of the change we seek will be possible. So, let me focus on this briefly.

FIGHTING CORRUPTION, PROMOTING GOOD GOVERNANCE

Why is corruption so corrosive? Because when people start believing the economy no longer works for them, they start disconnecting from society. Corruption saps economic vitality and siphons off desperately needed resources. The money diverted from education or health care perpetuates inequality and limits the possibil-ity of a better life. The annual cost of bribery alone is over 1.5 trillion dollars—roughly two percent of global GDP.2

Millennials feel the problem acutely. A recent survey of global youth revealed that young people identify corruption—not jobs, not lack of education—as the most pressing concern in their own countries.3

There is wisdom in this insight—because corruption is a root cause of many of the economic injustices young men and women feel every day.

Corruption is a cancer that does not recognize

borders.



That is why the IMF, with the support of all our membership, is scrutinizing anew the impact of corruption on a country’s macro-economic health. So far, we have worked with over 110 countries on improving their efforts to tackle money laundering and terrorist financing.

And this is only a small part of the wider work needed to promote good governance. Investing in institutions is indispensable, as is persistence to verify that institutions actually deliver.

Here is the fundamental point: Corruption is a cancer that does not recognize borders.

Think of how fintech is changing the eco-nomic game. New innovations—including cryptocurrency—can be used by cyber-crim-inals to funnel illicit financial flows and fund illegal activities worldwide. This is not one nation’s problem or within one nation’s power to resolve. It can only be fixed through cross-border collaboration.

But it is something fixable. The same innova-tions that create cross-border challenges can also be used to help us fight back. Through biometrics, blockchain, and more we can find creative ways to build a better, safer system for the long-term. Governments can and must work with the world’s best engineers to build stronger cyber security systems that protect people’s bank accounts and their well-being. This is a common good we must choose to support.

If we take on the challenge of corruption, it can be a model for cooperation in each of the areas I have raised tonight. It can be the sign that “the brotherhood of man,” as Keynes called it, is ready once again to meet the call of history. Except this time, women will play a starring role!

This is how we start restoring trust, the most precious and in-demand commodity in our society.

This is how we begin to adapt once more and reimagine international cooperation.

This is how, by working together, we can create the Age of Ingenuity.



Conclusion

Now, before I conclude, there is one thing left to do. I began my remarks by mentioning that December 4th was an important date.

On December 4th, 1918, one hundred years ago to the day, President Woodrow Wilson set sail for France to help negotiate what he hoped would be a lasting peace. He became the first sitting US President to travel to Europe. In some ways, we can trace the ori-gins of creativity and visionary thinking in US foreign policy to this date.

It is a humbling reminder that our plans do not always work out as intended. But it is also a signal that we must try and try again to overcome.

We must build on what worked, change what does not, and continually evolve, improve, and imagine a better future for all people. It was the vision that inspired the leaders of this country. It must be the mission that will guide all of us in the days ahead.

Thank you.

“ ”

We must build on what worked, change what

does not, and continually evolve, improve, and imagine a better

future for all people.



ENDNOTES

1 U.S. Bureau of Economic Analysis (BEA). “National Data.”

2 Corruption: Costs and Mitigating Strategies. IMF Staff Discussion Note. (May 2016)

3 World Economic Forum. Global Shapers Survey 2017.


Delivered at the Singapore Fintech Festival

in Singapore on November 14, 2018

Winds of ChangeThe Case for New Digital Currency


W I N D S O F C H A N G E 39

“ ”

In Singapore, it is often windy. Winds here bring change, and opportunity. Historically, they blew ships to its port. These resupplied while waiting for the monsoon to pass, for the seasons to change.

“Change is the only constant,” wrote the ancient Greek philosopher, Heraclitus of Ephesus.

Singapore knows this. You know this. It is the true spirit of the Fintech Festival—opening doors to new digital futures; hoisting sails to the winds of change.

And yet change can appear daunting, destabi-lizing, even threatening. This is especially true for technological change, which disrupts our habits, jobs, and social interactions.

The key is to harness the benefits while man-aging the risks.

When it comes to fintech, Singapore has shown exceptional vision—think of its regu-latory sandbox where new ideas can be tested. Think of its Fintech Innovation Lab, and its collaboration with major central banks on cross-border payments.

In this context, I would like to do three things:

• First, frame the issue in terms of the changing nature of money and the fintech revolution.

• Second, evaluate the role for central banks in this new financial landscape—especially in providing digital currency.

• Third, look at some downsides, and con-sider how they can be minimized.

The key is to harness the benefits [of technological change]

while managing the risks.



The Changing Nature of Money and the Fintech Revolution

Let me begin with the big issue on the table today—the changing nature of money.

When commerce was local, centered around the town square, money in the form of tokens—metal coins—was sufficient. And it was efficient.

The exchange of coins from one hand to another settled transactions. So long as the coins were valid—determined by glancing, scratching, or even biting into them—it did not matter which hands held them.

But as commerce moved to ships, like those that passed through Singapore, and covered increasingly greater distances, carrying coins became expensive, risky, and cumbersome.

Chinese paper money—introduced in the 9th century—helped, but not enough. Innovation produced bills of exchange—pieces of paper allowing merchants with a bank account in their home city to draw money from a bank at their destination.

The Arabs called these sakks, the origin of our word “check” today. These checks, and the banks that went along with them, spread around the world, spearheaded by the Italian bankers and merchants of the Renaissance. Other examples are the Chinese shanxi and Indian hundi bills.

Suddenly, it mattered whom you dealt with. Was this Persian merchant the rightful owner of that bill? Was the bill trustworthy? Was that shanxi bank going to accept it? Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision.

Why is this brief tour of history relevant? Because the fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it ques-tions the role of the state in providing money.

We are at a historic turning point. You—young and bold entrepreneurs gathered here today—are not just inventing services; you are potentially reinventing history. And we are all in the process of adapting.

“ ”A new wind is blowing, that

of digitalization. In this new world, we meet anywhere, any time.



“ ”Money itself is changing.

We expect it to become more convenient and user-friendly.

A new wind is blowing, that of digitalization. In this new world, we meet anywhere, any time. The town square is back—virtually, on our smartphones. We exchange information, services, even emojis, instantly—peer to peer, person to person.

We float through a world of information, where data is the “new gold”—despite grow-ing concerns over privacy, and cybersecurity. A world in which millennials are reinventing how our economy works, phone in hand.

And this is key: money itself is changing. We expect it to become more conve-nient and user-friendly, perhaps even less serious-looking.

We expect it to be integrated with social media, readily available for online and person-to- person use, including micro-payments. And of course, we expect it to be cheap and safe, protected against criminals and prying eyes.

What role will remain for cash in this digital world? Already signs in store windows read “cash not accepted.” Not just in Scandinavia, the poster child of a cashless world. In various other countries too, demand for cash is decreasing—as shown in recent IMF work. And in 10, 20, 30 years, who will still be exchanging pieces of paper?

Bank deposits too are feeling pressure from new forms of money.

Think of the new specialized payment providers that offer e-money—from Alipay and WeChat in China, to Paytm in India, to M-Pesa in Kenya. These forms of money are designed with the digital economy in mind. They respond to what people demand, and what the economy requires.

Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.



“ ”

I believe we should consider the possibility to issue digital currency.

There may be a role for the state to supply money

to the digital economy.

A Case for Central Bank Digital Currencies

Let me now turn to my second issue: the role of the state—of central banks—in this new monetary landscape.

Some suggest the state should back down.

Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in cus-todian accounts, and simply settle payments within their networks.

For their part, cryptocurrencies seek to anchor trust in technology. So long as they are trans-parent—and if you are tech savvy—you might trust their services.

Still, I am not entirely convinced. Proper regula-tion of these entities will remain a pillar of trust.

Should we go further? Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash?

Let me be more specific: should central banks issue a new digital form of money? A

state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm.

This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.

Today, we are releasing a new paper1 on the pros and cons of central bank digital cur-rency—or “digital currency” for short. It focuses on domestic, not cross-border effects of digital currency.

I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.

This currency could satisfy public policy goals such as (1) financial inclusion, and (2) secu-rity and consumer protection; and provide what the private sector cannot: (3) privacy in payments.



“ ”Digital currency offers great promise through its ability

to reach people and businesses in remote and marginalized regions.

FINANCIAL INCLUSION

Let me start with financial inclusion, where digital currency offers great promise, through its ability to reach people and businesses in remote and marginalized regions. We know that banks are not exactly rushing to serve poor and rural populations.

This is critical, because cash might no longer be an option here. If the majority of people adopt digital forms of money, the infrastruc-ture for cash would degrade, leaving those in the periphery behind.

What about subsidizing cash usage in those areas? But that means that economic life in the periphery would become disconnected from the center.

Of course, offering a digital currency is not necessarily the only answer. There may be scope for governments to encourage private sector solutions, by providing funding, or improving infrastructure.

SECURIT Y AND CONSUMER PROTEC TION

The second benefit of digital currency relates to security and consumer protection. This is really a David versus Goliath argument. In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms—banks, clearinghouses, and network operators. Simply by offering a low cost and widely available alternative.

Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies—the more people you serve, the cheaper and more useful the service.

For a start, private firms may under-invest in security to the extent they do not measure the full cost to society of a payment failure. Resilience may also suffer—with only a few links in the payment chain, the system may stop working if one of these links breaks. Think



“ ”A digital currency

could boost competition by offering a low-cost and efficient alternative

[means of payment].

about a cyber-attack, a glitch, bankruptcy, or a firm’s withdrawal from the local market.

Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative—as did its grandfather, the old reliable paper note.

PRIVAC Y

The third benefit of digital currency I would like to highlight lies in the privacy domain. Cash, of course, allows for anonymous pay-ments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.

Consider a simple example. Imagine that people purchasing beer and frozen pizza have higher mortgage defaults than citizens purchasing organic broccoli and spring water. What can you do if you have a craving for beer and pizza but do not want your credit score to drop? Today, you pull out cash. And tomorrow? Would a privately-owned payment system push you to the broccoli aisle?

Would central banks jump to the rescue and offer a fully anonymous digital currency? Certainly not. Doing so would be a bonanza for criminals.

Downsides of Bank Digital Currencies

This brings me to my third area—the potential downsides of digital currency. The obvious ones are risks to financial integrity and financial stability. But I would also like to highlight risks of stifling innovation—the last thing you want.

My main point will be that we should face these risks creatively. How might we attenuate them by designing digital currency in new and innovative ways? Technology offers a very wide canvas to do so.

RISKS TO F INANCIAL INTEGRIT Y

Let’s return to the tradeoff between privacy and financial integrity. Could we find a mid-dle ground?



Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default.

Anti-money laundering and terrorist financing controls would nevertheless run in the back-ground. If a suspicion arose it would be possi-ble to lift the veil of anonymity and investigate.

This setup would be good for users, bad for criminals, and better for the state, relative to cash. Of course, challenges remain. My goal, at this point, is to encourage exploration.

RISKS TO F INANCIAL STABIL IT Y

The second risk relates to financial stability. Digital currencies could exacerbate the pres-sure on bank deposits we discussed earlier.

If digital currencies are sufficiently similar to commercial bank deposits—because they are very safe, can be held without limit, allow for payments of any amount, perhaps even offer interest—then why hold a bank account at all?

But banks are not passive bystanders. They can compete with higher interest rates and better services.

What about the risk of bank runs? It exists. But consider that people run when they believe that cash withdraws are honored on a first-come-first-serve basis—the early bird gets the worm. Digital currency, instead, because it can be distributed much more easily than cash, could reassure even the person left lying on the couch!

In addition, if depositors are running to foreign assets, they will also shun the digital currency. And in many countries, there are already liquid and safe assets to run toward—think of mutual funds that only hold government bonds. So, the jury is still out on whether digital curren-cies would really upset financial stability.

RISKS TO INNOVATION

If digital currency became too popular, it might ironically stifle innovation. Where is your role if the central bank offers a full-ser-vice solution, from digital wallet, to token, to back-end settlement services?

What if, instead, central banks entered a part-nership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over.

This partnership could take various forms. Banks and other financial firms, including start-ups, could manage the digital currency. Much like banks which currently distribute cash.

Or, individuals could hold regular deposits with financial firms, but transactions would ultimately get settled in digital currency between firms. Similar to what happens today, but in a split second. All nearly for free. And anytime.

The advantage is clear. Your payment would be immediate, safe, cheap, and potentially semi-anonymous. As you wanted. And central banks would retain a sure footing in payments. In addition, they would offer a more level playing field for competition, and a platform for innovation. Meanwhile your bank, or fellow entrepreneurs, would have ensured a friendly user experience based on the latest technologies.



“ ”Putting it another way: the central bank focuses on its comparative advantage—back-end settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation. This is public-private partnership at its best.ConclusionLet me conclude. I have tried to evaluate the case this morning for digital currency. The case is based on new and evolving require-ments for money, as well as essential public policy objectives. My message is that while the case for digital currency is not univ

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