Opening remarks
by Már Guðmundsson, Governor of the Central Bank of Iceland, at a conference
organised by the Bank and the Reinventing Bretton Woods Committee on The
uncertain future of global economic integration, Harpa Concert Hall and
Conference Centre, Reykjavík, 14-15 September 2017.
I welcome all of you to this conference and the foreign participants to Iceland.
The conference is organised by the Central Bank of Iceland and the Reinventing
Bretton Woods Committee. The heading is broad and probably reflects in part
the worries that some of us might currently have about the future of global
economic integration.
The topic encompasses both real economic integration - that is, trade in goods
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and services and the flow of labour and equipment across borders and financial
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integration that is, cross-border capital flows and stocks and associated
activities of banks and other entities.
The financial integration part will probably dominate the proceedings, not least
because most of the speakers are current or former central bankers. I do not see
that as a problem, as in my mind more work remains to be done in assessing the
costs and benefits of global financial integration than regarding real side
economic integration. After all, the post-war global economic order was initially
based on the principles of free trade in goods, current account convertibility, and
monetary stability through fixed but adjustable exchange rates vis-à-vis the US
dollar. Open capital accounts were the exception, however. Real side economic
integration was seen to be more important for economic progress than financial
integration.
It worked well for a long while, and some call the period from 1950 to 1970 the
golden years. Yet there were inherent flaws in this set-up that contributed to its
demise in the early 1970s, not least the well-known Triffin dilemma regarding
the conflict between the domestic economic objectives of the country providing
the main reserve currency and the required international supply of that currency.
Then capital accounts were opened up, with strong momentum in the 1980s and
early 1990s. Capital controls were increasingly undermined by technology and
financial innovation, and strong arguments were being made to the effect that
open capital accounts would bring significant benefits. After all, ongoing real
economic integration at a global level demanded at least some degree of global
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financial integration. As the BIS reminded us in its latest Annual Report and
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Jaime Caruana might touch on in his keynote speech later in this session trade
and finance tend to go together. Freer capital movements in turn undermined
pegged exchange rates and thus contributed to the spread of flexible exchange
rate regimes and inflation targeting.
There can be little doubt that both real and financial global integration have
brought enormous economic benefits. Still, it has been increasingly questioned
of late. We partly understand why.
We know that there are significant gains from real integration but that there are
winners and losers. The losers can be compensated in principle, but in practice
this does not always happen. Inequality has increased within many countries and
economic integration is blamed, although research shows that technological
change plays a significantly bigger role.
At least in part, the case of financial integration is different. Finance is an integral
part of economic progress, and there are significant benefits from global
financial integration. But more is not always better when it comes to finance, as
we learned the hard way during the latest financial crisis. Furthermore, large and
volatile capital flows can undermine the financial stability of countries. It is not
clear who the winners are in that case nor what the compensation mechanism
would be. Spillover effects from monetary policy of global rate setting countries
to small, open and financially integrated economies (SOFIEs) increase as global
financial integration intensifies. In particular, if the global rate setter experiences
an economic slack at a time when a SOFIE is booming, the SOFIE might find it
difficult to pursue warranted macroeconomic policies without risks to financial
stability and/or significant detrimental effects on export sectors. This could be
the case if there are perceived limitations to the use of fiscal policy; for instance,
if there is already a sizable headline surplus. In this situation, macroprudential
and even capital flow management measures could help. In Iceland's case and
some others, this raises the issue of compatibility with existing international and
regional treaty obligations regarding free movement of capital. The jury is still
out on these issues.
It is one thing to try to make global financial integration safer and to mitigate
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unwanted spillover effects which might involve some retrenchment, as it did
in this country and many others after the crisis - but it is another matter entirely
to bring about a large-scale reversal of the global financial integration of recent
decades. Most likely, such a reversal would seriously undermine real economic
integration and the benefits associated with it.
We are going to discuss these issues and others that pertain to the current state
and future prospects of global economic integration. After Jaime's
keynote
speech, we will have two sessions with substantive presentations and discussions
on different aspects of the topic. This afternoon, we aim to take stock of recent
trends in global and regional economic and financial integration, assess country
responses to these trends, and discuss how the responses in turn affect the level
of integration. This includes macroprudential and capital flow management
measures. We will probably hear something about how the challenges have been
addressed in this country.
Tomorrow we turn to the international monetary and financial system. Part of
that discussion will aim at identifying potential reforms that would better allow
individual countries and the global economy to reap the benefits of economic
and financial integration and avoid the risks associated with it. We will then wrap
up with a policy panel.
Looking at the programme, I am particularly pleased to note the high level of the
speakers. I am even more pleased to see how many of them are old colleagues
and friends. The speakers will all be properly introduced in their sessions. Let
me just note that the relevant international organisations are represented at a high
level. We have a General Manager of the Bank for International Settlements for
the first time in Iceland. We have also a chairman of the Basel Committee for
Banking Supervision for the first time in Iceland, as far as I know, although
Stefan has of course been in Iceland several times with other hats. We have
Deputy Managing Director of the IMF for a second time in Iceland. We have
two current governors (not counting me) and two former governors. We have
three former deputy governors from G20 countries and we have prominent
academics. As you have probably realised there is some double counting in this,
which just goes to show the quality of the speakers.
Before I make my final remarks, I would like to remind us all that this is a
closeddoor invitation-only event. There is no press here, and we are under modified
Chatman House rules, which imply that you may use what you hear in your work
and even speak about the event, but without attributing to or quoting individual
speakers. We wanted to have it this way in order to facilitate frank and open
discussion of a difficult topic that many of us are trying to get a handle on. The
aim is to contribute in some small way to improved policy making at the global,
regional, and country levels.
In closing, I would like to thank all of those that have worked hard to make this
event possible, especially the staff in my own office. Last but not least, let me
thank our co-organiser Marc Uzan, Executive Director of the Reinventing
Bretton Woods Committee. This is the third event that he has been involved with
in Iceland. He has organised roughly 100 seminars around the world and must
be among the best connected individuals in this business. At the time of the 70th
Anniversary of the Bretton Woods Conference he edited a large volume of short
essays on the international monetary system that I among many others had the
pleasure to contribute to. I have also spoken in several of his seminars. It is a
great pleasure to work with him, and he has become a good friend. I have come
to realise that what drives him is a passion to improve the international monetary
system. It matters a lot, and for various reasons it matters more for small
countries like Iceland than for big countries that can better fend for themselves
in a non-multilateral and non-rule based world. That is why we are having this
conference here. Marc, the floor is yours.