‘Reason For Proponents Of Integrated World Economy’ — IMF Director Georgieva

The following is a transcript of an interview with Kristalina Georgieva, Director of the International Monetary Fund. Excerpts:

You have a lot of work ahead of you in this second term.You were just reelected to congratulations.

Thank you

Oil markets have been swinging because of this instability in the Middle East escalation risk, the threat to global shipping as well. Can you gauge at this point what the economic impact will be?

So far it has been somewhat moderate. We have seen on Friday, when the news of potential strike from Iran into Israel came, oil prices jumped by 1%. We have seen so far the impact of this conflict, primarily in the epicenter affecting Israel, and in particular, devastating Gaza and West Bank with spillovers to the neighboring countries. Even the shipping destruction in the Red Sea, has not yet led to a major impact. But any impact as small as it might be is not desirable in an economy with high uncertainty and inflation still not being brought down to target. Very simple. Oil prices go up, inflation goes up. So what can be done, to bring down uncertainty is, of course, for others- for those in politics, in the military, from an economic standpoint, the more we reduce uncertainty, the better.

We have a lot of uncertainty right now, one of them being the US Congress and funding for these conflicts. Congress is looking at authorizing the Biden Administration to seize Russian state assets, potentially for use in a negotiation or to rebuild Ukraine. What do you think of that idea?

This is really for the jurisdictions that have authority to take a decision to make….

But it could have a global impact?

What we do is we look at it and then we assess what the impact might be. And then of course, it is a matter of how would that be received as news across the world, countries that are holding their reserves and let’s- let’s remember today, there they are $11 trillion in reserves in countries around the world, they would be looking at that with some attention. So what our position is, when a decision is being taken, whatever the decision is, please think of the consequences and especially the law of unintended consequences and factor it in.

What you’re saying there is that this could essentially cause what, a flight of assets out of the banking systems in Europe in particular?

We have not seen the reaction to be of that magnitude. Our point is very simple. We have an integrated global economy, even with the winds of fragmentation… still, countries are connected with each other. So whatever decision is being taken, take it within an eye of the desired impact and also of what might be an unintended consequence.

We’re in an election year. As you know, Goldman Sachs put out a report outlining potential tariff increases as the most important issue for the economic outlook if President Trump were to be reelected, he continues to float ideas of tariffs anywhere from 10 to 60 percent, or upwards. How would you gauge the impact and the risk of doing that?

Let me first reflect on why we have seen over the last decade, a backlash on globalization. We all know an integrated world economy lifts up growth prospects and leads to improvement in standard of living, but not for everyone. What we have seen is that communities that have been negatively impacted by globalization and have not been attended, they have not been helped to cope with it are the backbone of this backlash that we are seeing today. So my most important point is, trade is good. But it is not necessarily good for everyone. And policies have to reflect on that. We have to make sure that the benefits are more broadly shared in society.

Tariffs would add to inflation as well. You agree, as an economist?

Of course. There’s- let me just be very clear. The reason we are proponents of an integrated world economy is because it brings costs down and it increases the well being of people around the world. So we are on the view that we should be striving to have a more integrated economy. And let me say this, what we are seeing is already trade patterns are shifting. What is the impact? The impact is the so called connector countries play a bigger role. So you don’t see a trade from A to B, you see trade going A to B to C to D. So we are lengthening the supply chains. And that, of course, leads to high costs on consumers and as you said, not great for inflation.