Debate on the Global Economy: Shaping Economic Policies Amid a Shifting Global Landscape — Transcript of President Tharman Shanmugaratnam’s Interventions at IMF Headquarters, 16 October 2025

Lisa Abramowicz, Bloomberg Co-Host; Moderator: I’d like to welcome everybody here. This panel - I am so excited about it, and frankly, I am so honored to be on the stage with this group of people. I’d like to introduce them. First, sitting next to me is the President of Singapore, Tharman Shanmugaratnam. And then, of course, the President of the European Central Bank, Christine Lagarde, is next to him. And then, of course, the Managing Director of the IMF, Kristalina Georgieva; Adena Friedman of Nasdaq — she’s Chair and CEO of Nasdaq — and Gordon Hanson, who is the Peter Wertheim Professor in urban policy at the Harvard Kennedy School.

This is a tremendous group of people to talk about the economy in flux around the world and how many changes there really have been over the past six to twelve months. And that’s where I want to start. Managing Director Georgieva, I want to start with you. How much has the world economy changed over the past six to twelve months?

Kristalina Georgieva, IMF Managing Director: This is an excellent question. Vis-à-vis twelve months ago, it has gotten worse; but vis-à-vis six months ago, it has gotten better. So what is our story? Our story is: when we were here in April, there was a big trade shock and tremendous uncertainty about what the impact may be. Our fear at that time was that there could be a contraction of growth, and that was reflected in our projections.

Since then, what we have witnessed is the world economy has been remarkably resilient. And when you look at the reasons for this resilience to stand up: one, countries over the last decades have built strong fundamentals — good policies, strong institutions — and this is particularly applicable to a big part of the emerging-market world. Good policies pay off.

Two, the private sector also, over this last decade, has gradually moved forward for a bigger role in the economy, and the private sector is more agile. And then we had the, so far, nice surprise that countries decided mostly not to retaliate when hit by tariffs. So, with only two exceptions — we have 191 members — the US and China; in the beginning, Canada retaliated; everybody else said, “Thank you, but no thank you. We don’t want a trade war. We prefer to retain trade as an engine for growth.”

Now, resilience so far — but I want to be straight with this audience. I don’t know whether this resilience has been fully tested, and I can think of three big risks. If they materialize, there will be trouble.

Risk number one: maybe this restraint on trade is not going to last. We see, for example, Chinese goods that were to come to the United States being redirected to Asia and to Europe. Will that be managed still with patience, or could there be a downward spiral of tariffs?

Two, financial conditions — they’re wonderful. That’s actually another reason for resilience. There is access to money; there is access to capital. But that has led to stretched valuations, especially in AI investments. Huge enthusiasm — AI would lift productivity, but what if it doesn’t? That could lead to a shock.

And the third big risk, as always, is the unknown. We have learned over the last years since COVID: think of the unthinkable. I don’t know what the next shock is going to be. I don’t know where it is going to come from, but I’m pretty confident there will be one — and then we will be tested.

Moderator: There’s a lot to unpack there. President Tharman, I want to go to you just to talk about what your experience has been as the head of an open economy in Southeast Asia during this period - in terms of what you’ve observed, and how much has changed in terms of trade flows and the consistency that people feel there is from policy.

Tharman Shanmugaratnam, President of the Republic of Singapore: It’s a setback for Asia as a whole; it’s a setback for Southeast Asian nations. And we’ve got to start thinking about how we can make it an opportunity.

The setback is clear. If you look at most Asian countries outside China — we know about the problems China is facing — but look outside China: they’re facing a double whammy. There are the US tariffs on the one hand, which will themselves have a fairly significant impact. There’s also the diversion of Chinese exports from the US to other Asian countries and to Europe, which Kristalina just mentioned.

And then there are two other, underlying challenges, two forces which are reducing the tailwinds that have been in favor of growth in Asia. One underlying force, which didn’t start with the US tariffs, but is now picking up steam, is the onshoring of production into both the US and China. China has been onshoring production too, as it goes for greater self-sufficiency.

A second underlying challenge, I would say, is the thinning out of the US-China trade corridor which a lot of Asia’s growth has rested on. And as that corridor thins out, we’ve got to for it with new corridors.

This is where we come to the opportunity. If the US tariffs are reconfiguring trade, we’ve got to reconfigure trade as well. We do have agency. The middle powers and the smaller nations of the world have agency.

Just think of what’s possible: The CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), the EU, the GCC (Gulf Cooperation Council), ASEAN — they’re not small trading arrangements. If the CPTPP and the EU start collaborating with each other, that’s about 42 per cent of world trade. If ASEAN and the EU start collaborating with each other, that’s more than a third of world trade.

So you are reconfiguring trade, we will all reconfigure world trade. Let’s go for new trading arrangements that will allow developing countries in Asia to continue rising up the ladder of value-added - first by trading within regions, within ASEAN, within Asia, but, very importantly, linking up across the world.

That’s the blessing of the US tariff move: it’s spurring regional integration, and it’s spurring bridges between regions.

So I think we will end up, after a period of some difficulty and some adjustment, with a new resilience. Let’s work towards this new resilience.

Moderator: Madame Lagarde, you’re a policymaker. You’ve been at the helm of the ECB for almost six years. How difficult is it to understand things like inflation, like economic strength, when you have the dual shocks of the idea of tariffs on the one hand, but also exports from China coming into Europe and actually suppressing price growth? How do you weigh all of this?

Christine Lagarde, President of the European Central Bank: Well — and don’t forget as well the unjustifiable war of Russia against Ukraine, which is at the doorstep of Europe. So first of all, it’s really nice to be back here. Last time I was here, I think it was my farewell party — so being back here is really, really nice.

Let me say, I’m going to follow up on where Kristalina and I left it, because my conclusion is that the worst is not always certain. And, if I may say, we’ve been surprised to the upside. A year ago, step forward to today, we had anticipated retaliation — tit-for-tat. Europe didn’t do any of that. As a result, the expected inflation contributor did not participate in the process.

On the exchange-rate front, we expected the euro to depreciate and the dollar to appreciate. What did we see? Exactly the opposite. So there was no imported inflation as a result. And, on the third point — uncertainty — we had uncertainty, granted, but eventually this driver was not as bad as we had anticipated.

So, because of all that, our monetary policy was not confronted with the traditional trade[1]off between stalling growth and rising inflation, number one. Number two, the risk to growth and inflation eventually narrowed, and were far more balanced. And, as a result of that, we are where we are.

And that impacts the tools that we’re using — in other words, models. We had to navigate a far more difficult situation where a lot of what was happening — sort of in the course of normal business, which was not normal at all — we had to face war; we had to face tariffs; we had to face, I would say, accelerated greed as a result of the impact of new technologies and social media; and we had to face exogenous shocks in quantities that we could not anticipate. And that certainly impaired our capacity to rely extensively on models, and encouraged us to use more judgment.

Bottom line: we are currently, at least in the euro area, at 2% inflation — which was our medium-term goal. We are at 2% interest rates. It’s a surprising coincidence, but we consider that where we are today, we are in a good place, and we’re well positioned to face future shocks. And future shocks there will be — Kristalina and Tharman said it, I completely agree with that. We will be facing shocks. In what direction? How do we adjust our policies in order to deal with it? What kind of regulatory framework do we have in order to reduce the financial-instability risks that abound as a result of new technologies breaking through into the financial system?

It’ll be incumbent upon us — advanced economies, emerging economies, low-income countries — to agree on what will be the best way to cooperate in order to maintain financial stability, price stability, while helping with the development of growth which, hopefully, will be inclusive and sustainable.

Moderator: There’s a lot to unpack there, too. Several panelists have been talking about the technological backdrop. Adena Friedman, you’ve been watching this as head of Nasdaq in terms of just how much private-company innovation has dominated what we’ve seen in terms of the upside surprise that Madame Lagarde was talking about. How sustainable do you see this? Is there a disconnect here between the uncertainty in the broader economic backdrop and the public sector, and the real dynamism that we’re seeing — and elevated valuations — in the private sector, particularly having to do with tech?

Adena Friedman, CEO of Nasdaq: I actually would say that I think investors have done a good job of synthesizing everything we’ve been talking about here and demonstrating it in the markets — and how they’re engaging with the markets.

So, you know, on the back of COVID, and in the aftermath of COVID — with a very changing monetary policy and a very fast-changing monetary policy to tighten monetary policy — investors kind of took a step back and took a very risk-off stance. And you saw that in terms of not as many IPOs coming to market and some market — frankly, some market capitalisation reductions in 2022 going into 2023.

But since then, I think investors have synthesized the fact that, going into 2025, we have likely a moderating monetary policy in the United States. We’ve already seen that in Europe. That’s very helpful — and that’s also extremely helpful to small caps.

I do need to call out small-cap companies. You know, with that change in monetary policy, small-cap companies are facing a situation where 40–45% of their earnings are going to paying interest expense right now. So they just cannot reinvest their capital to grow. They’re having to use their capital to pay off debt or to manage their debt — and that’s very constrictive. So, as we are seeing some changes in monetary policy, you’re seeing the small caps starting to lift up as well.

But the rest of the market — in particular, the large caps — have had an incredible environment around them. There is an incredible technology that is coming; it’s on the scene. It’s extremely early, but it’s already having an effect. I think that people, you know, as a general thesis, tend to be very excited and enthusiastic early. And, at the end of the day, this technology, in my opinion, will be the fastest-moving and most consequential technology that we’ll see in many decades.

It’s an incredible technology that will come, and I do think it will achieve a lot of incredible productivity gains over time. It takes time, though — it’s very early, and people get very excited. But the fact is that as we build out the infrastructure, the models are improving every single month, every single quarter. The way that the models are being able to be brought together now through agents and digital workers — to be able to string together capabilities — will drive productivity. And investors are understanding that. So investors are there to predict the future, and they definitely predict a bright future.

But I would also point out that since the beginning of 2024 until today, while the Nasdaq[1]100 is up 47%, the earnings of the companies in the Nasdaq-100 are up 32%. So there is a lot of justification for the fact that the markets are performing the way they’re performing — and then you’ve got the promise of more.

And then you also have an easy monetary environment, which also tends to be supportive of markets. And then you have a deregulatory environment, which tends to be supportive of growth. So there is a lot to synthesize, but I would say investors are synthesizing it and demonstrating it in what they’re showing in the markets right now.

Moderator: This is all predicated on the idea that we’re not necessarily going to be tested — and I’m going back to what Kristalina Georgieva had to say. Gordon Hanson, I’d love you to weigh in on this, because I know you have a pretty provocative idea about how it could be tested in the near term in terms of the tit-for-tat, and just how much we have seen the complete portfolio of the trade tussle that’s been going on.

Gordon Hanson, Professor at Harvard Kennedy School: So, we’re really still in the early stages of defining a new trade regime. And it’s been extraordinary in so many dimensions. One is that the nine most important policymakers, when it comes to global trade policy, are the Supreme Court justices of the United States. Sometime, probably after hearing arguments about the International Emergency Economic Powers Act — IEEPA — which will happen in early November, in January, in all likelihood, they will decide whether the President of the United States has free rein to set tariffs, or whether big changes in tariff policy across the board have to go through the US Congress.

If we’re in that first world, then I think the incentives to retaliate fundamentally change. The Managing Director was spot-on in saying that the limited economic consequences we’ve seen from the trade war so far are grounded in the absence of retaliation. But that retaliation is, in part, because you don’t know which United States you’re taking on — and we’re going to learn that quite soon.

Once that gets resolved, then I think countries are going to be choosing between the world that President Tharman laid out — in which the EU, parts of Asia, Australia, Canada come together and say, “We want civilized trade relationships; come join us, and we can play by a fixed set of rules” — and then we’ll have kind of trade barbarity going on in the rest of the world, in which you’ve got to take on the United States. The United States is going to do one thing one day, and it’s going to do another thing the next day.

But if we’re in a different world — if the President of the United States is constrained — then that pressure for retaliation looks quite different, and we’re more in a world that’s like what happened with anti-dumping policies and retaliation against anti-dumping. It’s about specific industries; it’s bilateral conflicts at different moments in time; and they’re things that we can manage that don’t throw us into all-out trade war.

Moderator: Does anyone want to respond? I just want to throw this out there because I see a lot of people writing. Madame Lagarde?

Christine Lagarde: I’m delighted to pick up on your two points, because I think it describes exactly the policy of the European Union. The two things that are happening — that have been awakened, if you will, by the uncertainty of which administration we’re dealing with. Number one, there has been significant public investment and a drive towards beefing up defense — in particular at both public and private level. So that’s a boost that is coming from investment and development of activity.

And the second one — which is obvious — is an acceleration of the negotiations that were underway, in a slow, laborious way, with quite a lot of partners, specifically in East Asia, but other countries of the world as well. So our trade secretariat in Europe is actively engaged in exactly that movement — just in case.

Moderator: But I wonder, President Tharman, how much you see already people rearranging versus actually waiting to see about the Supreme Court case, to decide how much to move away from a US-driven model?

President Tharman Shanmugaratnam: I think the unstated assumption in China and most Asian countries is that there will be continued unpredictability. There has been a step change in the whole regime of global trade.

So, regardless of how the Supreme Court rules on this or that, you’re now in a more unpredictable situation. And it will be wise to start building alternatives: building new resilience by building new trade connections, and investing together to tackle the challenges of the global commons — even if it doesn’t include the US for now. We’ve got to press ahead.

So we face a more unpredictable situation, we just can’t wait to see what eventually happens. We’ve got to start making alternative plans and, in the meantime, keep our relations with the US as best as we can. Keep our relations with the US — it’s still a major market, and it’s got the most innovative companies in the world.

Kristalina Georgieva: So, my experience over the last almost a year is the following. I lived through a revolution when the former Soviet bloc collapsed and countries moved from non-market to market economies, and I can say that the transformation that we are observing is quite significant. So I am not sure we will go back to the world we came from — of fairly orderly multilateralism — but it doesn’t mean that we would be moving forward in a world that is not based on international cooperation, just because we are bound to cooperate in different configurations, in a different manner than before.

Any place I travel in regions, I hear the same message: “You, IMF, help us to think through trade integration, financial integration.” We are talking here about trade, but there are also capital markets; there is finance. You know, the EU is, of course, much ahead of everybody else and, as President Tharman said, this move towards collaboration within regions — I was in the Gulf; Gulf Cooperation Council is moving very rapidly in trade integration and is talking very seriously about financial integration. The same is in ASEAN. Central Asian countries — they used to be not too comfortable working together; they’re now looking for opportunities to work together.

So that is going to happen — and these groupings, then, will collaborate across borders. The EU is very active in reaching out, and some of these relations will be more stable and some will be less stable. Therefore, we have to get accustomed to some inefficiency in the way we cooperate — but cooperate, we will.

And my last point on this — where we are headed is this notion of uncertainty. I actually think that we are now in an era in which uncertainty is the new normal. We’re not going to have the comfort of predicting, you know, five years ahead what is going to happen.

And you see a little bit — and I would be interested in Christine Lagarde’s view on that — you see a little bit of this impact of uncertainty on the trajectory of gold and also on longer[1]term yields. People are saying, “Okay, you want me to lend you money for ten years, fifteen years, twenty years — and God knows what will be done. You need to pay me more.” So that, I think, is something that policymakers here may not be comfortable with — because certainty is preferable — but I think we should embrace it and say, “Hey, that opens up more opportunities, because there are multiple combinations of relations that could be winning relations.”

Adena Friedman: Yeah, I mean, we operate markets in Europe as well. And I would say that what’s happened over the last year has been an enormous catalyst for Europe to come together and think differently about what can be — in terms of financial cooperation and bringing the Capital Markets Union / Savings and Investment Union construct. There’s a new energy around: how do we actually bring Europe closer together? How do we unlock the potential of this enormous economy?

And what I’ve found is, as you go around the world, you’re hearing that in other parts of the world, too. We provide technology to about 140 markets around the world, so we speak to the capital markets and the governments all over the world about what they’re trying to do. They ask, of course, “How do you create this innovation economy?” And there are lots of things — and I think we’ll talk about that. But it’s very possible, and people are thinking differently about what they’re taking agency, as you said — in terms of what they can do with their own economies; how they can spur their own growth; how they can collaborate and cooperate across borders in ways that weren’t before.

And, personally, I think in the end that will result in a stronger world and just a different relationship with the United States and elsewhere. But I’m an optimist, so I usually see this as a catalyst for us to think differently about innovation; to think differently about tax policies and economic policies and equity ownership, and all those things that, frankly, spur growth in a country and drive investment — also, by the way, that can strengthen countries.

Christine Lagarde: Happy to follow up on that, because it’s nice to be praised by non-Europeans, so thank you. But I think there is a momentum — you’re right — in two directions. The first one is at home. We have an internal market, which is the largest economic zone in the world, still at the moment. But we have inflicted upon ourselves one border after another, one barrier, one licence requirement after another hurdle that entrepreneurs and corporates have to jump over. I think the momentum is here to now reduce as much as possible those internal barriers — and the excellent study produced by the IMF, which indicates that on goods it’s as if we had a 40% tariff, and on services as if we had 110% tariffs, is, you know, a big kick in the backside to say: get on with it. Remove that 40%, remove that 110%, and don’t complain about, you know, your status.

The second direction we are heading into — and, as often with Europe, it goes one step at a time and there is no big bang, so to speak — is on the Capital Markets Union, where we really want to be attractive to non-European capital, number one, so investors can come over. And we want to make sure that the savings that are currently massively in deposits — you know, even … they’re here in the United States; €300 billion of those … a few European travel visas are right here. So we want to say, “You don’t have to travel the Atlantic; you can just stay here at home and generate a good yield.”

One last point — because Kristalina Georgieva prompted me on that. Yes, the long-term yields have behaved in a quite surprising way, and they have gone up; and it’s certainly attributable to a risk premium that is expected and required by the investors. But it’s particularly true in the 30-year, not so much in the 10-year; and it’s not as heavy as we had feared in the first phase — it’s come down a bit; and I think that the risk premium requested is now much more reasonable by all standards.

Moderator: and we’re going to get into the fiscal deficit, and how that changes and gives a very EM tinge to some DM. But Gordon Hanson, I’d love to get your take from China’s perspective, and how differently they’re approaching this new landscape — and how that kind of changes things in ways that people might not fully appreciate.

Gordon Hanson: So, we’re in the second big phase of China’s economic growth since it joined the global community of trading nations in the 1980s — and really in the 1990s. And that first phase was a pretty mechanical one. It was China making good on its latent comparative advantage in manufacturing, reallocating labour from farms to factories, and undergoing a process of urbanisation that had been staunched by the Mao-era policies 10 of central planning that were in effect for thirty years. That had played itself out by around 2010.

And now what we’re going through is this new phase of Chinese growth, which isn’t driven towards that natural process of comparative advantage; it’s driven by the state deciding where China should go, and enlisting competition among companies and competition among regional policymakers to figure all of that out. That first epoch — kind of China Shock One — market forces were stronger, and the government was neutral to some extent when it came to specific industries. Now the government is much less neutral. What China wants to be in command of are quality, productive sectors.

And what’s different about this time around is: whereas last time what you’re really talking about is engineering redistribution inside countries — the US went from producing manufacturing to producing intellectual property — now what we’re really talking about is the potential redistribution of technology-frontier industries from one set of places to China. That makes the stakes of what we’re living through very high.

But I don’t want to be the voice of gravity on this panel. There are reasons for optimism, and that is because there are self-regulating mechanisms here — and that is: what China is doing is extraordinarily expensive. And you can’t make those sorts of investments forever unless you’re going to generate a self-reinforcing process of productivity growth — and we’re not there yet.

Moderator: Well, Kristalina Georgieva, this goes to the question of the resilience of developing markets and developed markets to spend in order to be in this race, because right now these are all highly capital-intensive endeavours. So how limited are developed markets at a time when the fiscal deficit is so large?

Kristalina Georgieva: So, what we are seeing is very interesting. Many emerging markets — and even some low-income countries — have gotten the lesson of history that if you have strong institutions, you can withstand shocks better. We did a study, and it shows that those emerging markets where they made the investment in strong institutions and good policies — if a shock is to come — would have ½ percentage point up to 1 percentage point higher growth, and they would have 0.6% lower inflation, because they have these fundamentals right.

Some of this — they have created independent central banks; they have created fiscal councils; some of them have put fiscal rules in place; they built reserves to protect themselves. And this is not a small part of emerging markets.

So, in a way, what I fear is that now we see some of the advanced economies being a bit more leisurely. Here in this country, there are discussions around independence of the Fed — that is something emerging markets learned: don’t touch; let them do their job; we are safer when we have it.

We have to recognise that there are vulnerable middle-income countries that have not done this hard work; they haven’t built foundations for growth; they haven’t built reserves. When a shock comes, they’re in trouble. And then there are vulnerable countries because of their location on this planet and their vulnerability to climate shocks — they can see 200% of GDP loss just by one day of a hurricane. And that is different — not that they don’t want to be resilient, but they are in a very difficult position. And then we have low-income countries, fragile states.

 So when you look at the world, what you see is … I’ll give you a number: 100 poorer countries — middle-income and poor countries — hold somewhere between 3–5% of global reserves. Ten countries hold two-thirds plus of global reserves. And this is where we come into play — the IMF, the World Bank — we are there to provide an extra layer of resilience.

And yet I think it would be much better if we are more proactive in creating opportunities, creating jobs — building a bridge between the capital in the North that is now here, to the labour in, say, Africa, where there are young people eager to have a job.

So, as a world, where I am concerned about current developments is that we are losing sight of some of the big — from a humane standpoint — big questions. How do we have a world that is converging? It used to be that the idea was — and trade was the transmission line for this convergence: that you’re poor, then you do labour-intensive stuff, then you get rich, then expand in manufacturing, and you go up like this. And now — now what is going to be compensatory for the loss of this transmission line?

And President Tharman, I would urge us, when we think about configurations for the future, to also think about this — because it is morally right, but also because it is in our own self-interest. If we have a diverging world, it would be a more insecure world for all of us.

Christine Lagarde: Can I add just one word? Because there is a great study that you did at the IMF which shows as well that trade is conducive to innovation. If we put a brake on trade, we are just shooting ourselves in the foot. Trade leads to innovation — and productivity is, you know, one thing that we absolutely need.

Moderator: There was a lot to unpack there. President Tharman, on the independence of the central bank point of view: how independent can a central bank get, in your experience in monetary policy and as an economist for many, many years, if the deficit gets to a certain level?

President Tharman Shanmugaratnam: There have been repeated episodes in history of governments running up large deficits and then finding ways to finance their debts, either by putting pressure on central banks to lower interest rates, or by way of stealth inflation, making their debts cheaper to service through inflation.

It’s not just about one or two countries today; it’s been a repeated feature in history. It happens in countries where you’ve got seemingly independent central banks, not just in countries where central banks were never independent. So it’s a real risk.

It’s a headline issue today; it captures a lot of attention. But our focus really has to shift to the big issues Kristalina was talking about.

You know, we are treading water today, we’re obsessed with the short term. But if that’s all we do, we’ll eventually be drinking seawater.

We’ve got to look at the big issues, and they’re no longer distant issues, by the way. Climate change is not a distant issue. It’s about insurers today deciding that some states within countries are becoming uninsurable, and many homeowners are uninsurable and will not be able to get their mortgages. It’s coming home to roost. Climate change is not a distant issue, or somewhere in the air. It’s already on the ground, and affecting communities.

We’ve got to shift our whole focus in fiscal policy towards addressing the big issues. Because if we don’t do it, we are going to have to end up spending a lot more than we otherwise would. So, even from the point of view of just fiscal prudence, it’s better to repurpose fiscal spending today, rather than have to spend a lot more in the future.

Spend more to mitigate climate change, and particularly in Africa and some of the developing world, to adapt. Spend today to prevent the next pandemic, or to make it much less hurtful when it comes.

It’s also sensible for the global community to spend today to help the developing world, so it can grow the global middle class and become a source of demand. Not a huge amount of money required — just a fraction of the surplus savings that today goes towards funding rich countries’ fiscal deficits, which is where most of the surplus savings in the world go.

Just a fraction of that — whether it’s through aid money, or through the World Bank and the Multilateral Development Banks (MDBs), or working with the private sector by adding a bit of a public guarantee.

The bang for the buck that comes from addressing the really big issues is significant, compared to the way we’re just treading water today.

So we should repurpose fiscal strategy. When Christine first took over as Managing Director of the IMF in 2011, and I happened to be the Chair of the IMFC, I remember Portugal. They started off in a mess. They ended up, four years later — not ten years later, four years — as a success story. They repurposed both revenues and spending.

It may have appeared to many as “terrible, austerity is going to lead to hardship”. They made cuts in education and healthcare budgets. But what happened? Their educational performance caught up with the rest of Europe; their health outcomes, because they went for efficiency. They ended up cutting 6 per cent of GDP from their primary fiscal deficit, became a vibrant economy, and yet expanded their social safety net for the poor.

So they repurposed spending, took some of it away from the middle class and the upper middle class, but protected the poor. They cut out the waste in healthcare spending which, by the way, is a huge issue in much of the world today. If you’ve got a back pain, they send you for imaging; if you’ve got a headache, they’ll send you for imaging. There’s huge waste in healthcare.

So think about repurposing healthcare spending; repurposing social spending in general — while taking care of the poor, taking care of social mobility — and using the resources that are freed up to address the really big issues.

We have to think like the insurers do — insurers have no time for ideology, they’ve got their bottom lines to take care of, and they’re starting to price climate change - but invest like venture capitalists.

Think like insurers, but act like venture capitalists: take risks and invest for the future.

Christine Lagarde: I think the recipe that President Tharman is giving would also address the immigration problem — which is a recurrent issue the world over in advanced economies. Repurposing fiscal, investing in the right place, making sure that, both from climate change and poverty, people in those low-income countries are protected will also address immigration in a big way.

Adena Friedman: I also — just to add to that point — when you think of the power of the capital markets to also be an agent of innovation around those issues, I also think about: every country has the potential to have a vibrant capital market. I mean, it’s not just … you don’t need to be an enormous economy to achieve that.

And one of the examples that we like to point out is Sweden. It’s a country of ten million people, and it has an incredibly vibrant capital market — but it’s not because the technology’s great (which we’re a part of that, so we like it). It’s really because of decades of work by the government to establish a whole policy regime that encourages private investment.

So it encourages equity ownership of the citizens of the country — with really intentional financial-literacy programs; tax policies to have low-tax savings accounts; bankruptcy laws that allow people to try and try again; an innovation economy that really encourages and spurs on the university systems and others to invest in innovation alongside the private markets.

And, as a result — if you look at Sweden — 56% of citizens in Sweden own equities. The only other country that has anything like that is the United States, and it’s more than double what the rest of Europe has. And then the second is: you’ve got this pension system that really invests very heavily in the domestic markets, which is also another pool of capital that comes in that also benefits citizens. You also have these low-tax savings accounts that have been incredibly effective in Sweden and in Japan in spurring equity ownership.

And we had — I would say in Sweden, over the last five years — there have been 233 new issuances on the Swedish stock market, which is only second to the UK in Europe. And it’s been a lot of small- to medium-enterprise businesses, in addition to large-cap. We’ve had $6 billion raised in the US in the Swedish markets this year — which is more than double any other country in Europe.

So it’s a small country — and it’s becoming a more diverse country, too — and yet it still has this whole system that is created that allows for that innovation economy to grow. And I always say: people can solve these challenges when they think long term. And then that innovation can go toward a lot of the innovators in Sweden who do go towards climate change — do try to address the bigger problems. You know, so it’s a really interesting model to look at — as the IMF or as the World Bank.

Moderator: Gordon Hanson, I’m not saying that you’re going to serve as the wet blanket, but I do want a reality check about what actually is happening — and that a lot of funding has moved away from some of these things, right? I mean, whether it’s climate change, whether it’s international investments — because there is a prioritization of spending on the AI race, on some of the other technological infrastructure that is crucial for this. I mean, how much do you actually see those flows taking place that really helped places like Sweden and Portugal?

Gordon Hanson: So, I think one way to think about it is: in addition to maintaining macroeconomic resilience — which we’ve learned how to do, painfully, over the past forty years, with independent central banks and well-managed fiscal accounts, and what the IMF preaches to the rest of the world; it wasn’t easy, but we figured it out — what we’ve had a harder time figuring out is how we achieve microeconomic resilience. What do I mean by that? That’s the ability of an economy to move capital and labour from doing the thing you were doing to the thing now you need to do — and figuring out what that thing is.

On the capital side, well-functioning capital markets are important — especially those that feed into the formation of young, small businesses. The labour side is where we really mess up, and we’ve learned this over the past several decades when we’ve looked at how economies have adapted to the loss of manufacturing. It could be the China trade shock; it could be technological change; it could be changes in the regulatory environment. And the issue isn’t what are college-educated folks doing; it’s what are folks with a secondary education, or what are folks with some college education (in the US, that would be community college).

An example of how to do this well is what Costa Rica did. Costa Rica felt its world change in 1996 when Intel decided to go there, and all of a sudden it brought electronics manufacturing. Then, a couple decades later, Intel decided, “No, we’re getting out of town.” In the interim, Costa Rica had invested in technical training and English-language training in high schools — which made its labour force resilient to that sort of shock — and it was able to sustain production in semiconductors, expand into medical devices, and keep the economy moving forward.

We’ve learned lack of resilience by what has happened in the United States. So, if we think about adapting to climate change, we think about adapting to AI, the other shocks that are coming along down the line — we need to make sure we have the investments and the institutions in place to help us redeploy labour. Otherwise we’re going to pay the price — a similar price to what we paid for the adverse adjustments to manufacturing decline.

Adena Friedman: And, actually, I would say: in Costa Rica today, a lot of software businesses have teams in Costa Rica. English language is one, as you said; the technical education; it’s a great skill base in a small country. It’s a good example where they’ve been able to diversify their economy beyond that.

Moderator: President Tharman, I know you’ve had a lot of experience, and Singapore is rated very highly in terms of AI adoption. In particular, what’s the recipe there that you’ve seen?

President Tharman Shanmugaratnam: Just to follow on from the point that Gordon Hanson was making. Why is it Sweden? Why is it Costa Rica? Why is it Singapore? Why is it Chile? Because we are countries which have very little room for complacency. We’re small, always a little vulnerable, and have just very little room for complacency.

So the reason why we go for resilience, the reason why we act early and act with a certain robustness to prepare the workforce and to help anyone who’s displaced by technology or competition, is simply that sense that we have very little room for complacency.

And I think we are now in a situation — because of the AI revolution and the uncertainties we all face globally in world trade and investment — where large countries have to start thinking a little more like small countries, recognising that there’s little room for complacency, and you’re so much better off if you act early. Act quickly to help someone who’s displaced, or a community that’s displaced.

In Sweden, 90 per cent of workers who are displaced end up back in a job within a year. It’s not by any magic, it’s not a new economic formula. It’s just getting going with it. Bringing in the employers to talk to training institutions, looking at where the workers are starting from, what pool of skills they already have, what skills are adjacent to the skills they have and which they can move into, and helping to get them new jobs. Not anything magical; not a whole new economic formula, but a sense that you can’t be complacent, and you’ve got to move early.

Moderator: Madam Lagarde, one theory out there is that central bankers — particularly in the developed world — should err on the side of running the economy hot in order to facilitate this type of economic backdrop where people can get jobs. There is a theory that, if you’re going to err on one side or the other, it’s better not to have a group of people that are left behind for a cycle, especially at a time of such technological transformation. What do you think about that?

Christine Lagarde: Well, the purpose of monetary policy is certainly not to put people out the door and to get them unemployed and redundant. But the purpose of the monetary policy that I have to put in place with my colleagues is focused on one priority, which is price stability. We have a single mandate — it’s a primary objective. We also look at all sorts of other factors, including the economic purposes pursued by the other institutions, the employment situation, what have you. But the primary objective that we have is price stability, and that’s the way in which we procure this environment where fiscal policies — where other policies — can be deployed with a degree of certainty about what is the future.

So we do manage that as closely and as well as we can, to procure that stability.

Moderator: Should it be a dual-mandate central bank?

Christine Lagarde: You know, I don’t ask myself that question. I’ve got enough on my plate — thank you very much — and I do what I have to do.

Moderator: I’m wondering, from your standpoint, Kristalina Georgieva, this idea of how to create resilience and, frankly, faith in institutions at a time of such transformation. I’d be curious — do you think we’re doing a good job?

Kristalina Georgieva: Well, I think that we are doing a better job now than we did ten years ago — and than ten years before that. We are learning. There is an amazing learning process that is going on. And my conclusion of what I have experienced in my life — what I experience in this institution — is threefold.

One: keep channels of communication open with others — whether you agree with them or you don’t agree with them. Make sure that there are opportunities so you can pick up on something that maybe may matter to you. I think of the IMF as being, par excellence, the place where we keep channels of communication open — 191 countries. They come; they talk with each other. Make it as non-provocative as possible. I’ll tell you one thing I communicate when the members come: my message is, “Leave your trade wars, your cold wars outside. Come here; let’s talk about the economy. How can we do better for people?”

My second conclusion is: Tharman is right that countries that are faced with more constraints may be actually more active. But I think there is one more ingredient, and it is leadership. You have countries in similar situations, and one does much better than another. And you look under the hood of these countries — very often, more often than not — there is leadership.

And the third conclusion I draw is that there are certain things we know. We don’t have to discover them; we know them. We know that fiscal buffers protect you when a shock comes. We know that transparency in institutions, accountability to people, make it more likely they would make good decisions. We know that when we provide people with opportunity to learn — to learn — they can adjust to a changing environment.

So there is a menu of things we know; and then the question is: how do we make sure they get done? And then we hit the toughest component of all: common sense. The most common thing about common sense — it’s not very common. We do so many stupid things just because we refuse to be honest with the reality that surrounds us.

Adena Friedman: So, we’ve thought a lot about what’s been happening with this technology and where it’s going. And, as you think about the last twenty years — or fifteen years — the world had to deal with an economic shock of the financial crisis that resulted in most of the developed world and the developing world building out resiliency, building out institutions, putting a lot of, I would say, gates in the gears to make it so that we could have more safety and more security in the financial markets and in the economies.

But we have this technology that’s an unstoppable force that’s coming. And I would say that, at this point, with that level of transformation from this incredible capability that’s on our doorstep, we have to move to a time of agility and adaptability — absolutely. And so we have to look at what’s made us so resilient. There are a lot of things. I mean, I will point to the US markets for a second — we are hyper-resilient as a system. The US equity markets — we’re all interlinked; we’re networked. We have failures; we’ve had mistakes — and so we’ve all figured out how to make that resiliency work and handle an immense amount of volumes. You’re seeing huge volumes and huge shocks in the system, and they’re all being handled and absorbed.

So that resiliency is there — but now is the time to say, “Okay, on the basis of that foundation, what do you really need to have to remain resilient while becoming adaptable?” Because that adaptability — whether it’s digital assets or AI — adaptation is happening. And so, if the institutions aren’t prepared for it, or a country’s not prepared for it — and they’re calcified in their views — they will be left behind. But if they say, “Okay, I want to have this base and make it so that we have a resilient base,” and then we change our policies; we think differently about regulation; we think differently about taking down some of the gates — whether it’s state regulation for us in zoning, or whether it’s country regulation in the US that’s holding us back from allowing this new technology to take force — and thinking about education; thinking about all the things that, as a region or as a country, really need to change.

I personally think that we’re at the cusp of this moment, and that leadership’s critical to making sure that it’s successful — and it’s propagated around the world.

Moderator: We’re almost out of time, so I do want to get to this question — and Madame Lagarde, I’m going to put you on the spot with this. There is a lot of hope, as you can see, in all of the things that artificial intelligence can do. There’s also a question about whether we have priced that all in — and then some — and the systemic risk that comes with how high valuations have got, how high spending has gotten. How concerned are you about that, given the fact that, in the near term, you need to manage financial stability as a risk as well?

Christine Lagarde: Well, I agree very much with some of the points made by Adena Friedman, but I was also thinking that this should not happen at the expense of financial stability — right? And this should not happen at the expense of the right distribution and the right diffusion of those improvements resulting from artificial intelligence. We don’t want to create a universe where there would be a massive divide between those who benefit from it and those who suffer as a result.

So I think, when it comes to policymakers, we have to be very careful that those two factors are taken into account. And, you know, it cannot be just technology unleashed and “happen what happens.” I think policymakers have a key role to play.

Adena Friedman: So, I want to say here: we all give a round of applause to Christine Lagarde — for saying financial stability matters, because we are in the house of financial stability. Bravo.

Moderator: That’s a good place. And I completely agree with your comments.

Well, I just want to thank you all so much for taking the time. This has been a tremendous privilege for me, and I’m sure everybody in this room — as we all try to grapple with the reality. Thank you.

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