By S. Sethuraman
The Spring Meetings of the International Monetary Fund (IMF) and the World Bank in Washington (April 20-22) will address on how to outgrow the global crisis with co-ordinated actions for the future with the accent on social and financial inclusion designed to reduce inequalities, create jobs and secure durable and sustainable growth of the world economy.
There is a perceptible shift in IMF’s approach, learning lessons from the perils into which the world had been sunk by the free play of market forces and the boom-bust cycles that preceded the global financial meltdown of 2007-08 and the Great Recession. Advanced nations, mainly USA and EU, are struggling for over two years to recover and tackle fiscal imbalances and repair a broken financial system.
While there are signs of limited improvement in US economy and steady efforts to deal with the financial strains in Eurozone, “the risks remain high” with volatile markets and “the situation is fragile”, IMF Chief M. Christine Lagarde said in a policy-setting keynote address at the Brookings Institution, ahead of the Fund-Bank meetings. Apart from putting the crisis behind, she said it is time for “seizing the moment” to build “a stronger foundation for growth and stability”.
“For too long, the benefits of growth have been shared by too few. Growing inequalities and weak financial sectors left the world prone to instability and crises. I have seen the costs of that instability, the face of unemployment—the hardship, the loss of dignity, the economic loss. It is the same in all countries: advanced, emerging, and low-income” she said.
The Fund-Bank meetings will, apart from considering the next steps needed to strengthen recovery and stabilise the financial system, will also go into the adequacy of IMF’s resources, given the need for a “global firewall”, besides the European Financial Stability Mechanism, to provide protection for every country and prevent such crises in future. The Fund’s Managing Director Lagarde said she was encouraged by expressions of support for such a global safety net and was hopeful of progress at the spring meetings.
The World Bank will have a new President named before the meetings to take over from Mr Robert Zoellick who is to lay down office at the end of June. The Executive Board has interviewed the three candidates and said it would arrive at a consensus choice before the spring meetings. BRICS and other developing countries have been insisting on selection of merit-based candidates from any part of the world instead of continuing to treat IMF and World Bank heads as the sole preserve of Europe and USA respectively.
In rather unseemly haste, President Obama had named Mr. Jim Yong Kim, a US national and President of Dartmouth College, New Hampshire to succeed Mr Zoellick while the other two to take the field later are Mr. José Antonio Ocampo, a Colombian national and Professor at Columbia University, New York and Ngozi Okonjo-Iweala, Coordinating Minister of the Economy and Minister of Finance, Nigeria, who is endorsed by leading financial papers in UK.
Listing the short-term issues before the IMF policy-making committee (IMFC) on April 20, M. Lagarde said in the advanced economies, fiscal adjustment is essential, but the pace of adjustment matters (apparently with USA in view) and adjustment must be country-specific. Grounding adjustment in credible medium-term plans—as is needed in the U.S. and Japan, for example—will not only help address fiscal concerns, but also reinforce confidence and growth, she said.
Monetary policy can also support growth where inflation remains in check—as is the case at present in virtually all advanced economies. “For emerging economies, a bit more caution is required, especially if rising oil prices and extended credit booms begin to test the bounds of inflation”. (This could be true for India at a time RBI is mulling over the options it must make at its next review meeting.)
The IMF managing director said financial systems must support, not destabilise the economy. “This means repairing financial systems so they can deliver credit, growth and jobs, and better regulation and supervision, and coordination across countries, to prevent the recurrence of reckless risk-taking”. The financial sector should also pay its fair share of costs.
Emerging and developing economies have been, and should continue to be, a relative source of strength, M. Lagarde noted. Low-income economies also need to strike the right balance. Even as they are being hit by reduced aid flows and reduced remittances, they must guard against current risks—especially those radiating out of Europe.
Rebuilding their policy buffers is a priority. While getting growth restarted over the short term, “we must work toward growth that is more inclusive and more durable”.
Speaking of the “Arab Spring”, the IMF chief referred to the “painful collusion of social exclusion and high unemployment—especially among young people” and said those countries in transition toward reforms should have a “fair share” and must be provided appropriate financial support. ”We can support them with the IMF’s unique combination of advice, technical assistance, and financial support for their “home grown programs that meet their needs, built around consensus, and protecting the most vulnerable. We are doing this, importantly, working closely with the governments of the region”.
On emerging market economies becoming global players, the IMF Chief said they had made historic progress in reducing poverty, and over the past two decades have driven well over 50 percent of global growth. Their participation has strengthened G20 and the IMF quota and representation reforms now under ratification during 2012 would make their participation even stronger. She also noted progress in BRICS on swap arrangements among central banks and their plans to establish a development bank.
IMF has also emphasised the importance of further action on financial sector reform; in restoring competitiveness; and in helping to build better functioning labor markets. Given the difficulty of many of these reforms, she also called on policymakers to “protect and reinforce appropriate safety nets.” IMF will publish its new World Economic Outlook on April 17. With intensifying strains in the euro area weighing on the global outlook, the IMF had already cut its force forecast for world growth to 3.3 percent this year.
Referring to China and India, M. Lagarde said these countries have made important inroads into reducing poverty but they have also seen rising inequality “We also know, based on recent IMF research, that a more equitable distribution of income can help promote economic and financial stability, and more lasting growth,” she said. Also, rebalancing of the global economy — a shift in demand from external deficit to surplus countries — is key for durable and sustainable growth for the Asian giants. It is something IMF has been advocating for some time and has become even more important now. “We are seeing some promising signs — inChina, for example, albeit partially. But we know that more needs to be done,” she said.
M. Lagarde also suggested that the Brazilian example of bringing about reduction of inequality through a focused and efficient set of transfer programme could be followed by other countries and IMF analysis showed that periods of uninterrupted high growth could be 50 per cent longer than they might otherwise be.
The IMF managing director said they need financial systems that support—not destabilise—the economy. This means repairing financial systems so they can deliver credit, growth and jobs. This means better regulation and supervision, and coordination across countries, to prevent the recurrence of reckless risk-taking. And, it means getting the financial sector to pay its fair share. (IPA Service)