IMF Managing Director Dominique Strauss-Kahn welcomed a compromise agreement at the Group of Twenty (G-20) meeting in Paris on how to measure global economic imbalances but said stronger policy action was still needed to ensure the world gets the “right kind of recovery.”
Speaking after finance ministers and central bank governors from the world’s leading advanced and emerging market economies met February 18-19 to consider how to take forward moves to create a more stable global economy, Strauss-Kahn said that “while we have recovery, it is not the recovery we want.” Although, on average, global growth has resumed, it is uneven—both across and within countries.
“So we need really strong policy action to deliver the right kind of recovery,” Strauss-Kahn told reporters, “one that not only addresses global economic imbalances but also leads to better outcomes for everyone.”
At the G-20 ministerial meeting, the first under the French presidency, ministers decided on a set of indicators to measure imbalances in the global economy, in the wake of the worst recession for more than 60 years, and said that they aimed to agree by their next meeting in April on indicative guidelines against which each of these indicators will be assessed.
Strauss-Kahn said that in parts of the world — in Asia, and Latin America, countries were doing well. Even in Africa, many countries had recovered faster than in previous crises and expected to see 4.5 percent growth. But in advanced economies, the outlook for the United States was uncertain and Europe had a lot of problems, particularly in the Eurozone.
Within countries, unemployment remained high, especially in the advanced economies. While the world had put the financial crisis largely behind it and was recovering from the economic crisis, the social crisis was still there. “Growth without jobs is not meaningful to the man in the street,” Strauss-Kahn said, “so we are far from having done our job.”
Beyond unemployment in the advanced economies, major issues to be addressed included the risk of overheating in the emerging markets and the problems of increased food and fuel prices, which he noted were now as high as they were in 2008, and a threat particularly for low-income countries and for vulnerable people everywhere.
Major issues requiring action
Strong policy action was needed both nationally and internationally. More needed to be done to reform and repair the financial sector. He said that while important reforms have been undertaken, there was a risk that the financial system would return to “business as usual.”
In particular, he said that while steps had been taken to improve regulation, much more needed to be done on supervision and cross-border resolution of financial institutions. He also noted that, to discourage excessive risk taking by the financial sector, the IMF had proposed the idea of both a financial sector contribution and a financial activities tax, but sadly these had not been taken forward.
Income distribution was also an issue requiring further attention. He noted for example that while Egypt and Tunisia had experienced positive overall growth rates, they had also faced major problems in inequity. “So we need to do more on income distribution.”
Outcomes of the G-20 meeting
At the Paris meeting, ministers agreed on a set of indicators to measure global imbalances and said that they aimed by their next meeting in April to decide on indicative guidelines against which each of these indicators will be assessed. The goal is to make the global economy more stable. According to the G-20 communiqué, indicators will comprise:
n public debt and fiscal deficits;
n private savings rate and private debt ; and
n the external imbalance composed of the trade balance and net investment income flows and transfers, “taking due consideration of exchange rate, fiscal, monetary and other policies.”
Against this background, the IMF will provide technical analysis as part of the G-20 Mutual Assessment Process (MAP) designed to help improve policy collaboration and reduce global imbalances.
If implemented effectively, Strauss-Kahn said the process could lead to significantly higher growth, jobs, and poverty reduction. “So that is why the indicators agreed at this meeting are important.” He noted that cooperation had become more difficult than in the depths of the crisis, hence the process had not been easy, but in the end, the G-20 had been able to move forward.
Ministers said they had agreed on a work programme aimed at strengthening the functioning of the international monetary system (IMS), including through measures to deal with potentially destabilising capital flows, as well as better management of global liquidity to strengthen capacity to prevent and deal with shocks, including issues such as Financial Safety Nets and the role of the IMF’s Special Drawing Rights (SDRs), the value of which is decided through a basket of currencies.
Asked if he supported including China’s renminbi in the basked, Strauss-Kahn said he would like to see this as soon as possible, “but it means, one way or another, that the renminbi has to be, if not totally freely convertible, at least partly convertible.”
Strauss-Kahn underlined importance of IMS reform to prevent future crises, noting a broad range of issues — including exchange rates, reserves, capital flows. While recognising that these issues will not be resolved overnight, he said that “the IMF is at the centre” of this debate.
At the press conference, he noted the role of IMF in responding to the crisis, pushing early on for economic stimulus, helping coordinate policies, providing financial resources, supporting the G-20 with analysis, and in IMS reform.
This represented a major shift for the institution, “going from IMF 1.0 to IMF 2.0.” Now, he said, the challenge was to go further — to “IMF 3.0,” including a greater focus on financial sector issues and more generally enhancing the effectiveness of the 187-member county institution even further.
“In an increasingly globalised world,” he said, “there is an increasing need for a multilateral institution like the IMF.”