World Can Grow Faster With Right Policies, Says IMF
IMF Survey online - June 5, 2010
- Improved growth scenario could boost jobs by 30 million
- Need for continued international cooperation and policy coherence
- Financial sector reform efforts should be intensified, says G-20
The world economy is recovering quicker than expected from the global recession, but the pace is uneven and could be faster with better coordination and the right policies, IMF Managing Director Dominique Strauss-Kahn said.
Speaking in Busan, South Korea after a meeting of the Group of Twenty (G-20) finance ministers and central bank governors, Strauss-Kahn told reporters that IMF simulations showed that global output could be boosted by a cumulative 2.5 percent over the next five years if the G-20 continued to act in a coordinated manner and avoided pitfalls.
“With continued coordination, the global economy can do much better, and global growth could gain 2.5 percent, which would represent 30 million jobs at the global level,” Strauss-Kahn said. If, however, world leaders—scheduled to meet for a summit at the end of June in Toronto, Canada—did not face up to the challenges of the global economy, there is equally a risk that a negative scenario would cost the world around 30 million jobs.
“What’s at stake then in Toronto—the difference between good and bad policy—is 60 million jobs.”
Risks to recovery
Although the world is recovering from recession and the global financial crisis, countries face a variety of threats, including worrying fiscal deficits in some advanced economies, the prospect of asset bubbles in some emerging markets, and the risk that consolidation in one part of the world could have repercussions on growth elsewhere, particularly faster-growing exporters.
Possible policy options will be discussed by world leaders at the Toronto summit. The options are based on scenarios from by the IMF, with input from the Organization for Economic Cooperation and Development, the International Labor Organization, other international organizations, and an interim report by the World Bank.
In a communiqué, G-20 ministers said that “the recent volatility in financial markets reminds us that significant challenges remain and underscores the importance of international cooperation. The G-20's strong policy response to the crisis has played a pivotal role in restoring growth and we stand ready to safeguard recovery and strengthen prospects for growth and jobs.”
The IMF is scheduled to release an update to its world growth forecast in early July. In its last assessment in April, the IMF said world growth would be 4.2 percent this year. But since then financial markets have been rocked by worries of large fiscal deficits in parts of Europe.
The IMF and the European Union put together a €110 billion financing package in May to help Greece ride out its debt crisis, revive growth, and modernize the economy, amid market concerns about deficits in several other countries that pushed down the euro.
The ministers said recent events in Europe highlighted the importance of sustainable public finances and the need for countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, tailored to national circumstances. “Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions. Within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability. This will help ensure ongoing recovery.”
Asked whether he felt comfortable with the shift in emphasis by the G-20 toward deficit reduction, Strauss-Kahn replied: “Totally comfortable. I am not the champion of fiscal stimulus, but the champion of right fiscal policy.”
He added: “This means that some countries have to consolidate strongly; some countries have to go back quickly to normalcy, some others may go on with letting the stimulus expire on its own.”
Financial sector reform
Ministers preparing for the Toronto summit also emphasized the need to accelerate financial sector repair and reform in the wake of the global crisis, saying it was critical for global economic recovery.
They agreed on the need for
• stronger capital and liquidity standards. “It is critical that our banking regulators develop capital and liquidity rules of sufficient rigor to allow our financial firms to withstand future downturns in the global financial system. As we agreed, these rules will be phased in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012.”
• the financial sector to make a fair and substantial contribution toward paying for any burdens associated with government interventions, where they occur, to repair the banking system or fund resolution measures. “To that end, recognizing that there is a range of policy approaches, we agreed to develop principles reflecting the need to protect taxpayers, reduce risks from the financial system, protect the flow of credit in good times and bad, taking into account individual country's circumstances and options, and helping promote a level playing field.”
• strong measures to improve transparency, regulation, and supervision of hedge funds, credit rating agencies, compensation practices, and over the counter derivatives in an internationally consistent and non-discriminatory way.
• a single set of high quality, global accounting standards. Ministers urged the International Accounting Standards Board and the Financial Accounting Standards Board to redouble their efforts to that end.
The IMF will deliver a final report at the Toronto Summit on options for levying the financial sector and protecting tax payers in future crises.
IMF governance reform
Ministers called for an acceleration in the substantial work still needed for the IMF to complete reform of country representation and quotas by a planned summit in Seoul in November. They also stressed the urgency of implementing an earlier package of IMF quota and voice reforms, agreed in April 2008.
On the IMF’s financial resources, they underscored the G-20’s resolve to ensure the IMF has enough money for it to play its important role in the world economy.