IMF Managing Director Strauss-Kahn Says
Policymakers Globally Must Remain Committed to Collaboration to Effectively Face
Key Challenges Ahead
Press Release No. 09/424
November 23, 2009
International Monetary Fund Managing Director Dominique Strauss-Kahn today
said the global economy has made remarkable progress and now stands at the cusp
of recovery, but it still remains highly vulnerable to shocks and policy
missteps. In a
speech delivered at the annual conference of the Confederation of British
Industries (CBI) in London, Mr. Strauss-Kahn said policy makers stand at a
critical juncture where the sustainability of the global recovery will depend on
the decisions they make in the months to come.
“Today the storm has passed. The worst has been averted. And yet the economy
remains very much in holding pattern―stable, and getting better, but still
highly vulnerable,” Mr. Strauss-Kahn said. For policymakers “the challenges are
great. During the crisis, everyone was united by a common purpose. Going
forward, this might dissolve. So the road ahead will be less clear cut. We will
need some deft maneuvering, and perhaps some out-of-the-box thinking. We will
certainly need continued collaboration,” he added.
Four key challenges for policy makers
Policymakers will face four main challenges: exiting from accommodative
policies, adapting to increasing capital flows to emerging markets, developing a
new global growth model, and designing and implementing financial sector
On exit strategies, Mr. Strauss-Kahn stressed the importance of waiting for a
sustained recovery in private demand, as well as clear indications of financial
stability before accommodative measures are withdrawn. “It is too early for a
general exit. We recommend erring on the side of caution, as exiting too early
is costlier than exiting too late,” he said. Plans for fiscal consolidation
should be the top priority, especially in advanced economies. And monetary
policy can afford to stay accommodative for some time, given little sign of
inflation on the horizon.
A related challenge to exit strategies is managing capital flows to emerging
markets. “In many countries, appreciation should be the key policy response.
Other tools include lower interest rates, reserves accumulation, tighter fiscal
policy, and financial sector prudential measures. Capital controls can be part
of the package of measures,” he said in his speech. “But we should recognize
that all tools have their limitations. We should be pragmatic,” he added.
Moving to the challenge of creating a new global growth model, Mr.
Strauss-Kahn said the old paradigm of growth generation based on households in
the U.S. was dead. “If we are to have sustained global growth, somebody else
needs to step into the breach. The leading candidates are the surplus countries.
And we can see some shifts in the right direction. China and other emerging
Asian economies are shifting from exports to domestic demand. But they have some
way to go.”
Finally, Mr. Strauss-Kahn underscored the importance of forging ahead with a
number of reforms to make the financial sector a more stable place. He stressed
the challenge posed to policymakers by increased risk taking in the financial
sector while financial institutions are still in poor shape while regulators
seek to impose tough new standards that may jeopardize recovery. “How do we
square the circle? One possible answer is to reduce regulatory uncertainty. It
is throwing up some perverse incentives and might be encouraging a risk-taking
culture,” he said. Also on addressing risk management in the financial sector,
he added that it was essential to break the link between risky behavior and
compensation. “In this context, we have been asked by the G-20 to look into
financial sector taxes. There are a number of ways to think about this, and we
will look at it from various angles and consider all proposals,” he said.