The world economy has entered a difficult phase as the financial crisis spreads to the real economy, the head of the IMF said on Wednesday, and India, China and other emerging economies will feel the effects “sooner rather than later”.
IMF Managing Director Dominique Strauss-Kahn said while monetary policy was the first line of defense, governments must be ready to unleash temporary spending boosts to shore up economies. “This has become a global problem that requires a global solution,” he said in a speech delivered at a conference organized by the Indian Council for Research on International Economic Relations. “Emerging markets need to join industrial countries in the macroeconomic and regulatory policy responses.” A collaborative approach offered the best hope of ensuring global economic stability, he said, adding that despite their rapid growth, countries such as China and India had not decoupled from industrial economies. Instead the two sides were like horses yoked together. “If one is tired, the other can take up more of the strain for a while. But if one stops in its tracks neither is going to get very far,” he said.
Major central banks were doing their part in providing liquidity and monetary easing, but governments whose finances were in good shape should be ready to raise spending in a targeted way to support private consumption. But any fiscal boost should be temporary, as discipline remained important. “In a sense, medium term fiscal policy is all about saving for a rainy day. It is now raining,” he said. Emerging markets needed to consider how much scope there was for monetary easing or fiscal stimulus, he said, although not all emerging economies should loosen fiscal policy.
India, for instance, had very high growth and a still-high public debt, with fiscal consolidation remaining a priority, he noted. “There is also a broader role that some emerging economies can play to help support global growth -- through policies to strengthen their domestic demand as a growth engine, including greater exchange rate flexibility.” The crisis arising from problems in the US housing market had already lowered growth there and the effects would increasingly be felt in Europe and other countries. In the past, a 1% decline in US growth had led to growth in emerging economies slowing between 0.5 to 1%, depending on trade and financial links with the United States, Strauss-Kahn said. Last month, the IMF cut its forecast for world growth this year and warned that economic activity could slow even further. The main reasons for the revision were the weak growth outlook in the United States and Europe. The Fund lowered its global 2008 growth projection to 4.1% from 4.4%, down from 4.9% achieved last year. (Reuters)