Asia To Play a Leading Role in Reshaping the Post-Crisis Global Economy, IMF Managing Director Dominique Strauss-Kahn SaysPress Release No. 09/403
November 13, 2009
In a speech today at a conference organized by the Monetary Authority of Singapore, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn called on Asia to play a leading role in guiding the global economy to a new, more sustainable path for global growth. “This is not only appropriate given Asia’s economic weight,” he remarked, “but also necessary, since Asia is such an important part of the solution.”
The strength of Asia’s economies has helped them weather the global financial crisis, and the region is leading the world into economic recovery, he said. The IMF expects Asia’s GDP growth to be 5 ¾ percent next year—almost double the 3 percent rate forecast for the global economy. “Thanks to strong fundamentals and quick and forceful policy responses to the crisis, Asia has performed considerably better than other regions of the world—and has thus played an important role in supporting global recovery,” he said.
To succeed over the long term, Asia will need to adapt to the new challenges presented by the post-crisis economy. “In particular,” he said that “because there are limits to the pace of export growth, domestic and regional demand will need to play an increasingly important role in underpinning Asia's growth.” Pointing to Asia's increasing role in international fora—including the G-20 and the IMF—Mr. Strauss-Kahn said that “now is the time for Asia to use its stronger voice to contribute to global efforts to reshape the economic and financial landscape.”
In discussing the global context, the Managing Director commented that while he was hopeful that the world economy has turned the corner, the recovery remains “fragile.” He therefore urged policymakers to keep supportive measures in place until the recovery is firmly established and, particularly, until conditions were in place for unemployment to recede. He noted that “in some emerging markets, including a few in Asia, the recovery is further along and crisis support policies may be unwound sooner rather than later.” But in others, policy stimulus should be maintained. Mr. Strauss-Kahn remarked that while the resurgence of capital flows to a number of Asian countries reflected the favorable outlook for the region, they could potentially have negative effects on the recipient economies. Policy makers have a range of tools available to mitigate such effects, he said. He also noted the need to contain the risk of protectionism in the face of still rising unemployment in advanced economies.
Priorities to Reshape the Post-Crisis World—and Asia’s Role
Mr. Strauss-Kahn set out three policy priorities for the post-crisis global economy:
1. Rebalancing Global Demand. In economies that have run large current account deficits, national saving needs to increase; in many of these economies—the United States, for example—fiscal consolidation is key. On the other hand, in economies that have run large current account surpluses—China, for example—domestic demand needs to be stronger. Policies to boost high-return investment would help to reduce Asia's excess saving as well as stimulate domestic demand, he said. Asia's investment in infrastructure, education, and “green” technologies hold great potential, and he added that “for the world to succeed in its rebalancing efforts, exchange rates must be allowed to reflect medium-term fundamentals.”
2. Strengthening the International Monetary System. Mr. Strauss-Kahn said the crisis had clearly shown the need for additional forms of “global financial insurance” and that the IMF has the potential to serve as an effective and reliable provider of such insurance. However, while the Fund's resources have been increased during the crisis, he said that to serve as the world's “truly dependable lender of last resort,” the IMF would need considerably greater resources. In terms of Asia's role, he said that the pledged reserves that constituted the Chiang Mai Initiative offered an important complement to IMF financing. He added that “we should think about ways in which these regional resources—as well as those in other regions—could be combined with our Flexible Credit Line to make this instrument even more effective.”
3. Creating a Safer, More Stable Financial System. Mr. Strauss-Kahn said Asia's financial systems and institutions face considerably less pressure for reform than those at the epicenter of the crisis—largely due to the significant changes made following the 1997-98 crisis. He cautioned, however, that “Asia must not let down its guard,” as new risks could emerge—and he called on policymakers to maintain a strong supervisory regime going forward. At the same time, he said that Asia should not learn the wrong lesson from the crisis—namely that financial development can be risky and therefore its importance should be downgraded. “Moving ahead with the development of Asia's financial markets, and in particular its capital markets, will be critical for making the best use of the region's significant savings in support of domestic demand.”
Asia and the New Global Governance Framework
Mr. Strauss-Kahn said Asia's strong representation in the G-20 gave it a platform from which to make valuable contributions to reshaping the global financial architecture. With Korea hosting the G-20 next year, “the world's attention will be very much focused on Asia—with high expectations for the region to lead the global economy into a new period of sustained and strong growth.” IMF governance reforms—which will boost Asia's quota share significantly—were an important part of this process, he said.
He emphasized that the IMF is seeking new ways to deepen its engagement with Asia. One step is strengthening the Fund’s channels for listening to Asian views—including through a new advisory group of eminent persons (which held its inaugural meeting during his visit to Singapore). The Fund is also striving to strengthen its links with ASEAN and other regional groups. And he stressed the IMF is adapting the way it works to the meet the needs of its individual members—through important changes to its lending instruments and its cross-country analysis.
For Asia, he concluded, change brings “tremendous opportunities to contribute to the reshaping of the post-crisis global economy.” For the IMF, change “will allow us to become more legitimate in the eyes of our members, and hence more effective.”