IMFSurvey Magazine: Policy
Global financial crisis
IMF Urges World Leaders to Counter Global Slowdown
IMF Survey online
November 9, 2008
- Strauss-Kahn writes to G-20 leaders on coming summit
- Urges action to combat worst slowdown in advanced economies since World War II
- G-20 ministers back leading role for IMF in restoring stability
IMF Managing Director Dominique Strauss-Kahn urged leaders of the Group of Twenty (G-20) industrialized and developing economies to take action to help counter the global economic slowdown as ministers from systemically important countries agreed on the need for a coordinated response.
In a letter to G-20 and European leaders, released after a meeting in Sao Paulo, Brazil, on November 9, Strauss-Kahn said demand was falling rapidly around the world. "There is scope for fiscal expansion in many advanced and some emerging market economies; and with inflation declining, some central banks have scope for further monetary easing," he said.
U.S. President George Bush has invited G-20 leaders, as well as Strauss-Kahn and World Bank President Robert Zoellick, to a summit in Washington on November 15 to develop a common approach to combating the global economic crisis, triggered initially by the subprime mortgage meltdown in the United States.
The United States, China, Japan, and several European countries have each announced measures to stimulate their economies.
Sharply lower forecast
The IMF has sharply revised down its projections for world growth because of the burgeoning crisis, which has now spread to emerging market economies. In its latest forecast, released on November 6, the IMF projects that world growth will fall to 2.2 percent in 2009 from 3.7 percent this year and 5.0 percent in 2006.
Activity in the advanced economies is now expected to contract by ¼ percent on an annual basis in 2009, down ¾ percentage points from the October 2008 WEO projections. This would be the first annual contraction during the postwar period, although the downturn is broadly comparable in magnitude to those that occurred in 1975 and 1982. A recovery is projected to begin late in 2009.
The U.S. economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions. Growth in the euro area will be hard hit by tightening financial conditions and falling confidence. In Japan, the support to growth from net exports is expected to decline.
G-20 finance ministers and central bank governors gathered November 8-9 in Sao Paulo for a regular annual meeting that included a preparation session for next weekend's summit meeting. The G-20 comprises the seven major industrialized nations—Britain, Canada, France, Italy, Japan, Germany, and the United States—plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey. It also includes the 27-nation European Union, represented by France, which holds the rotating EU presidency. Both the IMF and World Bank participate.
In a communiqué released on November 9, the G-20 ministers said they agreed all necessary steps must be taken to restore market confidence and stability and to minimize the risk of a future crisis.
"Given its near universal membership and core macro-financial expertise, the Fund should take a leading role in this task consistent with its mandate," the communiqué said. It suggested the IMF should enhance its early warning capabilities, especially for systemically important economies, to be able to anticipate stresses and identify economic vulnerabilities at an early stage, along with systemic weaknesses and spillover risks across financial markets that can endanger both the international financial system and the global economy. "We also underline the importance of strengthening the IMF surveillance and policy advice leading to appropriate and timely macroeconomic policy responses from all countries," the ministers and governors said.
They said they would review the adequacy of the financial resources available to the IMF, World Bank, and other multilateral institutions, and stood ready to increase funding if necessary. They welcomed the creation of a new short-term liquidity instrument by the IMF to help countries with good track records that need quick financial help during the current crisis.
Two broad themes
In his letter to the leaders, sent on November 6, Strauss-Kahn said that emerging markets were now under great stress as the "capital flows that have sustained growth dry up across the board. The international community must take action."
The IMF has moved rapidly to help several emerging markets with new loans and policy advice to help combat fallout from the crisis.
The Washington summit meeting, he said, should tackle two broad themes:
• Deal with the immediate fallout from the financial crisis, for example through coordinated policy responses and by providing financing to restore confidence and growth;
• Tackle longer-term issues relating to the international financial architecture, such as fixing, what he termed "an inadequate regulatory system" and developing a reliable early warning and response system.
Strauss-Kahn, a former French finance minister who took over as head of the IMF one year ago, said the design of financial regulation around the world requires a rethink, including regulating some aspects that had previously not been regulated.
But he said that ultimately, regulation had to be done by national authorities, "subject to surveillance by a body or network of institutions alert to systemic implications across financial instruments, markets and countries."
The IMF, he said, had already begun intensifying its early warning capabilities and would strengthen collaboration with others in this area.
Bretton Woods II
He strongly endorsed recent proposals for a new Bretton Woods agreement, a reference to the original pact reached in 1944 to establish the International Monetary Fund and the World Bank following World War II.
But he said it took time to prepare for the Bretton Woods agreement and underlying issues needed to be discussed adequately. "I therefore very much welcome the initiative taken by the President of the United States to bring together the G-20 leaders, to follow up with various working groups, and to culminate these efforts in a conference, hopefully within the year ahead."
In their communiqué, the G-20 ministers said that the IMF and World Bank needed to be reformed so that they "more adequately reflect changing economic weights in the world economy and be more responsive to future challenges." They said emerging and developing economies should have greater voice and representation in these institutions.
They welcomed progress already made in reforming the IMF and said further reform was needed to improve the legitimacy and effectiveness of the two institutions.
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