Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Rising Inflation Complicating Response To World Slowdown
April 10, 2008
- World balanced between twin risks
- Mounting inflation reflects structural and cyclical factors
- Food price increases threaten to undermine low-income country gains
The global economy, battered by fallout from the U.S. subprime meltdown, is caught between a slowdown in growth and rising inflation, but there is no one-size-fits-all response and governments must tailor their policies to country situations, IMF Managing Director Dominique Strauss-Kahn said.
IMF Managing Director Dominique Strauss-Kahn said the world faced twin risks. (photo: IMF)
IMF-World Bank Spring Meetings
"The world economy is balanced between these two risks," Strauss-Kahn told reporters ahead of the IMF-World Bank Spring Meetings in Washington. Policymakers needed to balance between tackling inflation and countering the slowdown, he said, adding that the policy solutions cannot be the same for everyone.
The world faces a "serious slowdown in economic growth," according to Strauss-Kahn. He noted that emerging economies likely would not be insulated from the downturn in the advanced economies. "Even if growth is more resilient in emerging economies, they are not immune from the slowdown," he said, adding that the notion of decoupling was misleading.
Sharp U.S. downturn
In its latest forecast for the global economy, released on April 9, the IMF said global growth will decelerate in 2008, led by a sharp slowdown in the United States, amid a housing correction and a financial crisis that has quickly spread from the U.S. subprime sector to core parts of the financial system.
Citing the unfolding financial market turmoil as the biggest downside risk to the global economy, the April 2008 World Economic Outlook said the IMF expects world growth to slow to 3.7 percent in 2008—0.5 percentage point lower than it forecast in the January this year. Further, world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record 3 percent or less growth in 2008 and 2009, equivalent to a global recession.
Mutually reinforcing
Strauss-Kahn noted that the risks to global financial stability were rising. These risks are in part centered on the mutually reinforcing credit and housing crisis in the U.S. But there is also growing risk aversion, with higher financing costs and a sharp decrease in capital market flows to emerging markets, Strauss-Kahn said. "The increase in risk aversion and global deleveraging may induce a sharp decrease in inflows of capital," he said.
Another risk of key concern is sustained high inflation, fueled by high commodity prices. "Inflation may be back," the Managing Director remarked. Growing inflation reflected both structural and cyclical factors, including the growing role of biofuels, for instance, he said. "It is a key concern because food prices increased by 48 percent since the end-2006 and may undermine all the gains we have taken to reduce poverty."
Policy responses to high food prices
Strauss-Kahn singled out the impact of recent increases in food prices for low income countries. "It is a key concern because food prices increased by 48 percent since the end-2006 and may undermine all the gains we have taken to reduce poverty."
What can policymakers do as far as the higher food prices are concerned? There is no one-size-fits-all policy, Strauss-Kahn observed. "It needs to be tailored, depending upon the countries." He listed three ways the Fund can provide assistance.
• Define with member countries the right macroeconomic framework.
• IMF technical assistance and advice that would "help alleviate pressure on prices," including through financial support and targeted subsidies to the poor.
• Working with other agencies or other donors to help low-income countries with some financial support through the Fund's lending instruments.
World finance ministers and central bank governors will discuss the outlook for the world economy at the IMF-World Bank Meeting on April 12-13, when they will be briefed by Strauss-Kahn.
IMF reforms
He will also update leaders on reform of the IMF itself. At the press conference, the Managing Director observed that the Fund has come a long way in a few months to achieve important reforms on country representation and on a new income model. "If at the end of this month we reach the 85 percent of the voting power that we need, then it will be a real big success for the institution," he said, referring to the majority needed to give final approval for the reforms.
The adjustment to country quotas that determine their voting power has been a success for four reasons, Strauss-Kahn said.
First, the IMF will be the first international institution created after the Second World War to prove itself able to reform, he observed. Second, the reform and the changes are dynamic. "We have to judge this reform not only by its immediate results but in looking at the result that will be delivered during the coming five, ten, fifteen years." Third, the quota reform is a change in philosophy. "The idea at the beginning was that countries should be better represented owing to their economic weight, but the introduction of the tripling of basic voting rights ...has nothing to do with economic weight." Rather, he said, it underlined the right of each country to have a minimum of voting rights." Finally, he said, while there are more results to come over time, the changes already agreed represent a significant advance.
The Managing Director noted that the issue of quotas is not the end of IMF reform. "It is the starting point. There is a lot of things to change and discussion to have in the way to adapt the governance of an institution like the IMF to the 21st Century," he said. "We can go on to other reforms which may be more important for change in the institution than quota reform by itself," he added.
On IMF income and expenditure, Strauss-Kahn noted that the Board again has delivered, and recently endorsed the new income model, including the sale of 403 metric tons of gold. The Managing Director also explained that the Fund's downsizing exercise, a process which began six months ago, was now coming to an end.
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