Economic Stability, Economic Cooperation, and Peace—The Role of the IMF, Remarks by Dominique Strauss-Kahn, Managing Director, International Monetary Fund
IMF News, September 23, 2009
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- Published: September 23, 2009
Peace and Economic Stability: Core Thesis
- Peace and economic stability are "intimately entwined" — loss of one increases likelihood of losing the other.
- Peace is a necessary precondition for trade, sustained economic growth, and prosperity; economic stability and rising prosperity that is broadly shared can foster peace.
- Economic cooperation, openness, and a multilateral approach to economic and political problems make mutually reinforcing peace and prosperity more likely.
- Historical lesson: the Great Depression created fertile ground for a devastating war; increased international cooperation since the second world war coincided with fewer conflicts among nations and greater economic prosperity.
The Global Financial Crisis and IMF Response
- The IMF devoted much time and effort to fighting "the global financial crisis, the greatest economic slowdown since the Great Depression."
- The crisis is described as "truly global" — affecting big and small countries, rich and poor, and countries that made policy mistakes and countries that did not.
- Forecast: "we are now forecasting a global recovery in the first part of 2010."
- Labor-market lag: "unemployment might very well continue rising next year, even as the economy bounces back."
- IMF policies and actions:
- World leaders pledged to "triple our lending capacity, and more than double concessional resources for poorer countries."
- IMF emphasis: "more upfront financing in larger amounts, a greater emphasis on prevention, and more flexible lending."
- IMF contributions beyond lending: forecasts and policy advice—highlighting fiscal stimulus, need to restructure the banking system, and avoidance of protectionism.
- Recommendation maintained: preserve financial and aid flows to vulnerable countries.
Risks and Impacts for Low-Income Countries
- Stakes are "particularly high in the low-income countries" where populations are especially vulnerable.
- Two dramatic shocks reversed prior gains: "the food and fuel price shock and the global financial crisis" (plus a devastating drought hitting East Africa).
- United Nations and World Bank estimate: "up to 90 million people might be pushed into extreme poverty as a result of this crisis."
- Social indicators are deteriorating; in many areas the crisis threatens life and death, not just income.
- IMF lending to low-income countries:
- "Support to low-income countries over the next year or two will be three times what was available before the crisis."
- "We will charge zero interest on all concessional lending through 2011."
- Most low-income countries with an IMF-backed program have budgeted higher social spending and many are making efforts to better target spending toward the poor.
- "About 40 percent of the conditions in our low-income country programs focus on improving public resource management and accountability."
- IMF is reforming lending to be "more flexible and better tailored to individual country circumstances" and creating "a more flexible emergency facility" for countries coming out of conflict.
War, Conflict, and Economic Costs
- Current refugee and displacement figures: "about 9 million refugees and a further 14 million who are internally displaced — in each case, about half are in low-income countries."
- Research estimates on civil war impacts:
- "One year of conflict can knock 2-2½ percentage points off a country’s growth rate."
- "Since the average civil war lasts 7 years, that means an economy that is 15 percent smaller than it would have been with peace."
- "The overall cost of a typical civil war, including forced migration and increased disease, amounts to around 250 percent of GDP on average."
- Causality: weak economies, low income, slow growth, marginalization, and dependence on natural resources increase the risk of civil conflict; conflict in turn destroys infrastructure, human and financial capital, and weakens institutions.
- Post-conflict fragility: "During the first decade after a war, there is a 50 percent chance of returning to violence."
IMF Mandate, History, and Institutional Role
- The IMF's mandate: promote economic stability—monetary cooperation, facilitate expansion of trade and employment, oversee the global financial system, and lend to members with balance of payments needs.
- Historical context:
- Treaty of Versailles and interwar policies contributed to economic ruin and war; John Maynard Keynes warned against impoverishing central Europe.
- Post–second world war multilateralism (United Nations, European integration, Marshall Plan, social safety nets) aimed to prevent a repeat by linking economic stability to peace.
- The IMF was created in this multilateral milieu to fight the economic roots of war and to support stability that underpins peace and security.
Policy Implications and Recommendations
- Preserve and strengthen international economic cooperation and multilateral responses to global shocks.
- Provide timely financing to countries facing balance-of-payments needs to avoid forced cuts to social safety nets and essential public services.
- Emphasize coordinated fiscal, monetary, and financial-sector policies in crisis response.
- Avoid protectionism and maintain financial and aid flows to vulnerable countries.
- Target social spending and protect the most vulnerable to reduce risks of social unrest and political instability.
- Improve public resource management and accountability (about 40 percent of low-income program conditions focus here).
- Provide tailored, flexible lending instruments (including a flexible emergency facility) and zero interest on concessional lending through 2011 to ease burdens on low-income countries.
- Extend technical assistance and governance support to resource-rich and post-conflict countries to help manage revenues and rebuild institutions, recognizing that sustained help reduces relapse risk into civil conflict.
Remarks by Dominique Strauss-Kahn, Managing Director, International Monetary Fund; At the Global Creative Leadership Summit, New York City, September 23, 2009.