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Economic Stability, Economic Cooperation, and Peace—The Role of the IMF, Remarks by Dominique Strauss-Kahn, Managing Director, International Monetary Fund
September 23, 2009
As Prepared for Delivery
Thank you very much. I am the Managing Director of the IMF and I am going to talk to you this morning about peace. Some people might find that strange. But it is my abiding belief that peace and economic stability are intimately entwined. If you lose one, you are likely to lose the other. Peace is a necessary precondition for trade, sustained economic growth, and prosperity. But it can also work the other way. Economic stability, and a rising prosperity that is broadly shared—both within and among countries—can foster peace. This is most likely to happen in an atmosphere of economic cooperation, of openness, of a multilateral approach to economic and political problems.
Ultimately, peace and prosperity feed on each other, reinforce each other. I believe history teaches us this lesson. We all remember how the Great Depression created fertile ground for a devastating war. More recently, in many parts of the world, economic instability has provoked political upheaval, social unrest, and conflict. With increased international cooperation since the second world war, it is no coincidence that we have seen fewer conflicts among nations together with greater economic prosperity, encompassing an ever-increasing share of the world’s population.
Let’s flash forward to the present day. Over the past two years, the IMF has devoted much time and effort to fighting the global financial crisis, the greatest economic slowdown since the Great Depression.
This is a truly global crisis. It is affecting big countries and small countries, rich countries and poor countries, countries that made policy mistakes and countries that did not. It tells us that problems in one country can rapidly echo across the globe. It has exposed the deep and complex web of connections running through the global economy.
Thankfully, we can see light at the end of the tunnel even if the crisis is by no means over. Financial conditions have improved and the growth engine seems to be starting up again. We are now forecasting a global recovery in the first part of 2010. But even if growth recovers, it might still take some time for employment to follow. Unemployment might very well continue rising next year, even as the economy bounces back. For people losing their job, the crisis is not over. In many countries, particularly those without adequate social safety nets, poverty will persist. And with this comes risks to social stability.
The stakes are particularly high in the low-income countries, where populations are especially vulnerable. Until recently, the news from this part of the world was good. We saw the longest and broadest economic expansion among the low-income countries in modern history, especially in sub-Saharan Africa. But two dramatic shocks in rapid succession—the food and fuel price shock and the global financial crisis—caused fortunes to be reversed. And it’s not over—East Africa is now being hit hard by a devastating drought.
The consequences could be disastrous. Our colleagues at the United Nations and World Bank think that up to 90 million people might be pushed into extreme poverty as a result of this crisis. Social indicators are deteriorating. In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself. Economic marginalization and destitution could lead to social unrest, political instability, or a breakdown of democracy. We could see war. This is what we must avoid.
The IMF and the crisis
With this in mind, let me talk a little about how the IMF has responded to the crisis. Not so long ago, the global economy stood at the edge of the abyss. With the collapse of Lehman Brothers, uncertainty turned to outright panic, and economic activity began a downward spiral. People raised the specter of another Great Depression, and these fears were not unfounded. But today’s world looks different. The crisis is not over, but I hope the worst is now behind us. We seem to have averted disaster.
I contend that this was no mere accident. It was not just good luck. Rather, it came from the bold decisions taken by policymakers the world over, and—just as importantly—from an unprecedented degree of economic policy cooperation. Countries faced a common threat with a common response. We saw this in fiscal policy, in monetary policy, and in financial sector policy.
In a sense, the IMF stands at the apex of this multilateral response, promoting the global public good of economic stability.
On the eve of the crisis, the global economy had become increasingly integrated, with booming trade and deeper financial linkages. This all came to a halt as trade collapsed and capital flows dried up. Many emerging markets and low-income countries faced immediate financing needs. The IMF stepped into the breach. Recognizing the unique role of the IMF, world leaders pledged to triple our lending capacity, and more than double concessional resources for poorer countries. The IMF is committed to using the funds as effectively as possible—emphasizing more upfront financing in larger amounts, a greater emphasis on prevention, and more flexible lending.
Our role goes beyond lending. We also add value with forecasts and our policy advice. And as this crisis unfolded, I think we proved our worth with our realistic forecasts, both for growth and for credit losses. Likewise, we also helped as a policy advisor, emphasizing in particular the need for common, coordinated, action. The IMF was among the first to pinpoint the policy responses that have now become part of conventional wisdom, especially the fiscal stimulus and the need to restructure the banking system.
We also urged countries to avoid the mistakes of the Great Depression. We reminded the world that resorting to protectionism and closing borders would backfire, exacerbate the collapse in world trade and growth, and make everybody worse off. We also called for maintaining financial and aid flows to vulnerable countries.
Avoiding war
As I noted, the crisis is not over. Indeed, its human and social costs might get worse before they get better. This is especially true in low-income countries. Here, we don’t just care about growth for growth’s sake, we also want to safeguard peace and prevent war. Indeed, when low-income countries were doing well over the past decade or so, the incidence of war declined significantly. The great fear is that this trend could be reversed.
Wars might justifiably be called “development in reverse”. They entail huge economic costs and are the cause of great suffering. They lead to death, disability, disease, and displacement. One particular issue that causes great strain on the country itself and neighboring countries is the issue of refugees. Already, in the world today, there are about 9 million refugees and a further 14 million who are internally displaced—in each case, about half are in low-income countries. So this is a major risk factor.
Wars also increase poverty. They reduce growth potential by destroying infrastructure and leading to a loss in financial and human capital. They divert resources toward violence, rent-seeking, and corruption. They weaken institutions.
Most wars since the 1970s have been wars within states. It is hard to estimate the true cost of a civil war. Recent research suggests that one year of conflict can knock 2-2½ percentage points off a country’s growth rate. And 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. Of course, no cost can be put on the loss of life or the great human suffering that always accompanies war.
The causality also runs the other way. Just as wars devastate the economy, a weak economy makes a country more prone to war. Economic factors matter more than many people think. The evidence is quite clear on this point—low income or slow economic growth increases the risk of a country falling into civil conflict. Poverty and economic stagnation lead people to become marginalized, lacking a stake in the productive economy. With little hope of employment or a decent standard of living, they might turn instead to violent activities, where income opportunities might be higher. Dependence on natural resources is also a risk factor—competition for control over these resources can trigger conflict and income from natural resources can finance war.
And so we can see a vicious circle—war makes economic conditions and prospects worse, and weakens institutions, and this in turn increases the likelihood of war. Once a war has started, it’s hard to stop. And even if it stops, it’s easy to slip back into conflict. During the first decade after a war, there is a 50 percent chance of returning to violence, partly because of weakened institutions.
We must strive to avoid war at all costs. How can the IMF help? At a broad level, by helping countries maintain or consolidate economic stability. The most obvious way to do this, as I mentioned already, is by providing financing when needed. Without this, governments might be forced to cut social safety nets and essential public services. Economic activity might be further disrupted, and employment opportunities diminished. Here, the IMF is delivering—support to low-income countries over the next year or two will be three times what was available before the crisis. And to ease the burden, we will charge zero interest on all concessional lending through 2011.
Our lending has made a difference. Countries with sustained program engagement over the past two decades saw bigger boosts to growth than those without such involvement. We are trying to do better still, reforming the way we lend to low-income countries, and making this lending more flexible and better tailored to individual country circumstances.
Our lending programs in these countries always emphasize poverty reduction and protecting the most vulnerable. For many people in these parts of the world, when food prices triple, when jobs are lost, when remittance flows are cut, public social benefits are often the only answer. Without this lifeline, the risk of violence increases. I am pleased to note that most low-income countries with a program backed by the IMF have budgeted higher social spending and many are making efforts to better target spending toward the poor. This is one of our top priorities.
The IMF also places great emphasis on good governance. About 40 percent of the conditions in our low-income country programs focus on improving public resource management and accountability. We also provide advice and technical assistance to resource-rich countries, allowing them to better manage their revenues, again contributing to social stability. Many low-income oil producers managed the most recent oil boom much better than in the past, a very good sign.
The IMF also extends special help to countries in post-conflict or other fragile situations—again through lending and technical assistance. We help rebuild or strengthen institutions and economic management—essential elements of state building. I talked about making our lending facilities more flexible—one way we are doing that is by creating a more flexible emergency facility that can be used by countries coming out of conflict. Sure, the IMF’s role is a limited one, but our support can also open the door to much-needed aid flows. Sustained help is critically important given the risk of a relapse into civil conflict.
The IMF’s mandate
Let me return to my main point. When the nations of the world come together to address common challenges in a spirit of solidarity, we can attain a virtuous cycle of peace and prosperity, and avoid a vicious cycle of conflict and stagnation. On first glance, this might seem incidental to the role of the IMF. But it is not. It underpins our mandate.
This becomes clear when we look at the origins of the IMF, and the lessons of the 20th century. The nations of the world came together after the first world war. But instead of promoting economic cooperation, they were motivated by more myopic considerations. In particular, the harsh terms of the Treaty of Versailles sowed the seeds of economic ruin in Germany, which in turn was one of the causes of the second world war.
One of the people who saw this clearly was John Maynard Keynes, one of the founders of the IMF. He strongly condemned “the policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings,” For he saw clearly the implications: “If we aim deliberately at the impoverishment of central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing”. Keynes instead urged the people of his day to “base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction.”
Keynes’ admonition was ignored. Countries instead embraced the economics of self-interest, and retreated to isolationism. What followed was the unprecedented collapse in global economic activity in the 1930s, with dire social and political consequences. Economic warfare soon led to real warfare. The resulting second war world war left tens of millions dead and many countries around the world in ruins.
After the war, the nations of the world gathered once more. They vowed never to repeat the errors of the past. They embraced multilateralism and a cooperative approach to economic and financial policies. Leaders wanted to create a new world.
This strategy took many dimensions. The United Nations was founded to “save succeeding generations from the scourge of war” while promoting “social progress and better standards of life”. In my own continent of Europe, leaders embarked upon a remarkable process of economic and political integration. They were determined to forever banish the specter of war from the continent and realize the dream of “perpetual peace”—that great unfilled dream of so many philosophers over the centuries, including Saint-Pierre, Rousseau, Bentham, and Kant. Remember too that peace was aided by external financial support from the Marshall plan and internal financial support from the development of comprehensive social safety nets. It was economic and social stability that cemented the peace.
The IMF was born at this defining moment in history, forged in the furnace of a multilateral milieu dedicated to peace and cooperation. Its mandate was economic stability—promoting monetary cooperation and facilitating an expansion of trade and employment that benefited all people. It would oversee the global financial system and lend to members with balance of payments needs. It was understood that with stability would come peace and security.
And as the founding fathers gathered at Bretton Woods in 1944, peace was foremost on their minds. The pessimism expressed by Keynes a quarter century earlier now turned to optimism. As the conference ended, Keynes declared that by working together “this nightmare, in which most of us present have spent too much of our lives, will be over”. And in a sign of the times, he expressed his confidence that “the brotherhood of man will have become more than a phrase”. United States Treasury Secretary Henry Morgenthau shared this conviction, linking peace to shared prosperity and denouncing the economic policies of the interwar years. He declared that “Economic aggression can have no other offspring than war. It is as dangerous as it is futile. We know that economic conflict must develop when nations endeavor separately to deal with economic ills which are international in scope.” This is our legacy. From this stems our mandate.
Conclusion
Let me sum up. I have argued this morning that economic stability and peace go hand in hand. This is especially true when countries come together to cooperate on the international stage. The IMF was created to fight the economic roots of war. Its sits at the heart of multilateral efforts to achieve economic stability between countries and within countries.
As we look at the current global financial crisis, the worst since the Great Depression, the risks were incredibly high. The global economy could have faced a meltdown. But we pulled back from the brink, and the IMF certainly played its role. Even if it is too early to declare victory, we did what the founding fathers expected of us. And to quote Robert Frost, that has made all the difference.
Thank you very much.
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