Wuhu, China textile factory: China implementing policies that over time would help reduce reliance on exports as main growth engine (photo: Newscom)
WORLD ECONOMIC CRISIS
In a videoconference with Asian reporters before leaving for a February 6-7 visit to Malaysia, Managing Director Dominique Strauss-Kahn said that although Asia is not at the epicenter of the global turmoil, it has been hit hard.
The outward orientation that has propelled the region's spectacular development over several decades was now exposing it to external shocks.
Quick deceleration
The IMF says that growth in Asia's emerging markets is decelerating quickly. Latest GDP releases show that the pace of activity fell substantially at the end of 2008 in nearly all countries. The slowdown is being led by a slump in exports—the result of weakening external demand, particularly in advanced economies—and some dislocations in trade financing.
Against this background, the IMF has downgraded its growth projections for the region. Average GDP growth for Asia in 2009 is projected to decline to 2.7 percent, about 2¼ percentage points lower than the IMF's November forecast.
However, in developing Asia, growth should remain stronger at 5½ percent—and well above that in other regions. Chinese growth is forecast to be around 6.7 percent, although Strauss-Kahn said it may be possible for China to hit its target of around 8.0 percent. India is forecast to post growth above 5 percent.
Recovery factors
Strauss-Kahn said that Asia could bounce back quickly. Helped by the recovery of the global economy as well as expansionary fiscal and monetary policies in the region, economic activity in Asia is projected to experience a gradual recovery in 2010, with growth picking up to an average of 5¼ percent. Good policy implementation in the region remains, however, a prerequisite for a durable rebound.
Much-improved fundamentals over the past decade have opened up considerable room to mount a countercyclical policy response to the external shocks in most Asian countries. In fact, Asian policymakers have risen forcefully to this challenge: in all the major countries, substantial monetary and fiscal stimulus is under way, tailored to their individual circumstances. Macroeconomic policies are also being supplemented with measures to maintain adequate capitalization of domestic financial systems.
Yet, a number of countries still have more room for maneuver, according to the IMF. China, for example, has announced significant measures to strengthen domestic demand and protect the Chinese economy from the fallout from the external shocks. Nevertheless, there may still be scope in China for additional steps, targeted at supporting those displaced from the export sector and bolstering private consumption growth. Other countries too have further room to act, although some are constrained by access to financing or high levels of public debt.
China's shift
Strauss-Kahn noted that China was implementing policies that over time would help reduce the reliance on exports as a main growth engine and strengthen the role of domestic demand. The shift would be a difficult and protracted process, but was undoubtedly in China's interest. Other Asian countries could also follow China's example.
Asked about the exchange rate of the Chinese currency, Strauss-Kahn said the renminbi remained undervalued. However, he stressed this was not the main problem faced by the world at present. Promoting growth around the world was the policy issue.
"We're not in quiet times," said Strauss-Kahn. "So we had better concentrate on recovery, keeping in mind that it's true to say that the renminbi is still undervalued."
Resist protectionism
Strauss-Kahn warned against a possible protectionist backlash as the crisis unfolds, saying that in a globalized world protectionism "was already wrong in the past, but it's even more wrong today."
"When you're in a globalized economy, there is no way to find a domestic solution ... `beggar-thy-neighbor' policy will never provide good results."
Continued help for poor
Strauss-Kahn said there was a risk that in the global downturn, advanced economies might forget their commitments to low-income countries.
The IMF supported steps by the World Bank to create a "Vulnerability Fund" to assist the world's poorest nations during the crisis. "It's not because the richest countries are in a mess that we should forget our commitment to low-income countries," Strauss-Kahn told reporters.
Changing IMF
The IMF was always adapting to changing circumstances but the process had been accelerated by the global economic storm, Strauss-Kahn said. New thinking and new actions were under way at three levels:
• Lessons from the past. In addressing the current crisis, the IMF had learned from its experience in previous crises, including those in Asia and Latin America, and had adjusted the terms of its lending programs.
• Early warning systems. Although crises are not all the same, the IMF is also working hard to develop early warning systems that would identify vulnerabilities and risks and propose specific remedies.
• Governance of the world economy. The IMF was also channeling suggestions from its 185 member governments to the Group of 20 industrialized and emerging market economies that will meet in London in April to discuss reform of the international financial system and world economy.
Comments on this article should be sent to imfsurvey@imf.org
