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World Must Now Focus on Financial Sector Reform, Says IMF

Construction site in Jakarta, Indonesia: faster-than-expected global recovery testament to unprecedented cooperation (photo: Romeo Gacad/AFP)

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World Must Now Focus on Financial Sector Reform, Says IMF

IMF Survey online

April 22, 2010

  • World economy to bounce back to 4.2 percent growth, says Strauss-Kahn
  • But major problems remain including weak private sector demand, high unemployment
  • Need to tackle financial sector reform around the world more quickly

The international economy is recovering faster than expected from the global crisis, but the world remains a dangerous place and governments should now focus on stepping up reform of financial sector regulation to avoid future crises, said IMF Managing Director Dominique Strauss-Kahn.

Speaking ahead of meetings in Washington of the International Monetary Fund, the World Bank, and the Group of Twenty (G-20) leading industrial and emerging market countries, Strauss-Kahn said the faster-than-expected recovery was testament to the unprecedented cooperation between major economies to combat the crisis.

But in a wide-ranging press conference that also touched on Greece, Iceland, Argentina, China, and reform of the IMF, among other issues, he told reporters on April 22 that the recovery remained uneven and the world could not go back to business as usual.

Need to secure recovery

“The goal now is to secure and advance the recovery, because even if the recovery is stronger and faster than expected, it’s still fragile. And it’s fragile mainly because it’s uneven,” he said. “The world is still a dangerous place, and I don’t like that many people have in mind that the crisis is over, that everything is behind us, and we can go back to business as usual.”

Strauss-Kahn pointed to a variety of problems, including high unemployment in advanced economies, weak private demand, high government debt, the risk of asset price bubbles in emerging markets, and the need to press ahead rapidly with financial sector reform.

Releasing the IMF’s latest economic forecast on April 21, IMF Chief Economist Olivier Blanchard said the world faced an important “new stage of the crisis.” Achieving strong, sustained, and balanced growth would require more work, namely fiscal consolidation in advanced countries, exchange rate adjustments, and a rebalancing of demand across the world.

G-20 leaders will discuss on April 23 a process of mutual assessment of each other’s economies to try to even out the recovery. “Multilateralism and policy cooperation is obviously the great legacy of this crisis, and our point is that it has to be maintained in a postcrisis world. From this point of view, the G-20’s Mutual Assessment Program is very promising. Of course it’s a process which has to be improved, it’s a learning-by-doing process, it’s the first time we are doing it, but already I think it’s really interesting.”

Financial sector reform

Strauss-Kahn said progress was now needed on financial sector reform. He pointed to three key areas for international agreement by the end of the year.

• Rules on financial sector liquidity and capital;

• The toolkit for addressing systemic risks, and

• The framework for cross-border resolution issues.

While progress was being made on the regulatory side, “more attention has to be paid to the supervisory side, which in our view is the most important because you may have the best possible regulation, but if it’s not enforced and you don’t have supervision it’s as if you did nothing.”

He said he hoped that world leaders would be able to make progress together on pushing ahead with financial market regulation and iron out inconsistencies in approach. Countries do not need exactly the same rules, but they need to be consistent around the world.

Strauss-Kahn said that the IMF had prepared a preliminary paper for discussion by the G-20 on options for taxing the financial sector. “Our belief is that the tax system can help to reduce the likelihood of future crises, along with regulation, of course … What we tried to do was to provide a comprehensive analysis, having in mind two goals: to secure some resources to help with crisis resolution, if any; and to have a tool that would help curb risk-taking behavior, and try by this way to prevent the likelihood of future crises.”

Strauss-Kahn also discussed a variety of issues:

Greece. An IMF mission was just starting talks with the Greek government and discussions would take several days. Greece would be treated the same as any other IMF member. “There is no silver bullet to solve the country’s economic problems in an easy manner,” he said. But the IMF believes it has enough economic data for negotiations to proceed.

China’s currency. Strauss-Kahn said that he expected China to revalue its currency over time in its own interests as it shifted its economy from an export-led model to one focused on domestic growth.

Iceland. Strauss-Kahn said the Fund’s program with Iceland was on track. He said total disaster had been avoided, but he sympathized with the people of Iceland because they were saddled with the costs of failures by “oversized banks.”

IMF mandate and governance reform. “In our view the Fund’s role remains absolutely central,” Strauss-Kahn said. “For this, the IMF’s mandate needs to reflect better what we are really doing. We are not trying to review the mandate to extend what the IMF is doing, but just to try to have this mandate fit with what we are really doing, which is not exactly the case because what we are doing has evolved over time while the mandate has not.” The Fund would put more emphasis on multilateral surveillance. The IMF was proceeding with plans to increase representation at the IMF toward dynamic emerging markets and developing countries. He expected this to be achieved on target by next year.