The new head of the International Monetary Fund on Monday asserted a stronger role for the global lender in speaking out on economic policies that may disrupt the rest of the world, including in countries that have traditionally not needed its help.
The IMF is not known for commenting on economic policies of industrialised countries like the United States, but in a speech to the Council on Foreign Relations in New York, Rodrigo Rato warned that even though countries enjoyed prosperity they can contribute to the woes of the rest of the world.
"We are working to integrate more fully our advice at the global, regional and country levels, recognising that even if a country is not itself at risk, it may be contributing to global imbalances and placing the rest of the world at risk," Rato said in prepared remarks.
He said the benign outlook for the world economy, amid relatively robust growth and low inflation, was a chance for governments to tackle economic imbalances and constraints to sustainable growth.
For this to happen Rato said the United States should reduce its bulging fiscal and trade deficits, while the European Union and Japan should push for more vigorous growth through structural reforms, he said.
Economists fear that the twin deficits of the world's most powerful economy could trigger massive adjustments like a free-fall in the dollar or a deep global recession.
Rato said emerging economies, which have a growing stake in the global economy, should deepen progress in reducing economic weaknesses and set the stage for continued growth in productivity, job creation and poverty reduction.
He said poor countries should quicken the pace of building a framework for growth and fighting poverty.
The former Spanish finance minister, credited with policies that helped spur growth in his own country, said increased interdependence of economies and more dependence on capital markets meant the fund's role had become more vital in helping countries pursue policies that encourage domestic and global prosperity.
Broader global changes such the increasing influence of emerging economies likes China and India, and challenges of an ageing population, mainly in industrialised countries, also had implications for the fund's work, he said.
Rato said the Washington-based fund had to be alert to looming crises and should be "candid" in its advice.
"We need to identify imbalances and vulnerabilities to allow for corrections before they can create harm," Rato said. "And, we need to communicate our positions clearer, both to policymakers and to markets, and reinforce incentives for countries to undertake pre-emptive corrective actions."
Rato said advice was, however, not enough and the fund had to be effective in influencing policies of member countries.
Critics have long slammed the IMF for imposing tough conditions on countries it loans to, no matter the political cost to governments.
But Rato said the fund had gained a "strong appreciation" of the importance of understanding political factors that shape a country's ability to implement reforms under IMF programmes.
"It has become increasingly clear that success depends not only on the design of sufficiently strong policies, but also upon the underlying reforms being owned by the borrower," he said.
"In this context, by providing an objective, well-articulated outside view, the fund may be able to help muster the domestic political consensus required to push forward changes that are necessary and desirable," he added.
He said clarity and predictability of when the fund should step in with large bailout packages was crucial, but the IMF must also be prepared to say no to large-scale lending.
"Exceptional access must be contained but we also need to recognise that large support packages cannot, and indeed should not be ruled out," Rato added.
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