Global recovery seems stronger, but still fragile - IMF
The global economy is recovering significantly faster than previously
expected, but growth is still dependent in most advanced economies on
government stimulus measures and remains fragile, the Managing Director
of the International Monetary Fund, Dominique Strauss-Kahn, said.
While emerging market economies-especially in Asia-were leading the
recovery, most advanced economies were still sluggish, with private
demand weak and joblessness continuing to rise, he told reporters.
"We are not out of the woods until the private sector has recovered,"
Strauss-Kahn said at a January 14 news conference in Washington that he
started by conveying deep sympathies to the people of Haiti following
the severe earthquake.
The Managing Director announced the Fund would provide $100 million
to Haiti very rapidly in emergency help and would coordinate with other
agencies to come up with a larger assistance package in due course.
On the global economy, Strauss-Kahn said he expected to see countries
around the world recovering at different speeds in the various regions.
He urged governments not to relax stimulus measures too early in the
mistaken belief that a strong recovery had taken hold, and suggested
that they could shift stimulus measures toward projects that would
create additional jobs.
The IMF is scheduled to release its update on the global outlook on
Breaking down what had happened during the past two years of crisis
and looking ahead to 2010, he said this year must be a year of
transformation, to complete the reshaping of the global financial and
* 2008 was a year of humility: "our confidence in markets,
institutions, and the status quo turned out to be complacency; we
learned how fallible, fragile, and interconnected we are."
* 2009 was a year of unity: "the world pulled together to respond to
a profound economic and potentially human-calamity, and redeemed the
promise of international cooperation."
* 2010 must be a year of transformation-"we must complete the global
project to address the failings in regulation, economic policy, and
governance that lay behind the crisis."
Regulation and financial sector supervision needed to be not just
stronger but smarter. The aim was not to impose additional layers of
regulation. There was a risk, he said that momentum for reforming the
financial sector could be lost and policymakers should not forget the
roots of the crisis.
|* IMF Chief
says recovery still depends on government stimulus in advanced
* Warns worst yet to come on
* Announces $100 million to help
He welcomed a proposal by U.S. President Barack Obama that major U.S.
financial firms pay a fee to help the government recover losses from the
financial crisis, saying this showed that the world's biggest economy
was prepared to follow up although the crisis was receding.
At the request of the Group of Twenty (G-20) industrialized and
emerging market economies, the IMF is scheduled to provide an assessment
by April of options for how governments can get the financial sector to
contribute to the costs of the crisis. Strauss-Kahn said society must
move away from a system where banks can "privatize gains but socialize
The IMF's priorities
Strauss-Kahn outlined four priorities for the Fund in 2010, and also
said the institution was looking into proposals for how to finance
climate change measures. "We will provide ideas in the near future," he
In the coming year, the IMF would focus on delivering the economic
regeneration that will drive growth in this new decade. The four
* A sustainable recovery of output and employment must be the highest
priority. The Fund will provide the kind of real-time analysis needed to
see this project through, guarding against too early-or too
late-reversal of stimulus measures.
* The IMF will continue efforts to provide the kind of financing
needed to tackle modern crises and try to improve its toolkit of
financing packages to help member countries to keep recovery programs on
* The IMF will try to keep the spotlight on the need to modernize
financial sector regulation and put in place mechanisms to identify and
tackle the hidden risks to country economies. The upcoming reform of the
Fund's mandate is a historic opportunity to do the same at the global
level, with more focus on systemic-not just country-level risks,
especially in the financial sector, and financing facilities that
provide the kind of insurance needed to avoid excessive and costly
* The IMF will continue to improve its governance structure, with the
Managing Director saying that the Fund would meet an end-year deadline
to deliver a fair redistribution of Fund quotas, and to pursue other
Adjustments in the Fund's mandate were needed to take account of
modern-day crises that were far broader than traditional balance of
payments crises, and to broaden its scope to take into account the need
to ensure that any financial instability does not spill over into social
tensions and become a danger to world peace.
Asia Conference in Korea
The Managing Director, who is visiting Tokyo and Hong Kong January
19-21, also announced that Korea and the IMF are planning to jointly
host a high-level international conference on Asia in Seoul during July
The conference will bring together leading policymakers from Asia and
around the world to examine the region's economic dynamism and evolving
role in international policymaking. It will also provide the IMF an
important opportunity to deepen its engagement with Asia.
IMF Survey online
For financial sector rescues:
IMF studies how to pay
Last September, leaders of the Group of Twenty (G-20) industrial and
emerging market countries, meeting in Pittsburgh, asked the IMF to
prepare a “range of options” for “how the financial sector could make a
fair and substantial contribution toward paying for any burdens
associated with government interventions” to counteract financial sector
IMF First Deputy Managing Director John Lipsky leads the Fund group
tasked with preparing the report.
In this interview, Lipsky explains how the IMF will go about its work
as it studies various approaches. The final report will be presented to
the G-20 Leaders next June, with a preliminary version to be discussed
at the G-20 Finance Ministers meeting in April.
IMF Survey online: There’s a lot of
interest in the work that the Fund is doing on taxation of the financial
sector. What exactly is this about?
First of all, I want to be clear about the subject and scope of our
report. We are responding to the G-20 Leaders’ request for an analysis
of the various ways in which the financial sector could help to defray
the costs of public sector crisis support.
Since you mentioned “taxation,” I would stress that while this may
provide a convenient shorthand reference for the project, our report
will encompass other possible funding sources, including some that
resemble user fees.
Although we will focus principally on the funding challenges posed by
potential future crises, we also will examine the efforts underway to
recoup the cost of the current crisis. Of course, there are many links
between these two, but the analytical approach-and the appropriate
policy choices-inevitably will differ in each case.
At the same time, our study will examine which institutions and/or
activities should be included, and in the case of future crises, whether
a fund should be created in advance of any prospective use.
In analyzing the various policy options, important considerations
will include bolstering systemic efficiency and effectiveness, including
by removing existing distortions and by avoiding the introduction of new
IMF Survey online: What do you see as
the main challenges for this work?
At its heart, our analysis will address how to fund the direct
financial sector support that could be required in a potential financial
crisis. Assessing this need will require analysis of the spillover
effects-that is, externalities-that financial sector activities pose for
the rest of the economy.
At an analytical level, the burdens resulting from financial crises
can be addressed through taxation, or regulation, or a mix of the two.
Thus, a key question that our analysis will have to confront is the
appropriate balance between these two basic policy options. For example,
a more tightly regulated financial system presumably would be more
stable, and therefore would create less prospective risk. In this case,
the potential burden of public sector support should be lower, as would
be the possible need for funding. However, a financial system that was
severely constrained with regard to permitted activity likely would
provide fewer services and could even reduce overall output.
Unfortunately, the academic literature provides little practical
guidance for finding an optimal balance between financial regulation and
crisis mitigation. Thus, we will be breaking new ground. Of course, this
makes the work not only potentially important, but also intellectually
challenging and even exciting.
The challenges are somewhat daunting, however. The issue is situated
at the intersection of macroeconomics, regulatory economics, and public
finance. We need to take into account the tightly integrated and complex
nature of contemporary financial markets.
We will have to be aware of the regulatory changes currently being
discussed by G-20 members at the Financial Stability Board. We will have
to consider in practical terms how possible measures could be
implemented internationally without creating perverse incentives.
We also will have to be mindful of the near-term difficulties still
facing the financial sector, so as to avoid the danger that any proposed
measures could unduly jeopardize the sectors’ recovery. Adding to the
challenges, any eventual policy decisions in this area will involve
judgments about fairness and efficiency-issues that inherently are
difficult and often contentious.
As is self-evident, we will require a wide range of practical and
conceptual expertise. To accomplish this task, we are drawing on the
really impressive capabilities of our Fiscal Affairs Department, the
Monetary and Capital Markets Department, and our Research Department. In
fact, the staff team working on this project is absolutely world class.
That does not diminish the difficulties of finding the right
solutions. Not the least of the challenges we face is a tight timetable;
the final report to the G-20 Leaders is due in June 2010 and we will
present a preliminary version to G-20 Finance Ministers in April.
IMF Survey online: What measures are
you focusing on-and are there any you have ruled out?
At this stage, we have ruled nothing out. We will look at various
taxes, the formation of resolution funds, and the possibility of capital
charges or the creation of contingent capital requirements. The latter
term refers to debt finance that converts into equity in pre-specified
circumstances related to stress, and that potentially could prevent some
|* Goal to
reduce systemic risk, improve burden sharing
* Range of options, including
financial sector taxation, being discussed
* Measures need to balance
taxation and regulation
Of course, even before we look to use the tax system to fund crisis
resolution, we need to ask whether current tax rules favor excessive
risk-taking, and if so, how such problems could be corrected.
IMF Survey online: What about the idea of a Tobin tax on foreign
currency transactions, or a more general financial transactions tax,
which some have proposed?
Of course we will examine all worthwhile proposals. However, the
original “Tobin tax” proposal-first suggested by the late Nobel laureate
James Tobin-was limited to foreign exchange transactions, and was
intended to reduce the volume of such transactions, not to raise
While some contemporary advocates of a transaction tax view it as a
means to shrink the size of the financial sector, others are looking to
such a measure as a possible source of finance for development purposes.
Whatever the merits of this approach, and the worthiness of the overall
goal, this is not exactly the issue that the G-20 Leaders asked us to
IMF Survey online: There are clearly
strong views on the topics that you are exploring. How do you plan to
take them into account?
Clearly, these are issues that have attracted widespread attention,
and they merit broad consultation. Already, we are engaging the views of
interested observers and recognized experts in the area.
We envision this process to include official institutions, academics,
financial market participants, civil society organizations, and all
others with an interest in contributing to the discussion.
IMF Survey online: We are seeing some examples of banks that received
substantial support during the crisis that are now making arrangements
to repay governments for that support. How will the IMF take this into
We currently are surveying the G-20 countries regarding the types of
public support already extended to financial institutions, and the
repayments that have been made and are expected to be made in the
The amount of temporary support being made available to the financial
sector surely will have some relation to the net cost to the public of
such actions, rather than just the gross cost. Moreover, it will be
important to examine the incidence of proposed fund-raising measures, in
order to understand as much as possible their ultimate economic impact,
and not just their first-round effects.
IMF Survey online