BASSETERRE, St. Kitts – SIGNS of slow recovery are apparent in the world’s economy and according to the International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn, stimulus measures implemented to ward off the effects of the crisis should remain until the recovery is firm.
In his delivery of the 2009 Bundesbank Lecture in Berlin yesterday (Sep. 3), Strauss-Kahn hinted to a fairly positive economic outlook, but cautioned that progress thereafter would be “sluggish and that a jobless recovery remains a risk”. In this light, the IMF official urged all countries to relax their efforts only after recovery is certain and unemployment shows a favourable declining trend.
“I am concerned about the social and economic costs of high unemployment, which will persist even as financial markets and output stabilizes,” he stated in an IMF press release.
With economic uncertainty still ahead, Strauss-Kahn stressed that governments should develop their exit plans immediately to ensure that they “build public support and act when the time is right”.
International policy coordination has been a critical component in the response to the crisis, and the IMF official noted that a coordinated exit strategy would be equally necessary.
Strauss-Kahn focussed on three major policy areas that he deemed as “essential to ensure sustainable recovery”.
First, he underlined the importance of identifying new sources of growth, adding that “the baton will eventually need to be passed from the public to the private sector”.
Brief mention was given to boosting the financial systems in advanced economies in order to ensure “global rebalancing of demand across countries”. Much emphasis was placed on the need to increase labour market flexibility and competition in product markets, as the IMF views these steps as leading toward reforms that boost productivity.
The second policy spoke to reforming the financial sector in a way that erases “complacency in dealing with remaining and difficult problems in the banking system”. Strauss-Kahn encouraged countries to undertake a comprehensive diagnosis of banking systems and launch asset-management programmes to deal with banks’ bad assets. Financial regulation and financial sector compensation were also part of this policy plan.
The final policy area dealt with strengthening the international monetary system. To accomplish this, Strauss-Kahn highlighted that it is necessary to reduce each country’s demand for reserves while also strengthening insurance mechanisms.
“The IMF could play an important role in this regard and ideas that could be explored include: making access to its funding more predictable, making Special Drawing Right allocations more responsive to global developments and increasing the Fund’s resource base,” the report stated.
