core sector communique

GLOBAL ECONOMIC CRISIS

Peace, Economic Stability Interconnected, Says Strauss-Kahn

October 23, 2009 

• Global recovery result of bold policy action, says IMF head
• Challenge is to sustain spirit of cooperation in post-crisis world
• Economic stability crucial for maintaining peace and progress

The global economic recovery is no accident, but rather the result of bold and coordinated policy action taken by leaders around the world, said IMF Managing Director Dominique Strauss-Kahn, who urged policymakers to focus on economic stability to help underpin world peace.

“It was not just good luck. It came from the bold decisions taken by policymakers the world over, and—just as importantly—from an unprecedented degree of economic policy cooperation. In the face of crisis, countries came together to face common challenges with common solutions, focusing on the global common good. We saw this in fiscal policy, in monetary policy, and in financial sector policy,” he said in a speech in Oslo.

Strauss-Kahn stressed that the crisis is by no means over, and many risks remain. “Economic activity is still dependent on policy support, and a premature withdrawal of this support could kill the recovery. And even as growth recovers, it will take some time for jobs to follow suit. This economic instability will continue to threaten social stability,” he added.

The IMF has said that recovery is expected to be slow, as financial systems remain impaired and support from public policies will gradually have to be withdrawn. Households in economies that suffered asset price busts will continue to rebuild savings while struggling with high unemployment, according to the October World Economic Outlook (WEO), released on October 1.

Sustaining cooperation

The challenge for the post-crisis world was to sustain the spirit of cooperation, he added in his October 23 speech. “In an atmosphere of great fear and uncertainty, cooperation was not so hard to achieve. But with optimism on the rise, and recovery on the horizon, countries may be tempted to go their own way, and to abandon the cooperative approach that served them so well during the crisis.”

But he said recent decisions by the Group of Twenty (G-20) industrialized and emerging market countries gave a strong signal that multilateralism is here to stay.

Preserving international cooperation would be important in maintaining a peaceful world. Both peace and economic stability were intimately intertwined, he said.

“Ultimately, peace and prosperity feed on each other. I believe history teaches us this lesson. We all remember how the Great Depression created fertile ground for a devastating war. More recently, in many parts of the world, economic instability provoked political upheaval, social unrest, and conflict.”

IMF as first responder

The IMF had played its part in the multilateral response to the current crisis, promoting the global public good of economic stability. “When the crisis hit, we were sent out as a first responder, and G-20 leaders boosted our resources substantially. And as the crisis unfolded, we scaled up our emergency financing dramatically, we injected an unprecedented amount of liquidity into the system, we made our lending more flexible, and we supported the international response to the crisis with our forecasts and policy advice.”

“We tried to play our part in calming the waters. And having earlier expressed confidence in us by increasing our resources, G-20 leaders meeting in Pittsburgh extended this confidence to our surveillance, asking us to help with their mutual assessment of policies. Our goal is now to adapt to the needs of the post-crisis world,” Strauss-Kahn added.

To be effective, the IMF must be seen as legitimate. Here, the G-20 had moved the institution forward, pledging to shift quota shares toward dynamic emerging markets and developing countries by at least five percent from over-represented to under-represented countries. “This boosts our legitimacy, and represents a significant down payment on our future effectiveness,” he said.

High stakes for world’s poorest

The stakes were particularly high in the low-income countries. The United Nations and World Bank have estimated that up to 90 million people might be pushed into extreme poverty as a result of this crisis.

“In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself. Economic marginalization and destitution could lead to social unrest, political instability, a breakdown of democracy, or war,” he stated. “In a sense, our collective efforts to fight the crisis cannot be separated from our efforts guard social stability and to secure peace. This is particularly important in low-income countries.”

Strauss-Kahn said that war might justifiably be called “development in reverse” because it kills people, increases poverty, destroys infrastructure, and weakens institutions. Similarly, a weak economy can make a country more prone to war.

Delivering on concessional finance

The IMF could help by assisting countries in maintaining or consolidating economic stability, particularly by providing financing so that governments do not have to cut social safety nets and essential public services.

“Here, the IMF is delivering—support to low-income countries over the next year or two will be three times what was available before the crisis. And to ease the burden, we will charge zero interest on all concessional lending through 2011,” he added.

IMF lending, he said, has made a difference by creating growth. The IMF was also reforming how it lends to low-income countries, and making this lending more flexible and better tailored to individual country circumstances.

“Our lending programs in these countries always emphasize poverty reduction and protecting the most vulnerable. I am pleased to note that most low-income countries with a program backed by the IMF have budgeted higher social spending and many are making efforts to better target spending toward the poor. This is one of our top priorities,” he said.

“The IMF also places great emphasis on good governance. About 40 percent of the conditions in our low-income country programs focus on improving public resource management and accountability. We also provide advice and technical assistance to resource-rich countries, allowing them to better manage their revenues, again contributing to social stability.”