Monday, January 19, 2009

IMF Issues Policy Recommendations for Its Future and the Future of the Global Economy

Sources: IMF-The IMF and Its Future

IMF-Crisis Lessons for the IMF

This December, Dominique Strauss-Kahn, managing director of the IMF, took the time to lay out the Fund’s policy advice for economies struggling with the effects of the financial crisis, as well as its recommendations for the role of the IMF in preventing future crises.  Mr. Strauss-Kahn focused on three goals that need to be attained in order to regain economic and financial stability: restoring stability to financial markets, supporting aggregate demand, and providing financial support to Crisis-hit countries.

To further the objective of restoring stability and confidence to financial markets, he emphasized that government intervention in the markets should be “clear, comprehensive, and cooperative between countries.” He said that governments currently face politically tough conditions resulting from “bailout fatigue” because past interventions have not been adequately transparent. 

The IMF’s position on fiscal stimulus is that for most, but not all, countries it is absolutely necessary in order to pull the global economy out of its deep decline.  Not only is fiscal stimulus warranted for those countries that can afford it, but such measures should also be “large and diversified.”  The IMF’s current position is that a global fiscal stimulus should be at least 2 percent of global GDP ($1.2 trillion) in order to be effective in increasing global growth.

Finally, the Director highlighted the IMF’s efforts to provide liquidity for emerging economies hit hard by the after-effects of the financial crisis, including direct lending agreements and a short-term liquidity facility available to nations with strong fiscal track records.  But, as the G20 meeting in November addressed, the IMF has limited capital reserves on hand to lend to troubled economies, though Strauss-Kahn emphasized that it has enough “for now.”  He also praised Japan’s offer of $100 billion and encouraged other nations with large reserves to follow their lead so that the Fund can adequately assist any country, no matter how large, if necessary.

The speech also addressed the IMF’s vision for how it can play an important role in preventing a future crisis.  Strauss-Kahn praised the use of the G20 format as a more representative forum for necessary cooperation and stated the IMF’s intention to coordinate increasingly with other international organizations, like an expanded Financial FSF and the G20 forum.  The IMF sees its role, apart from the macroeconomic assessments for which they have traditionally been responsible, as increasingly one of an early warning system-to identify potential problems and give recommendations for how to remedy them before they become crises.  Ultimately, however, early warnings are only useful when heeded and it remains to be seen if world leaders will be more responsive in the wake of this global crisis.

Discussion: What kind of role can the IMF play in a new and improved international financial regulatory structure?  Would a more direct regulatory function be more effective?  What do you see as the prospects for more international coordination and cooperation in financial regulation?

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