Tuesday, February 08, 2011

IMF Chief Warns of Future Unrest

Guardian: Global Economic Recovery 'Beset by Tensions and Strains' Warns IMF Chief
CNN: IMF: Global Rebound 'Not the Recovery We Wanted'
Reuters: Global Imbalances Returning, Could Fuel Unrest: IMF Chief

In a speech recently given in Singapore, the managing director of the International Monetary Fund (IMF), Dominique Strauss-Kahn, warned that chronic trade imbalances could lead to international tensions and trade wars, while high unemployment and widening gaps in income could cause future instances of public unrest within nations, if not civil war.

Strauss-Kahn expressed concern about chronic trade imbalances, which could give rise to international tensions and possibly trade wars. Surplus nations (those whose exports exceed imports) like China and Germany, have been relying on the sale of its exports to other countries as a main source of economic growth. While this has helped fuel growth their economies, it has come at the expense of those countries that have been purchasers of those exports. At a global level, the sum of trade balances of all countries must equal zero. That means that when countries like Germany and China run persistent trade surpluses, other countries must be running trade account deficits (i.e., when imports exceed exports). Some countries, like the United States, have run persistent trade deficits.

Persistent trade deficits have the potential to be problematic because they are financed through funds borrowed from other countries (the debt that results is referred to as the “external debt” of the deficit nation), which the deficit country must ultimately repay. If the external debt of a deficit nation grows too large and it is unable to obtain funds to finance the debt, it will be forced to raise funds by reducing consumption and spending, which can contribute to an economic downturn in the deficit nation and its trading partners. In the worst-case scenario, if these deficits persist indefinitely, a nation’s external debt could theoretically grow to an amount that it is unable to repay, resulting in insolvency. To correct these imbalances, deficit nations would like surplus nations to do more to stimulate domestic demand for imports from deficit nations. If surplus nations fail to take such initiatives, Strauss-Kahn fears that deficit nations will take protective measures to balance their trade accounts, which could result in trade wars. Such trade wars would be undesirable for all nations involved, as traditional tools to conduct trade wars, like tariffs, raise the cost of a nation’s imports, which make these goods relatively more expensive for domestic consumers to buy.

In addition to possible international tensions caused by trade imbalances, Strauss-Kahn also warned that poor economic conditions within nations could give rise to public unrest, and possibly civil war. Citing the current unrest in Egypt and Tunisia as examples, Strauss-Kahn said rising unemployment rates could lead to similar crises in other nations. Strauss-Kahn did not limit the reach of such potential crises to only developing nations like Egypt, but left open the possibility that they could erupt in developed nations as well. Many developed nations, such as the U.S., are struggling to rein in high unemployment levels, which Strauss-Kahn indicated was an influential factor causing the current uprisings in Egypt and Tunisia.

Strauss-Kahn mentioned that tensions could also result from the rising income inequalities in developing countries, where the highest incomes are becoming increasingly concentrated in a smaller percentage of the population. Such inequality is nothing new for many developing nations, and a growing sense of hopelessness about improving their situation could frustrate the poorest segments of the population to the point of public revolt, much like what is currently happening in Egypt. This frustration is made worse by rapidly increasing inflation in these countries, where rising prices, especially food prices, leave the poorest with even less purchasing power.

Discussion Questions:
1. Strauss-Kahn emphasized that action needs to be taken to reduce global trade imbalances in order to prevent global trade barriers. Couldn’t an argument be made that such a trade war has already begun through competitive devaluations of currencies by various nations?
2. Given that both Tunisia and Egypt have (or had) been under the same political leadership for a long time (President Mubarek of Egypt has been the president for 30 years, while the ousted leader of Tunisia, Zine al-Abidine Ben Ali, had been in power for over 23 years), does that mean a causal relationship exists between a lack of political turnover and poor economic conditions? If so, would this license the IMF, provided its charter is amended to allow it, to offer assistance to economically troubled nations based on the condition that they make not only economic reforms (as it currently does), but also political reforms that are conducive to improving economic conditions?

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