New Delhi: Dominique Strauss-Kahn is into his fourth year as managing director of International Monetary Fund (IMF). His stint at IMF has been marked by two important developments: the advent of reforms within the organization in the form of a gradual increase in the importance of emerging markets in the governing structure and the institution’s attempt to cope with economic and debt crisis in developed markets. Strauss-Kahn talked to Mint about these issues on Thursday during a brief visit to India. Edited excerpts:
Asia is growing almost twice as fast as the world’s average, and simultaneously getting more integrated with the globe. You have been sceptical about the decoupling hypothesis. Could you explain what is happening here, is there some risk to Asia’s growth that has not got enough attention?
There are two concerns which are big. The uncertainty in United States and the situation in Europe. But the idea of decoupling was wrong and is still wrong. The recovery is taking place at different levels. (To say) decoupling will be the same growth rate everywhere, it’s nonsense. I still don’t see decoupling, but maybe for Europe. Europe is a bit different partly because of the debt crisis. If I really had to say something about decoupling, I would say Europe is decoupling from rest of the world and Asia is decoupling from rest of the world.
Dominique Strauss-Kahn, MD, IMF. Priyanka Parashar/Mint
In Asia, what do you see as the risk factors?
You mentioned it. The risk is growing too fast. It is a bit of an irony to say that. In Asia growth above potential will create tensions. You already see that on inflation side, it will create tension on the current account. That’s the real problem. It’s a problem people would like to have in other parts of the world.
Inflation and current account are two areas where India has had problems. How big a risk is it to Indian growth prospects?
Inflation is rather high but nevertheless still under control. I think the steps taken by the Reserve Bank of India is the correct one. The consequence on current account is normal for such a big expansion. So, the problem is more of taking this opportunity of high growth to consolidate and that is what the government has in mind. It is the right time to have the deficit going down.
You were French minister for finance in the late 1990s when the Euro came about. Europe needs internal rebalancing. Given the problems there, does Europe pose a far greater policy challenge than US?
The great thing about Europe is that it is an attempt at building something which never existed in the past anywhere. It is learning by doing process. It is far from being completed. When it was hit by a crisis like this one then you see the drawbacks. There are two points. The first is the high level of debt, not only for countries at the edge of the cliff like Greece and Ireland, but even for the core countries where the level of debt is higher than it used be before the crisis The question is to reassure markets about the commitment to go back.. At the same time they have to take care of growth. Immediately there will be tough measures that will kill growth. It is a difficult trade off between showing governments are aware, willing to take action to reduce debt levels in the medium-term, at the same time not to go too fast. The second challenge has to do with the European institutions. When the storm is there it seems they are not effective as they should be. Decisions have to be made in 27 countries, each of them having veto power. So, you can imagine it is not easy to make decisions. But in crisis times you need to make decisions rapidly. That is something leaders of the European Union are clearly aware of. I think have a clear view of not only what is happening, but also finding solutions.
Moving from Europe, IMF has concluded most Asian currencies are undervalued relative to their medium-term fundamentals. Is this constant emphasis on currency taking the attention some harder decisions that have to be taken?
We certainly believe in many Asian countries the value of the currency, and lets be candid, it starts with the renminbi in China and others wanting to peg to renminbi for understandable reasons. What happens in China has consequences on many other countries. We believe there is substantial undervaluation. But you are absolutely right. The main point is in China, the shift from export led growth model to domestic led growth model. The shift has been decided by the Chinese authorities rightly, it is what the Fed was advocating for years. It is not going to happen overnight, it is a huge economy. The logic of the shift is it goes a long way in revaluation of the renminbi because it gives household purchasing power. I think, over time, we will see the renminbi revaluating. I would say it more of the consequence than cost of the policy.
Now in G-20 discussion takes place, it was strong in Seoul and probably will be strong in 2011, to fight against the global imbalances. It is a bit of task because you have different kinds of imbalances. You may have surplus countries, you may have countries with big deficits because they are emerging countries. The idea of having a single target in terms of surpluses is too simple. We have been asked by the G-20 to provide by the next meeting some guidelines. Those ideas will narrow the gap but in a more sophisticated way.
You wanted IMF to be an organization with more teeth, perhaps an organization which would do research with uncompromising honesty to tell the world where it stands. If you were to take a brutally frank look at the $4 trillion of debt that is due to be refinanced over the next two years, what do you see?
Well, first, the idea of having teeth doesn’t mean, I believe the IMF should dictate. Now the problem is not capital account, the problem is current account, and certainly our mandate needs to be expanded, de facto it is.
Now on your question of refinancing, I am not that much worried. The main problem we are facing is what seems the right policy for one country for domestic reasons may have large consequences on others. That is certainly one of the main consequences of globalization, which is not surprising. What is new is that the man on the street realize that what is happening in China has tangible impact on the Europe, Brazil, the United States and others around.
We put a spillover report as to how the economic policy that is put place in China has consequences on the five currencies-the renminbi, the dollar, the sterling, the yen and the euro. Time is now away when you could say “I am a big systemic country and I am going to implement my own policies that suit for India. I am elected by my people and my duty is to do best for my own people. Of course I am interested on the rest of the world but that is not my job.” Its over because what you are doing has consequences on your neighbour and it backfires on your own economy. You can’t have a free rider saying “I manage my own business and I hope the others will do best for their own business.” Now we are really in a globalized economy and that’s what I think leaders have realized during the crisis and have taken action. We avoided a crisis which could have been as big as the great depression because of the quality and depth of cooperation among countries. Now the problem is, as people believe, not correctly, that the crisis is over, the temptation to forget about global cooperation is strong. What happens in different parts of global economy including India, as Indian economy opens more and more to the rest of the world, has consequences. The need for decision made together and for discussion is absolutely necessary.
Are you disappointed with the amount of cooperation you have seen in 2010 in G-20 as compared to 2008 and 2009?
I am not disappointed. It seems to me that cooperation has been lower. It is absolutely true. I think it is normal. It is the second phase of the story. The first phase was the crisis mode, cooperation was bigger and nobody wanted to be the black sheep.
Now, the less scared you are the more willing you are to follow your own way. The second phase of the G-20 is the more permanent phase. It is just normal, understandable. Cooperation is more difficult to achieve. There will be ups and downs in summits.
When do you think you will have a reasonable chance of actually considering Special Drawing Rights (SDRs) as an international reserve currency?
It is a very important topic. This question goes back to 1944 where the founding fathers decided a dominant role for the dollar. Now there are more and more voices explaining we will be better off with a multi-currency system. The way to do this will be to expand the position of the SDR basket. We are working on that. One big evolution of the governance side in recent weeks has been BRIC (Brazil, Russia, India, China) are major shareholders of IMF. Certainly, the role of SDR will be enhanced, it will become more and more non-sovereign international currency.
You mentioned BRICs and quota increase. There’s been criticism here that the moment the quota or share capital is increased it goes to help European countries. Are emerging market tax payers subsidizing Europeans living beyond their means?
That’s not absolutely true because what IMF is using is proportional to the quota. The BRICs together has about 15% of the quota of the IMF. The US has close to 20%, the Europeans close to 30%. The biggest part of what IMF is spending is coming from advanced countries. But you know the other face of the coin, the more important you become, the more responsible you are. The idea you can be a big player and at the same time a free rider is a wrong idea. So, big dynamic emerging economies like China, India, Brazil certainly have reason to ask for more voice, but at the same time they have more responsiblity.
It seems after the 2008 financial crisis, IMF has discovered a gentler side with inequality and unemployment being recurring themes in your speeches. What is the transition that is happening?
I think we have just learnt lessons from the past. And the lesson is if you want to be effective we need to go beyond macro economic policy and macro financial policy. We need to take into account the so-called reality of countries to have people to have some ownership of IMF programmes. We are like a doctor. The doctor comes and tells you I will give you some medicine, in our case the medicine is mostly money, and at the same time you need to change your behaviour as medicine will not do anything if you don’t change your behaviour which is to spend less. That is part of our job. But at least you need to trust your doctor even if you don’t love him.
Since the outset of this crisis, even if where fiscal consolidation is absolutely necessary, small part of it is devoted to helping the most vulnerable and frankly I think it works. Look at Greece. Greece is one of the toughest programmes we ever had, even compared to the Asian crisis. The adjustment that was asked, because they cannot use the devaluation tool because they are member of the Euro, They had to do some internal adjustment which is really really large. And what happens is that the government has won the local elections to the surprise of many. This is because the government was able to explain to its people without putting the IMF at the forefront. It tried to stick to social justice and to be fair to everybody and the people recognized this.
How seriously is the IMF debating to have somebody from the developing countries to be its next president after you?
I think it is very serious. I think the agreement between the US and the Europe that US will lead the World Bank and Europe will lead the IMF is there. But there is very good reasons that in those institutions the next leaders will come from other part of the world which does not mean that it would be forbidden for an European to lead the IMF or a person from US to lead the Bank. But I intend to stay as the head of the IMF, so the question is (at present) a theoretical question (laughs).