Washington, DC: Underlining the urgency of collective action to head off an impending global economic crisis, Christine Lagarde, managing director of the International Monetary Fund (IMF), appealed for consensus on politically difficult measures.
“Collective political leadership is critical to resolve the problem. Each country is at risk and can also participate in the solution,” she said, while emphasizing that IMF was a collective of 187 member countries, and effectively setting the agenda for action.
The implicit thinking is that most nations have depleted their fire-power in battling the after-effects of the contagion caused by the US subprime crisis. However, as a collective, they would have better chances to make up this policy deficit.
Lagarde’s call was preceded by a similar appeal by World Bank president Robert Zoellick, though phrased more candidly: “Hope these meetings will highlight that they can hang together or all hang separately.”
Both were speaking at their customary press briefing ahead of the launch of the annual meetings of IMF and the World Bank.
Lagarde, who in the run-up to the meetings has been blunt about her understanding about what needs to be done, put forth a four-part action plan that she called the “4 Rs” —reforms, repair, rebalancing and rebuilding.
To begin with, efforts have to be undertaken to repair the balance sheets of some of the advanced economies as well as banks. According to her, it was imperative to reform the financial sector and locate sources of growth that were inclusive—to protect the less privileged during the structural adjustment that will have to be undertaken.
Alluding to China, Lagarde also spoke about the need to effect a rebalancing between surplus (such as China) and deficit (such as the US) economies alongside a similar shift between public and private sectors.
Careful to avoid any direct references to any particular country, she reiterated her desire to forge a consensus among finance ministers, some of whom began to assemble in the US capital on Thursday. “(It’s) not just a problem of advanced economies, but concerns everyone,” she said. “We’re in this together and can pull out of it together. There is a path for recovery, though it is narrower than what it was three years ago.”
She reiterated that the outlook for the world economy was entering a “dangerous phase”—the third such warning from IMF in as many days.
She also emphasized that the required policy decisions would take time—and thereby test the patience of the markets—as they need the approval of democratic institutions. Lagarde said she was optimistic as several countries, particularly in Europe, had demonstrated their commitment to take hard-nosed decisions to address the economic crisis.
Earlier, Zoellick, while making a similar appeal for consensus, argued that countries should avoid the temptation of resorting to protectionism as global demand drops.
Maintaining that “nobody would be immune” from a possible global economic upheaval, he made an appeal to evolve a collective stand to fend off another global crisis.
However, he may have stirred up a potential controversy when he brushed off suggestions for a change in the leadership of the Bretton Woods twins—which by convention are held by leaders from Europe and the US.
Saying that it was an important way for the US to stay engaged with multilateral institutions, Zoellick said: “It is a good thing for the US to have leadership in some of these institutions.”
Emerging market economies have been pushing for a change in this practice and allowing leadership to devolve to other countries too.