With effects of the US subprime crisis unfolding across the world, including major emerging economies like China and India, the notion of a decoupling between the emerging and industrial world can be put to rest, according to IMF managing director Dominique Strauss-Kahn.
Talking to select mediapersons on the sidelines of a lecture on “Lessons from the Financial Market Crisis: Priorities for the World and the IMF", organized by the Indian Council for Research on International Economic Relations (Icrier), Kahn is concerned that the US downturn could cut emerging economy growth by close to 1%. Edited excerpts :
On whether IMF would advocate a fiscal stimulus for India
There is some room for fiscal stimulus in 25-27% of the world economy, including the US. In India, I believe there is at least some room for such stimulus. Chidambaram told me that it could be possible, due to the high tax revenues.
On regulating hedge funds or sovereign wealth funds and capital flows
IMF has a supervisory role, not that of taking regulations by itself. It points out risks and shortcomings to nations and advises governments and institutions accordingly. We are also preparing a code of conduct for sovereign wealth funds.
India benefited from capital inflows because of the strength of its economy as well as interest rate differentials. There may not be a reverse flow, but there could be a sharp decrease. There are now new kind of linkages by which the crisis could travel and have a direct influence on the investments in the country.
On if the impact of US downturn will cut emerging economy growth by 0.5-1%
This is a new phenomenon. We need to consider the financial effect in addition to the effects of trade now. Together, the effect would be close to 1%. A large part of the problem is still “a known unknown", so it is not easy to measure.
On advocating fiscal contraction before and fiscal stimulus now
The main tool for the IMF has not been its lending capacity but what Keynes called “ruthless truth telling". The US sub-prime crisis has indeed been a failure of supervision and regulation and they have to correct it. The IMF cannot work to change the US economy or the world economy, but will hopefully carry out some work of importance. We have an even-handed approach. If the US economy goes through pain, the world goes through some pain. A downturn in the US economy would have a lot of consequences, even with a lag.
On IMF reforms, change in ownership and quotas for emerging economies
The solution to reforms, which I hope will be found in the spring meetings (in April), is not only in increasing the quotas of countries such as India, China, Brazil. It is also a question of diversity of staff, of under-representation of these countries.
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