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IMF: Recovery may sow seeds of next crisis â€Ž

01 February 2011 13:11 (UTC +04:00)

BakÄ±. Nicat Mustafayev - APA-Economics. Old global imbalances are re-emerging and new ones are being created in the current recovery, leading to the possibility of another world-wide crisis, International Monetary Fund Managing Director Dominique Strauss-Kahn said Tuesday, IMarketnews reported.

"While the recovery is underway, it is not the recovery we wanted," Strauss-Kahn said in a speech at the Monetary Authority of Singapore. "It is a recovery beset by tensions and strains - which could even sow the seeds of the next crisis."

He said two main dangers have emerged out of the recovery: imbalances between countries; and imbalances within countries.

"We see a worrying development: the pre-crisis pattern of global imbalances is re-emerging. Growth in economies with large external deficits, like the U.S., is still being driven by domestic demand. And growth in economies with large external surpluses, like China and Germany, is still being powered by exports. As the IMF warned in the years leading up to the crisisand as the G-20 has emphasizedthese global imbalances put the sustainability of the recovery at risk," Strauss-Kahn said.

While growth in the developed world remains slow, "emerging and developing economies are growing much faster - and some may soon be overheating."

In Asia, "there are risks of overheating, and even a hard landing. This means that macroeconomic policies should be tightened in countries where output gaps have nearly closed, or have in fact already closed. In Asia, recent rate actions were the right decision - though more may be needed."

He repeated IMF advice that foreign exchange rate adjustment can help Asian countries lessen their reliance on exports and help rebalance global growth.

"Exchange rate adjustment will obviously have to play an important role - which is why it should not be resisted. Holding back such adjustment in one country also makes it harder, and more costly, for other countries to let their exchange rate adjust. For this adjustment to take place, time is of the essence, but asking for time only makes sense if there is a significant and regular move in the right direction," Strauss-Kahn said.

He said that at the same time as global imbalances are growing, so are imbalances within countries, which could have far-reaching and dangerous consequences. "Global unemployment remains at record highs, with widening income inequality adding to social strains."

"As tensions between countries increase, we could see rising protectionism - of trade and of finance. And as tensions within countries increase, we could see rising social and political instability within nations - even war."

"Over the long haul, the most effective way to promote income growth at the lower end of the distribution is to invest in education, innovation, and ramping up the skills of workers.... We must give people everywhere the tools they need to prosper in the highly competitive global economy of today.