Much of the recent public discussion on the International Monetary Fund has been about the successor to Dominique Straus-Kahn and the flawed system of choosing its chief.
An unusual feature of the global financial crisis is that for developing countries (DCs) the financial band seems to have picked up the pace of the music. While many advanced economies (AEs) continue to encounter debt deflation, financial stringency and risks of insolvency, the financial problem for most DCs is asset inflation, credit expansion and currency appreciations. Except for a brief interruption in 2008, DCs have continued to receive large capital inflows as major AEs have responded to the crisis caused by excessive liquidity and debt by creating still larger amounts of liquidity to bail out troubled banks and governments, lift asset prices and lower interest rates. Quantitative easing and close-to-zero interest rates are now generating a surge in speculative capital flows to DCs with higher interest rates and better growth prospects, creating bubbles in foreign exchange, asset, credit and commodity markets.
After a deep and widespread contraction in economic activity and a significant drop in output and employment, policy makers, financial analysts, and media pundits all appear to be heartened by the news from different parts of the world that the worst is over. The main concern now is about the strength and the shape of the recovery.