DEVELOPMENT: For the U.S., It Must Be Different

By IPS Correspondents Reprint | | Print |

Ravi Kanth Devarakonda

DAVOS, Jan 27 2008 (IPS) - International Monetary Fund managing director Dominique Strauss-Kahn has proposed a global fiscal stimulus to prevent economic contagion from the worsening housing and credit market crisis in the United States.

This amounted to a "call to arms", moderator Martin Wolf of the Financial Times said at a session on the global economic outlook 2008 Saturday at the Davos annual summit of international business and political leaders.

Kahn spoke of a "serious slowdown" in the U.S. economy that calls for a "serious response" because of its widespread ramifications the world over.

"There are shortcomings in financial regulation in the U.S.," he said. "The first priority is to restore normal functioning of the financial systems, in which central banks provide more liquidity."

But though there is need for more regulation, governments have to adopt cautious policies so as to avoid further complications in the markets, the IMF chief said.

Emerging economies like China and India are not immune from the U.S. crisis, Kahn said. The markets last week showed that they are not "decoupled" from the U.S. economy. Given that emerging economies have growing trade with the U.S., they would also face problems, he said.

Kahn called for more "multilateral" regulation under the aegis of the Fund. He said the IMF will announce its revised forecast next week.

Up until now, the Fund has always advocated tight monetary and fiscal policies for countries engulfed in serious financial crisis. In the late 1990s the IMF had asked Asian and South American countries to adopt fiscal policies to encourage further devaluation of their currencies, opening their economies to more imports, selling loss-making enterprises to foreign investors, and increasing interest rates.

These policies, which are the mainstay of the so-called Washington Consensus, further aggravated the economic difficulties in these countries to the extent that Argentina refused to implement some of the Fund&#39s policies. The Washington Consensus was agreed by the World Bank, the IMF and the U.S. Treasury Department to help economies in crisis by opening them to market forces further.

In contrast to the policies the Fund proposed for countries caught in macro-economic problems in the 1990s, it is now proposing a different set of ideas for the crisis originating in the world&#39s mightiest power.

Indian finance minister P. Chidambaram, who was a panellist during the discussion, said India did not face "first-order" slowdown effects from the U.S. crisis. He said its growth is "driven by surging investments (35 percent of the gross domestic product) and growing demand in domestic consumption."

Chidambaram insisted that India is relatively "decoupled", compared to other economies. But the Indian minister did not rule out second-order effects if there is full-blown slowdown.

French finance minister Christine Lagarde said the widening exchange rate differentials between the euro and the dollar, which is currently trading around 1.47 to the euro, has affected European exports.

Lagarde said the European Central Bank must pay attention to the slowing economic growth in the euro zone. The only way to overcome this problem is through innovation, she said.