India, China not immune to world slowdown: IMF

April 11th, 2008 - 10:44 am ICT by admin  

By Arun Kumar
Washington, April 11 (IANS) Despite resilient growth, India, China and other emerging economies would not be insulated from a “serious slowdown in economic growth” in the developed world, says the International Monetary Fund (IMF). “Even if growth is more resilient in emerging economies, they are not immune from the slowdown,” IMF Managing Director Dominique Strauss-Kahn said Thursday, adding that the notion of decoupling between north and south was misleading.

“Our forecasts for China, for India, as you know, are also between 1 and 1.5 percent below what they would have been without the crisis,” he told reporters ahead of the April 12-13 IMF-World Bank Spring Meetings here.

“Even if it leads to a rather high level of growth, something around 9.3 in China and 7.9 percent in India, which are huge rates of growth, but lower than they would have been in other cases,” Strauss-Kahn said.

Taken all around, it gives a forecast of 3.7 percent for the world economy in 2008, which is below four percent and slightly below what IMF forecast not only in the fall but also in February when it launched the last set of forecasts.

Indian Finance Minister Palaniappan Chidambaram is arriving here Friday to attend the IMF-World Bank meetings where world finance ministers and central bank governors will discuss the outlook for the world economy.

The global economy, battered by fallout from the US sub-prime meltdown, is caught between a slowdown in growth and rising inflation, but there is no one-size-fits-all response and governments must tailor their policies to country situations, Strauss-Kahn said.

“The world economy is balanced between these two risks.” Policymakers needed to balance between tackling inflation and countering the slowdown, he said, adding that the policy solutions cannot be the same for everyone.

Strauss-Kahn noted that the risks to global financial stability were rising. “These risks are in part cantered on the mutually reinforcing credit and housing crisis in the US. But there is also growing risk aversion, with higher financing costs and a sharp decrease in capital market flows to emerging markets.”

“The increase in risk aversion and global de-leveraging may induce a sharp decrease in inflows of capital,” Strauss-Kahn said. Another risk of key concern is sustained high inflation, fuelled by high commodity prices.

Growing inflation reflected both structural and cyclical factors, including the growing role of bio fuels, for instance, he said. “It is a key concern because food prices increased by 48 percent since the end-2006 and may undermine all the gains we have taken to reduce poverty.”

Strauss-Kahn singled out the impact of recent increases in food prices for low-income countries. “It is a key concern because food prices increased by 48 percent since the end-2006 and may undermine all the gains we have taken to reduce poverty.”

What can policymakers do as far as the higher food prices are concerned? There is no one-size-fits-all policy, Strauss-Kahn observed. “It needs to be tailored, depending upon the countries.”

He listed three ways the Fund can help: Define with member countries the right macroeconomic framework, provide IMF technical assistance and advice that would “help alleviate pressure on prices,” including through financial support and targeted subsidies to the poor, and work with other agencies or other donors to help low-income countries with some financial support through the Fund’s lending instruments.

Strauss-Kahn, who will update leaders on reform of the IMF itself at the weekend meetings, said the Fund has come a long way in a few months to achieve important reforms on country representation and on a new income model.

“If at the end of this month we reach the 85 percent of the voting power that we need, then it will be a real big success for the institution,” he said, referring to the majority needed to give final approval for the reforms.

The adjustment to country quotas that determine their voting power has been a success, Strauss-Kahn said, adding: “We have to judge this reform not only by its immediate results but in looking at the result that will be delivered during the coming five, ten, fifteen years.”

The issue of quotas is not the end of IMF reform, he said. “It is the starting point. There is a lot of things to change and discussion to have in the way to adapt the governance of an institution like the IMF to the 21st century,” he said.

“We can go on to other reforms which may be more important for change in the institution than quota reform by itself,” he added.

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