How does Strauss-Kahn look at global economy?

EDITORIAL (March 15 2010): Speaking to business students at a university in Johannesburg on 9th March, IMF Managing Director Strauss-Kahn made certain observations which were quite interesting, but out of the ordinary. He cautioned that the world needs to prepare for the next economic crisis, even as it begins to recover from the worst recession since the Great Depression.

Although, the timing or the nature of the next crisis cannot be predicted, yet it was sure to come. Strauss-Kahn's major concern, nonetheless, was that the present recovery could mean less pressure on the leaders to pursue such reforms as tightening regulation and supervision of financial markets.

Defending plans to create a 100 billion dollar fund to help countries mitigate the effects of climate change, the IMF chief recognised that the problem of climate change, itself, was not really in the mandate of his institution, but it had to intervene due to its grave macroeconomic consequences, including its threat to social security, democracy and sometimes, even to peace in the world. "This is why the Fund has undertaken a mechanism sophisticated enough to allow the unblocking of the considerable sums necessary to deal with questions of climate change."

Commenting on the Chinese and US economies, Strauss-Kahn observed that China's yuan was still very much undervalued, but he believed that the focus on domestic growth could lead to changes in exchange parity in the coming months, and added that "what goes with this kind of policy is a revaluation of the Chinese currency." Describing that increased saving rates by American households, since the financial crisis, was a huge change in the global economy, the Managing Director remarked that such a transformation could address structural imbalances between Asia and the United States.

Nonetheless, Chinese and other emerging market consumers were still a long way off from becoming the engines of growth to replace the US. "You don't change the route of a big ship like this one overnight." Warning that the world economy was now in unchartered territory and it was not going to be business as usual, Strauss-Kahn stressed the point that the growth model of the global economy was still basically unknown.

The observations of the IMF Managing Director at Johannesburg may appear to be somewhat strange, especially at a time when most of the economies are at early stages of recovery and anticipating better days but, in our view, most of his remarks were deliberate, thought provoking and targeted suitably. His warning that the world needs to prepare for the next crisis only states a simple and well known fact that free market economies are always prone to business cycles and slumps and recoveries/booms are part and parcel of this system of economic, social and political management. Picking up from this logical train of events, he has tried to emphasise that there was no need to ease the reform efforts prematurely and loosen the regulatory or supervisory framework of the financial sector.

If the governments were not very careful in managing their economies properly, another economic crisis could come sooner, rather than later. Probably he wanted to stress this point during his Africa tour because of the tendency of the governments in this region to adopt an easy approach, whenever there is a slight hint of such an opportunity. However, his observations on climate change and the involvement of the IMF to deal with the problem by sponsoring a Green Fund of $100 billion do not appear to be based on solid ground.

So far as we can see, there is still no global consensus or agreement on the issue and certainly the amount of $100 billion to be mobilised or unblocked for the purpose, as suggested by the Managing Director, is beyond the wildest dreams of even the most optimistic activists fighting for this noble cause.

By saying that the focus on domestic growth would oblige the Chinese authorities to revalue their currency, Strauss-Kahn has definitely given another dimension to the issue of realignment of currencies between the US and China. In our view, he has suggested indirectly that if China wants to be a major economic power by following the traditional growth model, it has to observe the rules of the game and adjust the level of its currency as dictated by market forces. Otherwise, it would be jeopardising the system and could expect reprisals.

The economic might of the US and its major role in the global economy was probably brought into the picture to remind the emerging economies that it was too early for them to behave like a dominant player on the world stage. It was better for them to recognise the reality that the size of their economies was still much smaller than that of the US, despite their rapid growth rates in the last few years. As far as the nature of the growth model of the global economy is concerned, it would always be less than perfect and evolving continuously because of the parameters involved in determining the course of economic events and the level of their influence at different times.

Source: http://www.brecorder.com/index.php?id=1031261&currPageNo=1&query=&search=&term=&supDate=