By Sandrine Rastello
Sept. 23 (Bloomberg) -- International Monetary Fund Managing Director Dominique Strauss-Kahn called on leaders from the Group of 20 nations to maintain efforts to pull the world economy out of a recession, warning that the crisis isn’t over.
“This recovery will be rather sluggish, at an average lower than growth we had before the crisis,” Strauss-Kahn said in an interview in Washington before the G-20 summit begins tomorrow in Pittsburgh. “It’s too early to say the crisis is behind us.”
The IMF chief also urged policy makers to seize the opportunity to address imbalances in trade and investment flows blamed for contributing to the credit collapse. Giving China a bigger role in the fund will help bolster cooperation, he said, as policy makers seek agreement to pare U.S. borrowing and buttress domestic demand in nations with trade surpluses.
“A failure to rebalance the global economy would cause any recovery to be ultimately doomed,” said Gerard Lyons, chief economist at Standard Chartered Plc in London. “Aiming for a balanced world economy is a win-win situation.”
Leaders from the G-20, which groups the largest developed and developing nations, gather tomorrow for their two-day summit in Pittsburgh. Formed out of the Asian financial crisis, G-20 meetings were elevated to the heads-of-government level in November.
“Suddenly, we’re in a better position to have this kind of cooperation and economic coordination than we were before,” Strauss-Kahn said in the Sept. 21 interview. The G-20 talks are a chance to “fix the way we work together governing globalization, and it may work.”
Geithner’s Goals
U.S. Treasury Secretary Timothy Geithner said at a press conference yesterday that G-20 leaders will “take stock of where we are in putting the world on a path to stronger, more sustainable, more balanced growth.” The goals include a stronger financial system that’s better able to absorb shocks, he said.
“We’re now seeing the first signs of growth” and “the financial markets have improved considerably,” Geithner said. “We want to make sure we build on the progress that we’ve achieved.”
U.K. Prime Minister Gordon Brown echoed Geithner’s sentiment, telling reporters in London on Sept. 21 that “what we want to do is safeguard a recovery from a recession” and that “the stimulus that we have still got to give the world economy is greater than the stimulus we have already had.”
U.S. Task
Strauss-Kahn said the U.S. can do its part by boosting the country’s savings rate and reducing its budget deficit, and China can contribute by fostering domestic demand, which would have the effect of revaluing its currency, the yuan.
China may be more willing to cooperate when it gets a bigger role at the IMF, which leaders are expected to announce by calling for a shift in voting rights that would favor emerging markets, he said.
“The Chinese know they’re becoming a big player, they want to be considered a big player, and if they’re considered a big player they will behave as a big player,” Strauss-Kahn said.
The Washington-based IMF, which has rescued economies from Pakistan to Hungary in the past year, is advising officials around the world not to withdraw economic stimulus programs too soon as they chart a path to lasting growth.
While the global economy is susceptible to a “double-dip” recession, Strauss-Kahn said that isn’t the “most probable” scenario.
‘Lot to Do’
Banks still have “a lot to do” to clean balance sheets, said Strauss-Kahn, 60, who became head of the IMF in November 2007 after a career in French politics, including a stint as finance minister from 1997 to 1999.
Banks may need to cut their size or increase their capital reserves in response to regulatory changes being considered by G-20, French Finance Minister Christine Lagarde said.
“The absolute minimum demand is that we don’t go back to the old rules, that we change the organization of banks,” she said yesterday on France Inter radio. “Maybe after that, banks will reduce their size, increase their capital or inevitably change their compensation structures. On these questions we will be intransigent.”
The IMF has a role to play in the global effort to narrow imbalances, Strauss-Kahn said, acknowledging that attempts in 2006 and 2007 at agreements between major economies yielded few results.
Follow-Up
Strauss-Kahn said it makes sense for leaders to have “a kind of machinery which provides policy notes and forecasts, and which follows up on decisions that have been taken at the big meetings.”
Strauss-Kahn said leaders would also give a “political guideline” on how much more power to give “underrepresented countries” at the lender, most of which are emerging economies. The main beneficiary of a shift in the IMF’s governance would be China, he said.
Talks before the summit in Pittsburgh are focusing on a 5 percent shift of so-called IMF quotas from countries with disproportionate influence, two officials from G-20 nations said last week. Quotas determine members’ voting rights, financial commitments and access to IMF loans.
China has overtaken Germany to become the world’s third- largest economy with annual gross domestic product of about $3.9 trillion, according to Bloomberg data. China currently has a 3.7 percent voting share on IMF executive board decisions, compared with 3.2 percent for Saudi Arabia, whose economy is about one- eighth the size of China’s.
Quota Shift
Brazil, Russia, India and China, the so-called BRIC countries, this month proposed a 7 percent shift in IMF quotas to emerging markets and developing countries, “to correspond roughly to their share in world” gross domestic product. That came after they agreed to contribute to a tripling of IMF coffers that G-20 leaders announced in April, a move richer nations linked to emerging countries’ demand for more clout.
China earlier this month signed an agreement to buy as much as $50 billion in IMF notes, and the other three BRIC countries have pledged to contribute about $10 billion each, a move Strauss-Kahn said is “done” even if it hasn’t yet been formally approved.
“Imbalances and governance are very much interlinked,” he said. To resolve the issue, “you also need the countries accepting that they don’t need such a big amount of reserves, which means they can find the reserves somewhere else, which in turn means they are confident in the global institutions like the IMF.”
To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net.
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