IMF Dodges Political Crisis Problem

Dominique Strauss-Kahn,  the Managing Director of the International Monetary Fund, spoke recently at the Monetary Authority of Singapore meeting. He identified what he says are the two most important risks to a global recovery. Neither had anything to do with the unrest in the Middle East or whether the trouble could spread to other developing nations.

The IMF MD said: “while the recovery is underway, it is not the recovery we wanted. It is a recovery beset by tensions and strains—which could even sow the seeds of the next crisis.”

His reasons:

First, the recovery is unbalanced across countries. While growth remains below potential in the advanced economies, emerging and developing economies are growing much faster—and some may soon be overheating. Second, the recovery is unbalanced within countries. Global unemployment remains at record highs, with widening income inequality adding to social strains.

He shared the solutions offered by most senior officials at world economic organizations. Fix, the banking system to mitigate risk. Stimulate national GDP enough to create jobs. Cut deficits but not by enough to cripple stimulus. Guard against protectionism. Reconcile the rapid growth of emerging nations with slower recoveries in developed nations.

The prescriptions are impossible actions. Strauss-Kahn knows that. It is why he paints his suggestions so broadly and without detail. Debt is already such a great problem from the US to Greece that the cost of stimulus it too high to afford. Large nations have already begun to protect their trade balances with the use of their currencies as the primary tool.

Even if the problems that Strauss-Kahn describes could be solved, he steered away from any discussion of the trouble in Egypt and how the fall of  governments could affect both their alliances with other nations and the value of their debts. The threat to the value of sovereign paper could suddenly shift from deficits and GDP to explosions of the decades-old world order.

There is not much value in whistling past the graveyard– the political and social threats in Egypt, Tunisia, Algeria, and Jordan. Local regimes may be swept away or may attempt to put down their crises with brutality. Either way, the issues which have caused the upheavals are permanent.

The IMF may be the most important force in assesing the global economy and the risks to it. The organization should not keep quiet about the most important near-term threats to a worldwide recovery.

Douglas A. McIntyre