Terming the current debt crisis in America as “mission-critical”, the International Monetary Fund has warned the US that its impending debt crisis could damage not only its domestic economy, but the entire global economy.
“The ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy,” IMF Managing Director Christine lagarde, said.
“So it is “mission-critical” that this be resolved as soon as possible,’ lagarde said in her address to the George Washington University.
The United States, she said, needs to “slow down and hurry up.”
By that she meant less fiscal adjustment today and more tomorrow, she added.
“That means replacing the sequester with more back-loaded measures that do not hurt the recovery. At the same time, the US needs to do more to make debt sustainable down the road—by containing the growth of entitlement spending and raising revenues,” lagarde said.
Japan, she said, also needs a credible plan to bring down its debt, which is approaching 250 percent of GDP—and amounts to about $90,000 for every man, woman, and child in Japan.
The initial consumption tax increase is a welcome first step.
Entitlement reform is the next one. Without these policy fundamentals, any gains made so far could easily melt away, she said.
“The fiscal and financial efforts must be complemented by structural reforms—to make sure that policies to boost demand are supported by policies to boost supply. We know this can pay off where it matters most—in terms of growth and jobs,” lagarde said.
“For the Euro Area, the IMF estimates that comprehensive and coordinated reforms of product and labour markets could boost GDP by 3 per cent after five years.
For Japan, increasing female participation in the labour force to match the G7 average would boost per capita GDP by 4 percent by 2030,” she said.
“We should remember that this group of economies accounts for about 40 per cent of world GDP. So, what happens in these regions has profound implications for the rest of the world.
...asks emerging economies to remove barriers to growth
Observing that immediate priority of emerging economies like India and Brazil is to ride out the turbulence as smoothly as possible, the IMF chief has said that currencies should be allowed to depreciate and asked them to knock down lingering barriers to long-term growth.
“Some countries also need to knock down lingering barriers to long-term growth, pushing ahead with infrastructure investment in places like India and Brazil, deepening financial markets, and opening up trade regimes,” IMF Managing Director Christine lagarde said on Thursday.
“liquidity provision can help deal with dysfunctional market behaviour. looser monetary policy can also help, although there is less room for manoeuvre in countries with inflation pressures—such as Brazil, India, Indonesia, and Russia,” lagarde said.
In this vein, China needs to keep moving to a growth path based less on credit—which hit 180 per cent of GDP this year—and more on higher productivity, higher incomes, and higher consumption, she said.
“likewise, there is not much space left across many emerging markets for using fiscal policy, given high debt and deficits,” she said in her address to the George Washington University.
This means liberalising interest rates, ramping up financial sector oversight, opening up protected sectors to private initiative, and further strengthening the social safety net, she added.
Stating that this emerging market transition will not be fast or easy, lagarde said these countries will likely spend the rest of the decade adjusting to the new reality.”As part of this adjustment, they need to keep cooperating—among themselves and with others. Again, international collaboration is the only way forward,” she said.