Christine Lagarde, managing director of the International Monetary Fund (IMF), has warned both advanced and emerging economies must work together in a ‘partnership for growth’ to promote faster and more sustainable convergence.
In a speech to the University of Maryland Ms Lagarde noted emerging and developing economies now account for almost 60 per cent of global GDP, compared with less than half a decade ago.
However, she highlighted key challenges for the emerging markets including China’s growth transition, declining commodity prices and asynchronous monetary policies. But she added that strong policy actions by both emerging and advanced economies “can be a win-win for both. A win-win for the global economy”.
She explained: “Faced with modest growth prospects, advanced economies need to continue to support demand through accommodative monetary policies. But they should use a more balanced policy mix.
“At the same time, the US has a special responsibility as it normalises its monetary policy—because this can be a source of global spillovers and spillbacks. So it is important that the Federal Reserve continue to do this in a prudent and well-communicated manner.”
In her speech Ms Lagarde pointed out growth rates in emerging economies are slowing and capital flows have reversed with emerging markets recording an estimated $531bn (£366bn) of net capital outflows in 2015 compared with $48bn of net inflows in 2014.
“This is bad not only for emerging markets themselves, but also for the advanced world that has come to rely on emerging markets as destinations for investment and as customers for its products,” stated Ms Lagarde.
While she called on emerging and advanced economies to foster innovation, facilitate a greater sharing of technology and implement the global regulatory reform agenda, the head of the IMF also warned of the need for a “global policy upgrade” for the international monetary system.
She stated that from the viewpoint of emerging markets the existing system “is less supportive than it should be” and warned many emerging economies do not have access to the “global financial safety net” of swap lines between institutions such as central banks and the IMF.
“So how can the safety net be strengthened? One could think about strengthening and broadening global precautionary financing instruments that work for everyone. One could also increase the size of the safety net. Over the next few months, the IMF will be considering with our members these and other issues related to the international monetary system,” added Ms Lagarde.
