“In designing a new macroeconomic framework for a new world”, he stated, “the pendulum will swing—at least a little—from the market to the state.”
In a speech entitled “Global Challenges, Global Solutions” at George Washington University in Washington, D.C. today, Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), called for a new approach to economic policymaking in the wake of the recent global crisis. He singled out three areas for improvement: a new approach to macroeconomic and financial sector policies, a new approach to social cohesion, and a new approach to cooperation and multilateralism.
Discussing the current economic situation, Mr. Strauss-Kahn noted that the global recovery is unbalanced both between and within countries, and the global outlook is still beset by uncertainty. He pointed in particular to the Middle East, noting that it is going through an “historic transformation” as “citizens are seeking greater freedom, and a fairer distribution of economic opportunities and resources”. The immediate challenge for the Middle East, he stated, was “to preserve social cohesion without undermining macroeconomic stability”.
Turning to global macroeconomic policies, Mr. Strauss-Kahn argued that policy must go beyond price stability, and look to financial stability, incorporating macro-prudential tools. The crisis has showed the value of fiscal policy, which had been the “neglected child” of the policy toolkit. Mr. Strauss-Kahn also called for more progress with financial sector reform, including across borders, and called for a financial activities tax.
“In designing a new macroeconomic framework for a new world”, he stated, “the pendulum will swing—at least a little—from the market to the state, and from the relatively simple to the relatively more complex”.
Mr. Strauss-Kahn called for policymakers to pay more attention to inequality and social cohesion. “The lethal cocktail of prolonged high unemployment and high inequality can strain social cohesion and political stability, which in turn affects macroeconomic stability.” He suggested that inequality, which was a factor in the Middle East, might also have been among the root causes of the global crisis, and that sustainable global growth is associated with more equal income distribution.
“We need a new form of globalization, a fairer form of globalization, a globalization with a more human face”, he said. “The benefits of growth must be broadly shared, not just captured by a privileged few. While the market must stay center stage, the invisible hand must not become the invisible fist”.
Mr. Strauss-Kahn stressed the virtues of enhanced cooperation and multilateralism in the post-crisis world, noting that “the great challenges of today all require a collective solution”. He cautioned countries against using currencies or trade restrictions for short-term gain.
“In such a world, multilateral institutions—as forums of global cooperation—will become even more important. But they must stay relevant. They must adapt to the new globalization,” Mr. Strauss-Kahn stated. He pointed out that the IMF is striving to better understand the complex interconnections running through the global economy and to strengthen its ability to prevent crises, not only manage them. But this requires legitimacy, he noted, making the recent IMF governance reforms particularly important.