Addis Ababa, Ethiopia – The trillions of dollars advanced economies spent in stimulus to rescue their growth from further crumbling seems to have borne result fast but prospects remain gloomy if the stimuli are away.

This is the latest statement from Dominique Strauss-Kahn, Managing Director the International Monetary Fund (IMF), about the world which is still recovering from the international financial crisis.

According to him, emerging Asia leading the way – with giants China and India in the front – world economy is recovering faster than expected but still fragile.

Risks include growth of asset bubbles in the emerging economies while growth in developed west was still largely driven by government stimulus measures and countries risked a return to recession if anti-crisis measures are withdrawn too soon, Straus-Kahn said on Monday, January 18 speaking about his Asia trip to journalists at the Tokyo Foreign Correspondents Club.

There are several key concerns the IMF boss outlined about the world recovering from the financial crisis. Unemployment is still growing, posing a threat of social unrest and even conflict if not tackled. The risk appetite of investors is on the rise; while investors are still not putting capital into advanced economies, large sums are flowing into emerging economies, including Russia, Brazil, and emerging Asia, creating the risk of both asset bubbles or of a damaging abrupt halt in inflows, according to him.

“The financial system remains damaged. Japan's experience with its own financial crisis since the late 1990s shows that recovery begins only when companies and banks have cleaned up their balance sheets,” he was quoted as saying by IMF press statement issued Tuesday.

The timing of unwinding of government stimulus measures is crucial. Although governments are now saddled with high debts from the anti-crisis measures, trying to remove the stimulus measures too quickly could result in a “double dip” recession, with advanced economies in particular falling back into negative growth, he said.

Weak private demand

According to the IMF chief, weak private demand is key reason that would hold governments from withdrawing stimulus.
“For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn't exit," he said.

The world was seeing a multispeed recovery, with different countries emerging from the crisis at different rates. Accordingly, IMF’s quarterly growth forecast release is expected soon showing a faster recovery than expected.

Emerging markets, particularly in Asia, are leading the recovery, but advanced economies are still gaining ground more quickly than anticipated earlier. However, the recovery is fragile and growth, particularly in advanced economies, remains dependent of government stimulus measures.

“Our forecast at the IMF is not a forecast of a double dip. But you never know. It may happen and especially if countries exit too early. If they exit too early and we have a new downturn in growth, then really I don’t know what we can do,” Strauss-Kahn said. “A lot of our toolkit in terms of fiscal and monetary policy has been used. If we fall back into negative territory for growth it will be very, very difficult to solve the problem, so, our advice is to be very careful,” the Managing Director cautioned.

Strauss-Kahn is visiting the region as part of enhanced engagement with Asia by the Fund. The IMF and the Government of Korea are planning a high level regional conference in Seoul for July.

Focus for 2010

Strauss-Kahn said the focus in coming months should be on building a sustainable recovery, addressing the roots of the crisis, forging global cooperation and pursuing change at the IMF.

Hence, governments should use stimulus measures to help create jobs and combat unemployment. Joblessness was a threat to democracy and could lead to social unrest and even war.
“When we are working to try to achieve economic and financial stability, what is at stake is not only dry figures on a piece of paper. It’s the whole stability of the world that is at stake, and that’s why sustainable recovery goes much further than only the rate of growth,” he said.

On addressing the roots of the crisis, lax supervision and regulation of financial markets was an underlying cause of the crisis. In Strauss-Khan’s view, the financial sector cannot return to business as usual, and governments must not abandon financial sector reform just because recovery is under way.

The third focus, governments should build on the global cooperation that developed during the crisis. The IMF is providing analytical support for the mutual assessment process initiated by the leaders of the Group of Twenty (G-20) and will present a paper to finance ministers at their April meeting. Strauss-Kahn believes this would be very important for the future of the world economy.

“It acknowledges that we are truly in a globalized world… There is no domestic solution to global problems,” he said.

The fourth focus for this year has to do with the Fund itself. According to its chief, IMF had already changed to help combat the crisis, introducing more flexible loan facilities, with streamlined conditionality. The Fund would push ahead with changes in its governance structure to better reflect the weight of dynamic emerging economies as well as reviewing its mandate.

“We need multilateral institutions that deal with globalized problems,” he told reporters.