Beware of Back-Door Protectionism
Dominique Strauss-Kahn is the managing director of the International Monetary Fund (IMF). This interview was conducted by IMF Survey Online and NPQ in late February.
NPQ | The financial crisis seems to be intensifying. Are we in the center of the hurricane right now or is worse to come?
Dominique Strauss-Kahn | The problem is that the effect on the real economy, for the most part, is still to come. This will certainly be a rather bad year for growth, not only for the advanced economies but also for the emerging economies.
But there are some signs of hope. Large stimulus packages have been prepared, especially in the United States. The same is true, even if it's not on the same level, in most European countries. Also, most governments have realized that they have to work on the financial sector — to restructure the financial sector and clean up bank balance sheets.
NPQ | With dramatic job losses around the world, how serious is the risk of protectionist politics?
Strauss-Kahn | It's really big. Not traditional protectionism—increasing tariffs and things like that. Most governments have understood the lessons from the past that this did not work, and it even made things worse.
But you may have protectionism coming through the back door, especially in the financial sector. To give you an example, when governments provide some new resources or recapitalization of banks, they may add some comment saying that the money should stay at home.
Or you may have in different stimulus packages some comment or amendment saying that this money also should be used to buy national products.
This kind of protectionism may come back. So the risk of a "beggar your neighbor" policy is still high. In no way in a global crisis should there be a domestic or national solution: We have to find a global response.
NPQ | Governments have done a lot already, but they haven't achieved a decisive breakthrough yet in stemming the crisis. What more should governments do to prevent a further downward spiral in the global economy?
Strauss-Kahn | Most governments, including the US, Japan, the European countries, but also others, did not realize until the G-20 meeting last November that what the IMF had been claiming for months was true—that we needed a stimulus package at the global level and comprehensive action on the financial sector.
Now, it takes a lot of time in different countries, depending on the national democratic processes and other reasons, to implement changes. This is true for the stimulus packages, and even more so for restructuring of the financial and especially the banking sector. So the question is no longer one of convincing governments to move, but for them to implement the policies they have pledged to adopt.
I have just come from a tour in Europe and Asia and the message I've communicated is twofold: First, what you have proposed to do is OK, in most cases, so just do it! Second, the crisis has now hit hard in the emerging countries, and the financing the IMF has provided for the emerging countries is very important. It may come back to us in the wealthier countries if it goes badly in those countries because of the global economy—because we are in a global crisis. So leaders have to take care not only of what is happening in their own economy, or in the regional economy, but in the global economy.
NPQ | Some critics are already saying, as in the Asian crisis, that the IMF is making things worse by suggesting that governments raise interest rates and cut spending. Are IMF programs different from before?
Strauss-Kahn | I'm not sure I agree with the premise of your question. Yes, the IMF made mistakes, sometimes even big mistakes. But please remember that we were trying to help economies that were in trouble. That's what we are here for! If countries never ran into problems, there would be no need for the IMF.
But when no one wants your currency, then you have no choice but to raise interest rates to make it more attractive. And when you are running a large current account deficit, you must take steps to reduce it. You need to find additional resources—including by borrowing from the Fund—and to balance it with cuts to the budget.
So when the IMF is called in it is because a country has problems, and it is a bit naive to believe that those problems can be resolved without pain. In fact, without the help of the IMF, the solution in the country will be even more painful for the people.
That said, the world has changed, and this crisis differs from previous crises, so we have had to adapt our policies. What the IMF has tried to do is to focus the conditionality of our loans on the core problems we need to fix. In the past there were many conditions which were certainly good for the country but not directly linked to the most pressing problems at hand.
When you look at the number of conditions in the IMF's most recent programs, they have dropped by 30 to 40 percent, and are mainly focused on the financial sector or the fiscal deficit.
In this crisis, everyone in the country may be hit, but some will be hit harder than others. I believe the IMF has to take care of the most vulnerable in society. And that is why developing safety nets, even in a crisis, is very important.
For example, we have a program with Pakistan where the Fund has agreed, along with the World Bank, that a dedicated amount be spent on programs to help the most vulnerable people. What is true for Pakistan is also true for other countries.
NPQ | What is the most important thing the G-20 can accomplish to ensure that globalization doesn't collapse as a result of this crisis, as the "first globalization" did in the early 20th century?
Strauss-Kahn | The world is looking for a strong and immediate global response to this first global crisis. Specifically, the G-20 must agree to a critical mass of measures around the world to restart growth and restore financial sector health while avoiding protectionism. It must focus on how to provide the financing needed for emerging markets and developing countries to weather the storm.
This crisis has also drawn attention to the shortcomings in global arrangements in financial regulation and decision-making. I do see a much greater willingness to come to grips with these fundamental issues.