De Rato's Annual Meetings address: IMF should not shy away from pointing out problems with members' economic policies

• Pages: 280-281

Page 280

Let me begin with some thoughts on the global recovery and how to sustain it. Over the last year, the recovery has become increasingly well established. Global GDP growth this year is expected to be the highest in nearly three decades. In financial markets, the start of the transition to higher interest rates has been successfully managed by most countries. In short, the world economy has mounted a vigorous recovery from the slowdown of 2001. This is a remarkable performance in the face of the shocks experienced in the past few years. Looking ahead, there is much for our members to do to sustain the global recovery, and, therefore, there is much for the IMF to do to nudge them in the right direction.

Sustaining the global recovery

First, policymakers need to monitor carefully-and be prepared to address-the near-term effects of higher oil prices on their economies. To date, in many of our member countries, the impact of higher oil prices on output and inflation appears moderate. But a high oil bill places an especially heavy burden on the poorest countries, in part by reducing their ability to finance other much-needed imports.

Second, the challenge of maintaining an orderly transition to higher interest rates has not ended. The move to a neutral monetary policy stance should be continued through timely actions by central banks. Of course, the desirable pace and timing of monetary tightening vary among countries, depending on their cyclical situations and the extent to which oil prices are contributing to inflationary pressures.

Third, we also need to continue policy actions to have an orderly adjustment of current account imbalances. This is a global problem and the solution requires efforts by many countries. What is now needed is for U.S. fiscal policy to carry out a more ambitious deficit reduction over the medium term. European countries should use the recovery to implement structural reforms. Greater exchange rate flexibility in emerging Asia will serve both multilateral and national needs. In addition to reducing global imbalances, it would help countries in the region to better withstand external shocks.

Strengthening medium-term growth

We should also use this time of cyclical recovery to address structural challenges to continued global growth. First, there is a need to strengthen fiscal positions over the...