Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF), warned that emerging economies aren’t immune to weakness in the US and urged countries to relax fiscal policy to cushion the slowdown.
Predictions that the global economy had ‘‘decoupled’’ from the US were overly optimistic, Strauss-Kahn said in New Delhi. ‘‘No region will escape entirely unscathed,’’ he said. ‘‘The industrial and emerging economies are more like two horses yoked together.’’
The IMF chief said strong growth in emerging markets had been based in part on improved economic policies from governments. Trade had also played a role, he said, and this was likely to be undermined
by US slowdown. In the past, he said, a 1% decline in US growth has led to a decline in growth in emerging economies of 0.5% to 1%, depending on trade and financial links to US.
Strauss-Kahn last month broke with IMF tradition and argued for more active use of fiscal policy to offset economic weakness, and he repeated that call on Wednesday. ‘‘Governments may also need to deploy fiscal policy,’’ he said.
‘‘Unless the situation improves, the fiscal authorities in countries with low fiscal risks should prepare to exploit the headroom in a timely and targeted fiscal stimulus that can add to aggregate demand in a way that supports private consumption.’’
He said that a fiscal boost would not be appropriate in all countries, including India, which he said had fast economic growth and high public debt.
Strauss-Kahn conceded to IMF failures in warning about the crisis in subprime markets in the US ‘‘The fund did warn our members and warn the world about the crisis,’’ he said. ‘‘But perhaps we did not warn forcefully enough.’’
He also said the fund did not foresee how the turmoil would spread. ‘‘The recent market turmoil has made it very clear that we need to pay greater attention to the links between real and financial sector developments,’’ he said. ‘‘We stand at the corner of Main Street and Wall Street.’’ BLOOMBERG