Washington: Observing that immediate priority of emerging economies like India and Brazil is to ride out the turbulence as smoothly as possible, the IMF chief has said that currencies should be allowed to depreciate and asked them to knock down lingering barriers to long-term growth.
"Some countries also need to knock down lingering barriers to long-term growth, pushing ahead with infrastructure investment in places like India and Brazil, deepening financial markets, and opening up trade regimes," IMF Managing Director Christine Lagarde said on Thursday.
"Liquidity provision can help deal with dysfunctional market behaviour. Looser monetary policy can also help, although there is less room for manoeuvre in countries with inflation pressures-such as Brazil, India, Indonesia, and Russia," Lagarde said.
In this vein, China needs to keep moving to a growth path based less on credit-which hit 180 percent of GDP this year-and more on higher productivity, higher incomes, and higher consumption, she said.
"Likewise, there is not much space left across many emerging markets for using fiscal policy, given high debt and deficits," she said in her address to the George Washington University.
This means liberalising interest rates, ramping up financial sector oversight, opening up protected sectors to private initiative, and further strengthening the social safety net, she added.
Stating that this emerging market transition will not be fast or easy, Lagarde said these countries will likely spend the rest of the decade adjusting to the new reality.
"As part of this adjustment, they need to keep cooperating-among themselves and with others. Again, international collaboration is the only way forward," she said.
In her address, Lagarde said today's emerging markets are much stronger than in the past, having come a long way since the crises of the 80s and 90s -with flexible exchange rates, higher reserves, and lower external debt.
For the past five years, they drove the recovery and kept the global economy afloat-accounting for three-quarters of total growth, she noted.
These countries are also facing a more challenging external environment, the IMF chief said.
"The ultimate goal of their transition is clear-living standards that are closer to the advanced economies. They can get there, but they face new obstacles in their way. Momentum is slowing, with growth 2.5% points lower than in 2010."
Over the past five years, capital flooded into emerging markets-partly due to loose monetary policy in the advanced economies. Bond inflows alone rose by over USD 1 trillion-more than 2 percent points of GDP a year for the recipient countries.
First Published: Friday, October 4, 2013, 09:56