Posted by: mulrickillion | October 31, 2011

“Global Economic Challenges and Fostering Future Prosperity” Address at the University of Iceland by IMF Deputy Managing Director Nemat Shafik


Ms. Nemat Shafik

Address at the University of Iceland by IMF Deputy Managing Director Nemat Shafik
Reykjavik, October 28, 2011

As prepared for delivery

Good afternoon. It’s truly an honor to be here. I would like to thank the Dean of the University of Iceland, Dr. Kristín Ingólfsdóttir, for her kind invitation to talk to you today. I would like to congratulate the university for one hundred years of academic excellence, and I am proud to participate in its centennial celebration.

More generally, it’s an honor to come to Iceland to pay tribute to the remarkable achievements of your country over the past few years, in the face of incredibly difficult circumstances. It’s a great privilege to come to Iceland to see what lessons it might offer to others.

In my address today, I will talk about the global economic challenges, which are extremely severe and urgent right now. I will offer some immediate policy prescriptions, and I will also try to tease out some lessons from the crisis for the future. Economic outlook

Let me begin with the global economic outlook. Overall, we expect global growth to slow to 4 percent this year and next. But tempestuous currents flow beneath these seemingly tranquil waters.

The recovery is looking more and more uneven. In the advanced economies, it is still weak and bumpy, with unacceptably high unemployment. They will only manage an anemic 1½ to 2 percent in 2011-12. Compared to its advanced economy peers, Iceland is doing reasonably well, with growth expected at closer to 2½ – 3 percent over the same period. Meanwhile, the emerging markets and developing countries should get growth in the 6 – 6½ percent range.

What about the tempestuous currents? Although we expect the recovery to continue, the risks are severe and growing. Financial stress has risen dramatically. Adverse feedback loops between the real economy and the financial sector are gaining strength. Concerns about public debt sustainability in the euro area have intensified, leading to fears about the health of the area’s banks.

It’s a dark picture. The world is suffering from a collective crisis of confidence. And uncertainty has been made worse by policy indecision and political dysfunction.

Without action to halt this vicious circle, we could face a long lost decade of low growth and high unemployment. Even worse, we cannot rule out a downward spiral of uncertainty and risk aversion, dysfunctional financial markets, unsustainable debt dynamics, and a collapse in global demand.

In such dire circumstances, it is folly to believe that the emerging markets and low-income countries can chart their own course. The global south can take little comfort from rising tensions in the global north—their economies would likely sink under the weight of large and abrupt capital outflows and lower trade. And any underlying vulnerabilities related to excessive credit growth would be cruelly exposed.

And Iceland of course would not be immune—even with the shield of capital controls, it would be hit. Exports would be hurt by both lower demand and reduced commodity prices, and foreign borrowing would probably become more expensive. In such trying times, let’s never forget what it’s all about—preserving sound economic policies to protect the welfare of the ordinary person. Graduates like you looking for a job. The unemployed who find it so hard to find another job. People who face increased economic anxiety and insecurity, increased vulnerability and marginalization, and even increased poverty and misery. We must all be attuned to the hopes and fears of ordinary people. And that includes the IMF.

Policy options

So far, I have painted a pretty gloomy picture. And yet, I believe there is a way out. There is a policy path forward—a way to regain economic stability, which also the way to keep the social fabric intact. Let me talk about what that path looks like. . . .

“Global Economic Challenges and Fostering Future Prosperity” Address at the University of Iceland by IMF Deputy Managing Director Nemat Shafik


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