India, China, Emerging Economies Not Immune to Slowdown

IMF says countries should cut interest rates and spend more money.

India, China and other emerging economies are in the "perfect storm" of global financial risk sparked by the U.S .credit crunch and should mull steps to avoid a sharp downturn, the IMF chief said Feb. 13. International Monetary Fund director general Dominique Strauss-Kahn told a meeting of Indian economists that large fast-growing economies like India and China had not "decoupled" from poor growth prospects in the U.S .and Europe. "The industrial and emerging economies are like two horses yoked together," Strauss-Kahn told the Indian Council for Research on International Economic Research.

"If one is tired, the other can take up more of the strain for a while. But if one stops in its tracks neither is going to get very far."

To combat the risks to global economic growth, Strauss-Khan called on emerging market countries to be ready to cut interest rates and spend more money, the same efforts the IMF fund has urged for industrial nations. "In economic policy, emerging economies could consider how they would respond to a downturn: how much scope there is for monetary easing in some countries; how much scope there is for fiscal stimulus in others," he said, while cautioning that any extra spending should be temporary and accompanied by other policy measures like exchange rate flexibility. He noted that some countries may not have much scope to ease monetary policy or increase spending, but said there needs to be a concerted global effort to boost the world economy.

"I think that the trade links that bind emerging and industrial economies together are still tight - and perhaps are tighter than they seem from a casual examination of trade figures."

Last month, India's central bank held key interest rates steady, saying the risk of higher inflation had increased despite global threats to economic growth and financial stability, while China has also warned that rising prices require tight monetary policy in 2008. On the other hand, the U.S. government has prepared a $150 billion package to stimulate its flagging economy, while the Federal Reserve has slashed interest rates. But other G7 nations have shown less appetite for fiscal measures to boost domestic demand, particularly Japan which has huge national debts.

Copyright Agence France-Presse, 2008

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