Ex-IMF head says US-Iraq war to result in worse global economic slowdown

Former International Monetary Fund (IMF) managing director Michel Camdessus said the US-Iraq war will not plunge the global economy into a recession, but the slowdown will be worse than originally projected.

According to Camdessus, post-war rebuilding will also be difficult and countries like the Philippines will have to cope with negative external elements on top of dealing with internal weaknesses in the local economy.

Speaking before the Jose B. Fernandez Jr. Center for Banking and Finance at the Asian Institute of Management yesterday, Camdessus said the consequences of war would be disruptive and it would be particularly difficult to dissociate Asian economies from the economic impact of the war.

"I don’t think there will be a recession but certainly, economies will be slower than anticipated, particularly the US," Camdessus said. "This is also especially true for countries like Japan and France as well as the European Union in general where the fiscal situation is already bad."

The Philippines, in particular, would have to cope with the disruption in its export markets in the US and Europe while dealing with its "problems with the bureaucracy, corruption, vested interests and fiscal difficulties that aggravate the situation."

"To achieve growth, these elements must be addressed on top of the external elements that are unfortunately negative at the moment," Camdessus said.

In the midst of these concerns, Camdessus said the IMF has to struggle to adapt and fulfill its mandate as a lender of last resort.

"I cannot reconcile myself with the fact that in the last 20 years, we have not been able to stabilize the monetary regime," Camdessus said. "We can no longer afford this collective benign neglect."

"We still have to answer the question: Do we need a lender of last resort and if we do, what should be its means and tools of intervention?" he pointed out. "The IMF should no longer appear as an international technocrasy."

Camdessus also hailed the move by IMF shareholders to endorse a staff proposal to develop a concrete plan for a treaty-based sovereign debt restructuring mechanism (SDRM).

"Debt restructuring is an indispensable step towards building a new financial architecture," Camdessus said.

IMF members wanted an amendment to its charter that would bind members to rules for restructuring sovereign debt although the IMF itself is resisting the lobby, saying that "debt restructuring cannot substitute for policy reforms."

However, Camdessus expressed optimism that the IMF would adapt to the shifting trends in the global financial architecture. "It was one of the main things that I liked about the IMF – it is a permanently adapting institution," he said.

Despite Camdessus’ pronouncements, however, the IMF has been less than accommodating with international calls for the Fund to reassess its relevance in the changing landscape of global finance.

The IMF has been under constant fire for causing more problems than it was supposed to solve as well as its inability to react swiftly to unique situations where the emerging crisis required non-traditional responses.

Specifically, the Fund was much criticized for its "ineffectual" role in the 1997 financial crisis in Asia that reverberated throughout the global financial system.