Observing that countries like India and Mexico are enjoying a robust growth, IMF Managing Director Christine Lagarde today said a new economic reality has slowly emerged as nations have developed and grown richer.
"A new economic reality has slowly emerged as countries have developed and grown richer. And now that some of these countries experience difficulties after many years of strong growth, we are affected by it, too," Lagarde said in her address at University of Maryland.
"This is not something to fear, but it does require us to be aware and think a bit differently, a bit more multilaterally," she said.
Sharing her views on the growing importance of emerging market economies, she said it is a group of about 30-50 countries that are in a transition phase-not too rich, not too poor, and not too closed to foreign capital, with regulatory and financial systems that have yet to fully mature.
"These countries are incredibly diverse-culturally, geographically, and even economically. Right now, for example, Brazil and Russia are in recession, while India and Mexico are enjoying robust growth. So it would be a mistake to think of these countries as a homogenous bloc," Lagarde said.
"At the same time, all these countries are eager to catch up with their richer peers. As I explained, however, the current difficult economic context makes catching up much harder-which brings me to the key challenges," she said.
China, she said, has embarked on an ambitious rebalancing of its economy - from industry to services, from exports to domestic markets, and from investment to consumption. It is also moving towards a more market-oriented financial system.
"These reforms are a necessary process that, in the long run, will lead to more sustainable growth and benefit both China and the world. In the short run, however, it will lead to slower growth, and this slowdown creates spillover effects - through trade and lower demand for commodities, and amplified by financial markets," she added.
Lagarde said faced with modest growth prospects, advanced economies need to continue to support demand through accommodative monetary policies. But they should use a more balanced policy mix.
"Countries with budgetary room for maneuver should also use fiscal policy to stimulate their economies-for example, by funding much-needed upgrades of public infrastructure," she said.
At the same time, the US has a special responsibility as it normalises its monetary policy-because this can be a source of global spillovers and spillbacks. So it is important that the Federal Reserve continue to do this in a prudent and well-communicated manner, Lagarde said.
"The bottomline is that today's IMF more accurately
reflects the dynamics of the 21st century's global economy, including the role of emerging markets," an IMF statement said quoting Lagarde.
Meanwhile, the European Commission today said India is consolidating its position as the world's fastest growing large economy.
"In China, the relatively smooth structural adjustment assumed in the central scenario over the forecast horizon is consistent with a gradual slowing in the country's officially reported GDP growth from 6.9 per cent in 2015 to 6.2 per cent in 2017. However, it is surrounded by major risks.
"The outlook for the rest of emerging Asia remains broadly stable as compared to the autumn forecast. India is consolidating its position as the world's fastest growing large economy, with the rest of the region remaining closely tied to China," it said.
Indian economy is projected to see a real GDP growth of 7.4 per cent this year and 7.5 per cent in 2017, as per the report.
In its Winter 2016 Economic Forecast, the Commission said Europe's economy is now entering its fourth year of recovery while growth continues at a moderate rate.
