Rich, poor economies 'face similar challenges'

Developed and emerging economies are often seen to be at cross-purposes, but they actually face similar issues, says the head of the International Monetary Fund's policy steering committee.

Media reports frequently give the impression that there are "very different solutions" for the two groups, said Mr Tharman Shanmugaratnam, chairman of the International Monetary and Financial Committee, which advises the IMF's board of governors.

But in fact they have "very similar policy challenges": they need to improve their finances, implement structural reforms and open up their labour markets, he said in an interview conducted by the IMF last Saturday.

"The policy lessons coming out of the advanced economies are getting borrowed by the emerging economies, but we're also getting some reverse lessons," noted Mr Tharman, who is also Singapore's Deputy Prime Minister and Finance Minister.

For instance, some emerging economies have done a better job of fixing their finances than developed ones. In the US, much of the last two weeks has been taken up by political wrangling over fiscal and debt issues.

"Medium-term fiscal consolidation is critical for those that have large debts," said Mr Tharman. "We don't yet have it in the United States, we're getting it in some European economies, and we have it in several emerging economies already."

Mr Tharman also pointed out that both advanced and developing economies share a need for deregulation and labour market reforms.

Opening up economies to greater competition from both domestic and foreign firms is a "major priority" for Japan and Germany, as well as some emerging markets, he noted.

"The services sector in particular can do with a lot of deregulation across the world," he added.

Similarly, labour markets need to be more flexible not just in developed Europe, but also in other developing countries, he said.

It is "critical" for all economies to ensure that "we always keep the labour market open to the young, to women, and to minorities", he said.

In the interview, which was released by the IMF on Sunday night, Mr Tharman also touched on the need for low-income countries to bolster their economic resilience by moving away from their dependence on commodities and expanding into a wider range of industries.

"Commodity prices may not be the same in the future as they have been in the past, particularly on the minerals side," he said, adding that this is a result of changes in China and the global economy.

Poorer nations thus need to diversify their sources of both government revenue and job creation away from commodities, Mr Tharman said.

The IMF is "very closely engaged" with low-income countries on this topic, and is also working together with the World Bank and other agencies, he said.

"There's a sense of realism and optimism... that I find very encouraging amongst our low-income countries."

fiochan@sph.com.sg

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