IMF urges tailored reforms, better global policy coordination

International Monetary Fund (IMF) Managing Director Christine Lagarde Thursday called for better global policy cooperation and economic reforms that could help tackle specific challenges in both advanced and emerging economies.

There is no "one-size-fits-all" economic reform recommendation suitable for all the IMF's 188 member countries, and they should take different fiscal consolidation paces and set different reform priorities, Lagarde told reporters.

Advanced economies including the euro zone still have "significant potential risk," and there should be structural reforms and a banking union "in a comprehensive way" in the currency bloc, she said during a roundtable briefing.

Had the euro zone and the United States not acted last year to address sources of serious tail risks, there would likely have been significant negative spillovers to the rest of the world. Their policy response took these risks off the table for now, thereby lowering uncertainty and financial stress, both of which act as a drag on growth, the IMF said in its "2013 Spillover Report" released Thursday.

The United States and Japan should anchor their medium-term fiscal consolidation plans including reforming entitlement programs in order to offer the degree of security for the medium term, she suggested.

"In the near term the key issue for the United States is that it could afford to run less tight fiscal policy, and doing so would allow faster short-term growth and with it the prospect of scaling back asset purchases earlier," noted the flagship report examining the external effects of domestic economic policies from five systemically important economies (S5), comprising China, the United States, the euro zone, Japan and Britain.

The pickup in growth provided by short-term fiscal and monetary stimulus is expected to wind down after a year or so, not least because of the need to revert to fiscal consolidation. In the absence of a successful reform package including structural reforms, fiscal consolidation, and achievement of the new inflation target, the economic output in Japan would be lower by 4 percent after 10 years, noted the report.

Emerging market economies have slowed down recently, and each of them should have its own set of policies, Lagarde said, adding that countries like India should have more investment and conduct structural reforms to address the bottlenecks curbing economic growth.

Economic rebalancing "has clearly taken place" in China, she said. In the last couple of years, there has been policy action in the Asian country to shift the economic growth driver from domestic investment to domestic consumption, "but we need to see the continuation of that," she stressed.

In China, the policy priority is a set of reforms to contain growing risks in the financial, fiscal, and corporate sectors while transitioning the economy to a more "consumer-based, inclusive, and environmentally-friendly" growth path, echoed the report.

China's "shadow banking sector needs to continue to be under very solid scrutiny by the authorities," Lagarde cautioned.

After the outbreak of the financial crisis, there is "really intensive" global cooperation in policy making between 2008 and 2009, but after the crisis abated and global economy embarked on recovery, the degree of urgency calling for cooperation has diminished, Lagarde noted.

Adoption by the S5 countries of more complete reform policies would reduce the need to rely on ultra-easing monetary policy along with its side-effects, and would materially lower risks of large adverse spillovers, the Washington-based global lender noted in the annual report.