Economy May 8, 2012
Washington: Global policymakers should strike a balance between austerity and growth in designing economic policies to deliver faster and better growth, as fiscal adjustment and other headwinds weighed down growth, International Monetary Fund (IMF) chief Christine Lagarde said.
The global economy needs "higher and better" growth. Getting there depends on choosing the right combination of policies, Lagarde said on Monday during a speech in Zurich, Switzerland.
"With the wrong choices, we risk losing a decade of growth, a generation of young people, and an opportunity to put the global economy on a secure footing. We dare not fail," reported Xinhua citing from her written speech.
Among the advanced economies, the output gap -- the difference between what an economy is producing and what it can produce -- remains close to 4 percent this year on average, noted the managing director of the Washington-based global lender, adding that "austerity versus growth is very much the debate of the hour".
Lagarde called the fight a "false debate", as policymakers could design a strategy that is "good for today and good for tomorrow".
In the short run, demand matters most for growth and jobs. But loose monetary policies in some advanced countries have not ignited strong recovery, as the growth is being held back by three "brakes" in the system -- fiscal adjustment, weak banks and poor housing markets, she said.
Advanced economies need to tackle their mountain of debt, as the ratio of debt to gross domestic product (GDP) among the advanced economies is expected to hit 109 percent next year, the largest ratio since World War II, Lagarde added.
However, fiscal austerity holds back growth and the effects are worse in downturns, so finding the right mix between cutting spending and raising revenue is critical, she cautioned.
Lagarde stressed the importance of well-paced, country-specific credible fiscal adjustment combined with reforms aimed at increasing growth and jobs.
More From Firstbiz.