Downside of globalisation will be felt by all: IMF boss Kahn

“Earlier, the developed economies had only trade links with emerging economies but today there are financial links as well. India has received huge capital inflows, so when financial and real sectors, emerging and developed economies are linked and there is a crisis, somewhere there are risks of capital outflows,” he said.

Kahn said that the effects of the global financial crisis are serious and the IMF has reduced the forecast for global growth to 4.1 per cent from 4.9 per cent. Speaking about the ways to mitigate the crisis, he said that countries with lower fiscal deficits should prepare some headroom to maintain demand. For instance, “If there is high demand in China, it can in turn generate employment and raise consumption levels and boost the global economy,” he added.

With RBI governor Y V Reddy sitting beside him, Kahn said that central banks are doing well to maintain liquidity. However, they should focus on providing monetary policy support to restore investors’ confidence in the markets. He also emphasised the need for more transparency and consistent auditing practices by banks.

Emerging economies should also learn from the regulatory and supervisory lapses that occurred in the US, he pointed out. The IMF chief said that the Fund is undergoing an overhaul as it is shifting its focus from regulating exchange rates to proactively participating as an advisor on policy making. The IMF would not only like G-7 countries to participate in policy decisions but all its members to come on board, he said.