Speech

Economic Stability, Economic Cooperation, and Peace—the Role of the IMF, speech by Dominique Strauss-Kahn Managing Director, International Monetary Fund at Oslo, October 23, 2009

October 23, 2009

Over the past year or so, the global financial crisis has been the subject of intense debate. But today, instead of dwelling on the economic risks, I would like to turn instead to another important topic—the relationship between economic stability and peace. It is my abiding belief that they are intimately entwined. If you lose one, you are likely to lose the other. Peace is a necessary precondition for trade, sustained economic growth, and prosperity. In turn, economic stability, and a rising prosperity that is broadly shared—both within and among countries—can foster peace. This is most likely to happen in an atmosphere of economic cooperation, of openness, of a multilateral approach to economic and political problems.

Ultimately, peace and prosperity feed on each other. I believe history teaches us this lesson. We all remember how the Great Depression created fertile ground for a devastating war. More recently, in many parts of the world, economic instability provoked political upheaval, social unrest, and conflict.

Why should we talk about the risks to peace?

The current slowdown is the deepest and broadest since the Great Depression. Not long ago, the global economy stood at the edge of the abyss. With the collapse of Lehman Brothers, uncertainty turned to outright panic, and economic activity started to collapse. People raised the specter of another Great Depression, and these fears were not unfounded.

But today’s world looks different. Fear has turned to hope. We seem to have turned the corner as the growth engine starts up again. Our latest projections suggest that global economic activity will expand by about 3 percent in 2010.

This was no mere accident. It was not just good luck. It came from the bold decisions taken by policymakers the world over, and—just as importantly—from an unprecedented degree of economic policy cooperation. In the face of crisis, countries came together to face common challenges with common solutions, focusing on the global common good. We saw this in fiscal policy, in monetary policy, and in financial sector policy.

This collaboration encompassed more countries than ever before in history—showing us that in our modern globalized world, responsibility for the economic policy agenda can no longer rest with a small club of countries. This crisis heralded the ascent of the G-20—a group that includes the dynamic emerging economies—as the leading vehicle of multilateral cooperation.

The challenge is to sustain this spirit of cooperation as we venture into the post-crisis world. In an atmosphere of great fear and uncertainty, cooperation was not so hard to achieve. But with optimism on the rise, and recovery on the horizon, countries may be tempted to go their own way, and to abandon the cooperative approach that served them so well during the crisis. I am happy to note that early signs are positive. Meeting a short while back in Pittsburgh, G-20 leaders stressed that the global collective interest must always infuse national policy decisions. Multilateralism, I hope, is here to stay.

The IMF played its part in this multilateral response, promoting the global public good of economic stability. When the crisis hit, we were sent out as a first responder, and G-20 leaders boosted our resources substantially. And as the crisis unfolded, we scaled up our emergency financing dramatically, we injected an unprecedented amount of liquidity into the system, we made our lending more flexible, and we supported the international response to the crisis with our forecasts and policy advice.

We tried to play our part in calming the waters. And having earlier expressed confidence in us by increasing our resources, G-20 leaders meeting in Pittsburgh extended this confidence to our surveillance, asking us to help with their mutual assessment of policies. Our goal is now to adapt to the needs of the post-crisis world.

Of course, to be effective, we must be seen as legitimate. Here, too, the G-20 has moved the institution forward, pledging to shift quota shares toward dynamic emerging markets and developing countries by at least five percent from over-represented to under-represented countries. This boosts our legitimacy, and represents a significant down payment on our future effectiveness.

Securing stability

Let me stress that the crisis is by no means over, and many risks remain. Economic activity is still dependent on policy support, and a premature withdrawal of this support could kill the recovery. And even as growth recovers, it will take some time for jobs to follow suit. This economic instability will continue to threaten social stability.

The stakes are particularly high in the low-income countries. Our colleagues at the United Nations and World Bank think that up to 90 million people might be pushed into extreme poverty as a result of this crisis. In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself. Economic marginalization and destitution could lead to social unrest, political instability, a breakdown of democracy, or war. In a sense, our collective efforts to fight the crisis cannot be separated from our efforts guard social stability and to secure peace. This is particularly important in low-income countries.

War might justifiably be called “development in reverse”. War leads to death, disability, disease, and displacement of population. War increases poverty. War reduces growth potential by destroying infrastructure as well as financial and human capital. War diverts resources toward violence, rent-seeking, and corruption. War weakens institutions. War in one country harms neighboring countries, including through an influx of refugees.

Most wars since the 1970s have been wars within states. It is hard to estimate the true cost of a civil war. Recent research suggests that one year of conflict can knock 2-2½ percentage points off a country’s growth rate. And since the average civil war lasts 7 years, that means an economy that is 15 percent smaller than it would have been with peace. Of course, no cost can be put on the loss of life or the great human suffering that always accompanies war.

The causality also runs the other way. Just as wars devastate the economy, a weak economy makes a country more prone to war. The evidence is quite clear on this point—low income or slow economic growth increases the risk of a country falling into civil conflict. Poverty and economic stagnation lead people to become marginalized, without a stake in the productive economy. With little hope of employment or a decent standard of living, they might turn instead to violent activities. Dependence on natural resources is also a risk factor—competition for control over these resources can trigger conflict and income from natural resources can finance war.

And so we can see a vicious circle—war makes economic conditions and prospects worse, and weakens institutions, and this in turn increases the likelihood of war. Once a war has started, it’s hard to stop. And even if it stops, it’s easy to slip back into conflict. During the first decade after a war, there is a 50 percent chance of returning to violence, partly because of weakened institutions.

How can the IMF help? At a broad level, by helping countries maintain or consolidate economic stability. The most obvious way to do this is by providing financing when needed. Without this, governments might be forced to cut social safety nets and essential public services. Economic activity might be further disrupted, and employment opportunities diminished. Here, the IMF is delivering—support to low-income countries over the next year or two will be three times what was available before the crisis. And to ease the burden, we will charge zero interest on all concessional lending through 2011.

Our lending has made a difference. Countries with sustained program engagement over the past two decades saw bigger boosts to growth than those without such involvement. We are trying to do better still, reforming the way we lend to low-income countries, and making this lending more flexible and better tailored to individual country circumstances.

Our lending programs in these countries always emphasize poverty reduction and protecting the most vulnerable. I am pleased to note that most low-income countries with a program backed by the IMF have budgeted higher social spending and many are making efforts to better target spending toward the poor. This is one of our top priorities.

The IMF also places great emphasis on good governance. About 40 percent of the conditions in our low-income country programs focus on improving public resource management and accountability. We also provide advice and technical assistance to resource-rich countries, allowing them to better manage their revenues, again contributing to social stability.

The IMF also extends special help to countries in post-conflict or other fragile situations—again through lending and technical assistance. We help rebuild or strengthen institutions and economic management—essential elements of state building. We introduced a more flexible emergency lending facility that can be used by countries coming out of conflict. Sure, the IMF’s role is a limited one, but our support can also open the door to much-needed aid flows. Sustained help is critically important given the risk of a relapse into civil conflict.

The IMF’s mandate

Let me return to my main point. When the nations of the world come together to address common challenges in a spirit of solidarity, we can attain a virtuous circle of peace and prosperity, and avoid a vicious circle of conflict and stagnation. On first glance, this might seem incidental to the role of the IMF. But it is not. It underpins our mandate.

This becomes clear when we look at the origins of the IMF, and the lessons of the 20^th century. The nations of the world came together after the first world war. But instead of promoting economic cooperation, they were motivated by more myopic considerations. In particular, the harsh terms of the Treaty of Versailles sowed the seeds of economic ruin in Germany, which in turn was one of the causes of the second world war.

One of the people who saw this clearly was John Maynard Keynes, one of the founders of the IMF. He strongly condemned “the policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings.”. Keynes instead urged the people of his day to “base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction.”

Keynes’ admonition was ignored. Countries instead embraced the economics of self-interest, and retreated to isolationism. What followed was the unprecedented collapse in global economic activity in the 1930s, with dire social and political consequences. Economic warfare soon led to real warfare. The resulting second war world war left tens of millions dead and many countries around the world in ruins.

After the war, the nations of the world gathered once more. They vowed never to repeat the errors of the past. They embraced multilateralism and a cooperative approach to economic and financial policies. Leaders wanted to create a new world.

This strategy took many dimensions. The United Nations was founded to “save succeeding generations from the scourge of war” while promoting “social progress and better standards of life”. In Europe, leaders embarked upon a remarkable process of economic and political integration. They were determined to forever banish the specter of war from the continent and realize the dream of “perpetual peace”—that great unfilled dream of so many philosophers over the centuries, including Saint-Pierre, Rousseau, Bentham, and Kant. Remember too that peace was aided by external financial support from the Marshall plan and internal financial support from the development of comprehensive social safety nets. It was economic and social stability that cemented the peace.

The IMF was born at this defining moment in history, forged in the furnace of a multilateral milieu dedicated to peace and cooperation. Its mandate was economic stability—promoting monetary cooperation and facilitating an expansion of trade and employment that benefited all people. It would oversee the global financial system and lend to members with balance of payments needs. It was understood that with stability would come peace and security.

And as the founding fathers gathered at Bretton Woods in 1944, peace was foremost on their minds. The pessimism expressed by Keynes a quarter century earlier now turned to optimism. As the conference ended, Keynes declared that by working together “this nightmare, in which most of us present have spent too much of our lives, will be over”. And in a sign of the times, he expressed his confidence that “the brotherhood of man will have become more than a phrase”. United States Treasury Secretary Henry Morgenthau shared this conviction, linking peace to shared prosperity and denouncing the economic policies of the interwar years. He declared that “Economic aggression can have no other offspring than war. It is as dangerous as it is futile. We know that economic conflict must develop when nations endeavor separately to deal with economic ills which are international in scope.” This is our legacy. From this stems our mandate.

And now we have a historic opportunity to renew this commitment to multilateralism, and to adapt it to a post-crisis world. We all must rise to this challenge. The peace of our planet depends on it. Thank you.