Pull coordinated policy levers to tackle 'New Mediocre': IMF chief

All policy tools and coordinated efforts, from infrastructure development to the promotion of free trade, should be mobilized to boost demand and to address the sluggish economic growth affecting many countries, International Monetary Fund (IMF) Managing Director Christine Lagarde said in Beijing.

NEW MEDIOCRE

Many parts of the world are confronted with a "new mediocre," a period of prolonged tepid growth and high unemployment, "with additional risks from geopolitical concerns and asynchronous monetary policies," Lagarde told Xinhua during an exclusive interview in Beijing.

"Policy makers have a hard time dealing with the legacies of the financial crisis, such as high debt and high unemployment," she said on the sidelines of the Asia-Pacific Economic Cooperation (APEC) meetings.

Lagarde highlighted that to address the risk, the IMF's advice is that all available policy tools and levers -- including monetary policy, growth-friendly and job-friendly fiscal policy, as well as structural reforms in most economies -- must be mobilized.

The "new mediocre" affects a large part of the world including the Euro area and Japan, and it has spillover effects for other economies, as all economies are strongly interconnected through trade and finance channels.

The Washington-based global lender last month lowered its global economic growth forecasts for this year and the next. It expected the world economy to grow 3.3 percent in 2014 and 3.8 percent in 2015, down 0.1 percentage point and 0.2 percentage points from its July forecasts, respectively.

When asked what keeps her awake at night, Lagarde said her top concerns included environmental sustainability, the large number of unemployed youth, lack of access to education for young girls in many parts of the world, and people living in Ebola-stricken countries.

The former French finance minister borrowed a metaphor from gardening to highlight the importance of balancing various economic policies.

"You could look at it this way: The economy is the earth that needs to be nicely ploughed and maintained, and that would be your fiscal policy. It needs to be watered but not flooded, and that could be your monetary policy. You need compost, and that could be your structural reforms. From existing bushes, tress and flowers, you need to plant new seeds, and that could be innovation," she said.

Central banks using unconventional monetary policies, such as quantitative easing (QE), or asset-buying, should tread carefully and put good market communication strategies in place, as a shift in monetary policies will lead to a certain degree of market volatility.

"Presumably, the long-term interest rates in the United States will probably rise in the future, which will bring capital flows back to the Untied States," she said.

The U.S. Federal Reserve recently announced that it had decided to end its asset-purchase program, while the European Central Bank and Bank of Japan are stepping-up efforts on monetary easing to bolster economic growth.

Continuing with the gardening metaphor, she said: "Watering is important, but you don't want to flood the garden, and you need a good irrigation system. Monetary transmission has to work well, and you have to tell your neighbors when you start the watering or when your stop the watering."

ASIA, CHINA REFORMS

"Monetary policy in China is clearly geared toward the long term, and China has the benefit of large reserves and a growing economy, with a vigilant central bank. I think all the ingredients are there to address the potential market volatility," she said.

"Lots of economic reforms have happened in China in recent years. China is clearly more open, with its currency increasingly more international than it was. This is moving in the right direction and further reforms in the period ahead will enhance the process," she added.

More broadly, on the topic of overall economic reform in China, Lagarde said that steps identified last year are "very comprehensive, and have the objective of strengthening the economy, improving governance, and making the economy more competitive. These are all very positive factors."

Despite the sluggish growth facing many countries, "we can still expect the largest and strongest growth contribution to global gross domestic product (GDP) to come from Asia," said Lagarde.