The world economy has begun improving but is beset by problems such as high unemployment and rising prices which could fuel crippling trade protectionism or even lead to war within nations, the head of the International Monetary Fund warned on Tuesday.
Rising food and fuel prices in recent months have already hit poorer countries and are one of the factors behind massive anti-government protests in Egypt and in Tunisia, whose president was ousted last month.
The United Nations' food agency (FAO) said last month that global food prices hit a record high in December, above 2008 levels when riots broke out in countries as far afield as Egypt, Cameroon and Haiti.
The pre-crisis pattern of global imbalances is re-emerging, Dominique Strauss-Kahn said in a speech in Singapore.
Growth in economies with large external deficits, like the U.S., is still being driven by domestic demand. And growth in economies with large external surpluses, like China and Germany, is still being powered by exports, he said.
As tensions between countries increase, we could see rising protectionism -- of trade and of finance. And as tensions within countries increase, we could see rising social and political instability within nations -- even war.
Over the next decade, 400 million young people would join the global labor force, posing a daunting challenge for governments, he added.
We face the prospect of a 'lost generation' of young people, destined to suffer their whole lives from worse unemployment and social conditions. Creating jobs must be a top priority not only in the advanced economies, but also in many poorer countries.
Unemployment stands at 9.4 percent in the United States while a number of European countries are also struggling to create jobs in a global economy where much of the growth is coming from emerging market countries.
DEVELOPED COUNTRIES ALSO AT RISK
Concerns about rising debt in developed countries, meanwhile, have increased in recent months.
Ireland was engulfed by Europe's debt crisis late last year, Greece continues to struggle despite a rescue package and many market watchers fear Portugal and Spain may be next.
Last week Standard & Poor's cut Japan's credit rating and Moody's warned it may place a negative outlook on the United States unless it can reduce its gaping budget deficit.
In Asia, the worries center around inflation and analysts say central banks in countries such as Indonesia need to respond faster to contain rising prices.
Strauss-Kahn also said foreign exchange rate adjustments have an important role to play in addressing global economic imbalances and should not be resisted.
Holding back such adjustment in one country also makes it harder, and more costly, for other countries to let their exchange rate adjust, he said.
For this adjustment to take place, time is of the essence, but asking for time only makes sense if there is a significant and regular move in the right direction.
Chinese policymakers were moving in the right direction by taking steps to bolster domestic demand, he noted, though the United States and many other Western countries continue to push Beijing to let its yuan currency appreciate faster.
Strauss-Kahn said the IMF expected subdued growth of 2.5 percent for advanced economies this year as high unemployment and household debt weighed on domestic demand.
Without jobs and income security, there can be no rebound in domestic demand -- and ultimately, no sustainable recovery, he said.
Emerging markets would grow at a faster pace of 6.5 percent, with Asia excluding Japan expanding by 8.5 percent, he said.
Monetary policy in the advanced economies should remain supportive as long as inflation expectations are well anchored and unemployment stays high, while Asia may need to do more to address the threat of overheating and a possible hard landing, he said.
(Editing by Kim Coghill)