International Monetary Fund member countries sought to bridge sharp differences over the global economy, acknowledging that rising inflation in emerging markets poses a risk to rich countries too.
Addressing one of their biggest challenges, the 187 IMF nations on Saturday recognized the alarm among developing countries about huge inflows of speculative cash that are stoking their growth but also their inflation rates.
When inflation goes up in emerging markets, it's not just an emerging market problem, it's a global inflation and possibly interest rate problem, said Singapore Finance Minister Tharman Shanmugaratnam, who chairs the IMF's steering committee.
Top finance officials, in Washington for a twice-yearly meeting of the IMF, argued over the dangers posed by high government debt and super-low interest rates in sluggish, rich countries and the risk of overheating in developing economies.
It's one of the most difficult policy moments, one of the most complex challenges I've ever seen, certainly in my lifetime, Angel Gurria, head of the Organization for Economic Cooperation and Development, told Reuters.
The increased focus on the pitfalls in the policies of wealthy nations is part of a shift at the IMF to be more attentive to increasingly influential emerging powers.
Countries such as Brazil have struggled to cope with waves of yield-chasing hot money which pushes up inflation.
World Bank President Robert Zoellick called rising food prices the biggest threat to the world's poor.
The World Bank estimates another 10 percent rise in the food price index could add 10 million more people to the 44 million already thrust into poverty over the last year.
We risk losing a generation, Zoellick said.
Aware of stiff opposition in some emerging countries to any limits on how they manage the inflows that drive up prices, IMF members said the policies that lead investors to chase higher returns in other emerging economies also need oversight.
Tharman said inflation in the developing world, if unchecked, could spread to rich economies already shouldering large deficits. That would push up borrowing costs and threaten the recovery from the worst global recession in decades.
We have learned from painful experience in the last few years that nothing is isolated and that risk in one region.... rapidly gets transmitted to the rest of the world, he said.
The IMF committee said the global economy was strengthening but that policy action was needed given significant risks.
It also sought proposals to strengthen IMF surveillance of countries that pose the largest systemic risks.
The Group of 20 developed and emerging economies on Friday delayed a decision on contentious guidelines for when countries may use capital controls.
French Finance Minister Christine Lagarde said it seems vital to have a common set of rules.
France chairs the G20 this year and is seeking a deal on capital controls in time for a G20 leaders summit in November.
The G20 did agree on Friday to a plan that could put more pressure on the United States to fix its deficits as well as push other leading economies, including China, to address their own shortcomings.
Gurria said sometime in the fall or this time next year, maybe inflation will have a higher profile in G20 talks.
IMF SHIFT ON CAPITAL CONTROLS
The IMF this month endorsed use of capital controls, once considered anathema to its free-market philosophy. Advanced countries want to establish a framework to monitor their use, an approach emerging markets oppose.
Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression and have yet to solve their own problems are eager to prescribe codes of conduct to the rest of the world, Brazilian Finance Minister Guido Mantega said.
Brazil, with one of world's highest official interest rates at 11.75 percent, is among the countries that have used taxes and other measures to curb inflows. But rate hikes designed to cool growth end up attracting still more money from abroad.
U.S. and other rich countries have long argued that emerging countries can combat inflows and price pressures by allowing their currencies to strengthen against the dollar.
China, the world's biggest exporter, has rebuffed acute U.S. pressure to let the yuan rise more rapidly, though Premier Wen Jiabao this week said the country should resort to more exchange rate flexibility to combat rapidly rising prices.
Consumer price increases accelerated in both China and India in the year to March.
GETTING FISCAL HOUSES IN ORDER
Some finance officials said ultra-loose monetary policies and rising budget deficits in the United States and other advanced countries posed the main threat to global recovery.
The fiscal situation in the advanced economies gives us great concern, and it is in this area that we see the major risks to the global economy, said Russian Finance Minister Alexei Kudrin.
The IMF this week noted that the U.S. budget gap was on course to hit 10.8 percent of economic output this year, tying Ireland for the highest ratio of deficit to total output among advanced economies. It urged Washington to tighten its belt.
At Saturday's meeting, U.S. Treasury Secretary Timothy Geithner said the United States was committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery.
Leaders also fretted about fiscally strapped euro zone countries and their ability to refinance their massive debts.
(Reporting by Reuters IMF/G20 team; Writing by Steven C. Johnson; Editing by William Schomberg and Leslie Adler)