The world economy is beset by problems such as high unemployment and rising prices which could fuel trade protectionism and 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.
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, Dominique Strauss-Kahn said in a speech in Singapore.
Strauss-Kahn noted two dangerous imbalances that he said could sow the seeds of the next crisis.
The first was the unbalanced recovery across countries, as emerging nations grow much faster than developed economies and possibly overheat. The second was the social strains within countries with high unemployment and widening income gaps.
Over the next decade, 400 million young people would join the global labor force, posing a daunting challenge for governments, Strauss-Kahn 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 European countries are struggling to create jobs.
Despite high joblessness in the wake of the 2008 global credit crisis, trade barriers have not reached levels feared by many analysts. Instead, a number of countries, most prominently China according to its critics, have sought to keep their currencies undervalued to keep exports humming.
The pre-crisis pattern of global imbalances is re-emerging, Strauss-Kahn said.
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.
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.
Emerging markets would grow at a faster pace of 6.5 percent, with Asia excluding Japan expanding by 8.5 percent, he said.
Strauss-Kahn said the global growth gap was straining the recovery in other ways, with energy prices rising swiftly, reflecting the rapid growth in emerging economies.
Food prices are rising too -- though here supply shocks are the main reason with potentially devastating consequences for low-income countries. Together, these price increase are beginning to feed into headline inflation, he said.
The U.N. food agency 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.
Strauss-Kahn added that foreign exchange rate adjustments had 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.
Chinese policymakers were moving in the right direction by taking steps to bolster domestic demand, he noted. The United States and many other Western countries continue to push Beijing to let its yuan currency appreciate faster.
(Editing by Kim Coghill and Dean Yates)