IMF Preaches to the Choir
The spring meetings of the International Monetary Fund and World Bank in Washington this weekend provide an important opportunity for central bankers, finance ministers, economists and bankers to compare notes and work collaboratively. Unfortunately, apart from the bilateral talks, including those between Greece and the IMF, the wrong people will be on hand to ensure that the meetings are followed by systemic actions at the national, regional and multilateral levels the global economy needs.
The IMF established the context for the meetings in its publications -- particularly the updates to its World Economic Outlook and the Global Financial Stability Report. The two well-written documents present a general picture of a healing but still fragile and tentative global economy with notable structural impairments. And it is reasonable to believe that these assessments are a toned-down version of the closed-doors discussions among staff, between staff and management or among members of the Executive Board representing the fund's 188 countries.
Two items in the reports are particularly consequential; both provide actionable guidance for the majority of countries that will be represented in Washington.
First, the IMF expects the global economy to be less divergent and less dynamic than it had predicted in earlier reports. Specifically, it projects largely flat global growth for 2015, at 3.5 percent, that is accompanied by greater convergence in the expected performance of the major economic blocks in the developed world. Most notably, the U.S. growth forecast was trimmed to 3.1 percent, an 0.5 percentage-point decline, while the euro zone's prospects brightened somewhat, to 1.5 percent from 1.2 percent.
Second, the financial stability report offers an updated assessment of the evolution of financial risk, which it says morphed and migrated to less well-regulated (and, I would argue, less understood) segments of the financial service industry, such as hedge funds, asset managers and new areas of the shadow banking system.
Both conclusions point to a risky global economy -- and that's without taking into account wildcards such as Russia and Greece.
Although it is certainly good news that Europe is picking up, few would opt for a convergence that implies a weaker U.S. economy. China is stabilizing at a lower growth rate and still has to deal with pockets of financial excess. That means the U.S. remains the leading powerhouse of global growth. Meanwhile, the significant transfer of risks to non-bank institutions is accompanied by legitimate concerns about the erosion of market liquidity during periods of stress.
Fortunately, the IMF has done more than just take note of the challenges facing the global economy. It has also laid out the implications for policy. These include the need to create growth that doesn’t come at the expense of others -- after all, the U.S. slowdown is partly attributable to the dollar's appreciation in a stealth currency war -- as well as a better balancing of global demand and the revamping of financial regulatory and supervisory structures.
The good news for country officials in Washington this week is that a lot of the groundwork has been done. The bad news is that even that won't be sufficient to ensure the type of coordinated policy progress the global economy urgently needs.
For some time, there has been a growing economic consensus in the analysis of the major issues, though there is still some disagreement on the precise balance between secular and cyclical challenges (recently demonstrated in the blogging dialogue between former Fed Chairman Ben Bernanke and former Treasury Secretary Larry Summers).
The larger problem has been the lack of sufficient action. This is partly the result of messy domestic politics that inhibit responsive policy implementation at the national level, let alone appropriate regional and global policy coordination.
Don’t expect this week’s meetings to produce consequential policy breakthroughs. Instead, we are likely to get more of the same -- interesting conversation and broad expressions of concern, with few concrete follow-up actions that would make the global economy materially better. This will remain the state of play until the world encounters much more severe economic and financial turbulence with consequences far greater than the very short-term disruptions in markets we have experienced in recent years.
For these gatherings to produce meaningful results, it would have been far better if the economic officials, who already are well aware of the gathering clouds, had stayed home and, instead, the dithering politicians were brought together to confront the latest findings and recommendations of the IMF.
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