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Thursday, May 3, 2012
Modest steps at the IMF
The biannual meetings of the world's leading financial institutions, the International Monetary Fund and the World Bank, are generally pretty staid affairs — after all, how riled up can gatherings of central bankers and finance officials really get? In recent years, the answer is "pretty much."
Then again, a global financial crisis that refuses to go away, overlaid with (and compounded by) complaints about how the global financial architecture is run, makes for a combustible mix.
At last month's meetings, IMF members agreed to raise at least another $430 billion, almost doubling its capacity, to lend in the event the global economy makes another downturn. Given recent developments in Europe, with Britain sliding into recession, Spain being battered by markets as it tries to roll over its debt and anemic growth in the United States and the Chinese economy slowing and looking shaky, that day may not be long in coming.
Agreement to increase the IMF reserves follows a fund analysis that concluded the global economy could need as much as $1 trillion to be ready for shocks in the next few years. IMF members decided they would raise half that sum if Europe matched that amount in its own bailout fund.
A month ago, European leaders did that, boosting funding for the European Stability Mechanism — the permanent "firewall" that is designed to prevent runs on member economies — to €800 billion, an increase from the originally planned €500 billion.
With that pledge in hand, the IMF followed suit. Most of the new commitments came from wealthy developed economies, with Japan leading the way with a $60 billion pledge. That promise brings Japan's total contributions to the IMF to $186 billion, making it the IMF's No. 1 creditor, surpassing the U.S. by $14 billion.
Washington opted out of the IMF resupply, insisting that the IMF has enough lending capacity and that Europe should play "the dominant financial role" in dealing with its own crisis, as U.S. Treasury Secretary Timothy Geithner put it.
The U.S. position reflects domestic politics more than anything else: The U.S. Congress would not approve any new commitments, and may even claw back a $100 billion pledge made in 2009.
Thus far, however, the IMF has secured $286 billion. Many of the cash-rich emerging economies — such as the BRICs (Brazil, Russia, India and China) — promised to contribute but would not specify an amount. Details should be forthcoming at a meeting of Group of 20 nations that will be held in Mexico in June.
The emerging economies are holding out for a reapportioning of voting power within the IMF and the World Bank. They have complained for years that the power structure of these institutions, along with that of other international organizations such as the United Nations, is outdated and reflects global power during the Cold War. The IMF agreed to modify its quotas in 2010, but no changes have been carried out.
Thus, as Mr. Guido Mantega, finance minister of Brazil, complained: "The calculated quota share of Luxembourg is larger than the one of Argentina or South Africa. The quota share of Belgium is larger than that of Indonesia and roughly three times that of Nigeria. And the quota of Spain, amazing as it may seem, is larger than the sum total of the quotas of all 44 sub-Saharan African countries." Plainly, reform is overdue.
While the decision to replenish the coffers of the IMF and the European stability fund is necessary, that move is, ultimately, a measure to respond to the symptoms of crises, not a measure to prevent the crises themselves.
The problems that confound the eurozone economies, and the global economy more generally, appear to be structural as they reflect foundational elements of national, regional and global economic policies.
In Europe, nations have been living beyond their means, and when pushed to deal with that situation, they must reconcile domestic fiscal decisions with a regional monetary policy. The result has been austerity regimes that compound domestic economic crises and are politically unsustainable.
No government can withstand an increase in unemployment rates, as is now the case in Spain, at one-quarter of the population — with more than 50 percent of those under the age of 25 jobless — and stay in power.
Japan and the U.S. appear to be embracing a similar mentality that puts austerity at the top of the economic agenda rather than the stimulus measures that any Keynesian would be endorsing. This will ripple through Asia, where export-oriented economies will be hit hard by a slowdown in Europe and the U.S.
A global economy that relies on the developed world to provide markets for exports from developing countries is inherently unsustainable. Asia must stimulate its own domestic demand to provide a cushion against downturns in its overseas markets. This will also lessen the imbalances that magnify the impact of inevitable corrections when they occur.
These are long-standing complaints. Yet there has been little progress toward the resolution of the problems. Instead, there is preference for patchwork solutions and political posturing.
If the emerging economies want to make a stronger case for reform of global financial institutions, they could set an example and do more to fix the structural flaws that weaken the global economy.
The burden is not theirs alone, but action on their part would accord even more credence to their call for reform.