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Friday, Oct. 19, 2012
The IMF's new message
Mea culpa. That might be the biggest message from the recent gathering of global financial leaders in Tokyo. The annual IMF/World Bank meeting is an opportunity for finance ministers and central bankers to seek agreement on the state of the global economy and ways to ensure greater or more stable growth. Last week's conclave will be remembered for the admission by those technocrats that austerity, their standard prescription for national economic woes, missed the mark. While we are pleased to see some humility from these officials, it is curious that this reassessment only follows the imposition of that remedy on European economies.
The Tokyo meeting began with recognition by the IMF that world economic growth is slowing. Six months ago, global growth in 2012 was anticipated to be 3.5 percent — the slowest rate in three years — but would increase to 4.1 percent in 2013. Now, the IMF puts growth at 3.3 percent this year, with a half percentage point drop in expected growth to 3.6 percent in 2013. Most large developed economies would either shrink this year or expand sluggishly at about 2 percent or less; only Japan and the United States will surpass 2 percent, and they are expected to eke out just 2.2 percent expansion. (Next year, Japanese growth is expected to plunge to 1.2 percent, while the U.S. will fall to 2.1 percent.) Developing economies will do better, but they too are slowing.
The biggest clouds over the global economy are the uncertainties produced by the euro crisis and the prospect of a U.S. plunge over the "fiscal cliff" if policy makers do not reach a deal on the budget. The failure of politicians in Washington and throughout Europe to agree on actions and then deliver on them has cast a pall over the global economy. While economies elsewhere have their own problems, the collapse in demand from Europe and the ripple effects of prevarication by U.S. politicians and the Federal Reserve Bank's quantitative easing have added to local woes. The elections in the U.S. (in November) and Germany (next year) magnify the uncertainty. Political machinations in Tokyo have delayed resolution of this country's budget funding problems; a bill is needed by the end of next month to restore predictability to financial planning for fiscal 2012 in Japan.
The collapse of demand in the West has prompted a reassessment by the IMF of its standard policy response. Typically, the IMF demands that the countries it assists must balance their books as a condition of aid and that exercise has consisted of aggressive austerity measures — steep cuts in government spending with equally tough revenue collection efforts. This was the response to the Indonesian and South Korean financial crises in the late 1990s, and has shaped thinking about how to deal with Greece and other troubled European economies. The cost of those adjustments was severe: Despite a forecast of 3 percent growth, Indonesia's economy contracted 13 percent the year after it adopted the IMF prescriptions. In the South Korean case, growth was anticipated at 3 percent after the aid package; instead the economy shrank nearly 6 percent.
Two years ago, then IMF managing director, Mr. Dominique Strauss-Kahn, conceded that the institution had made "mistakes" in Asia. At the Tokyo meetings, the IMF published research showing that those aggressive austerity measures exacted a toll perhaps three times worse than previously estimated; apparently, economists underestimated the impact of the GDP deflator — the ripple effect of cutting government spending.
This concession set the stage for a clash between Ms. Christine Lagarde, the new IMF managing director, and German Finance Minister Wolfgang Schaeuble, who has championed a hard line consistent with the traditional IMF position. While Ms. Lagarde said that she was prepared to give Athens as much as two more years to meet its deficit-reduction target, Mr. Schaeuble hewed to the status quo, insisting that there is "no alternative" to deep budget cuts. The two eventually papered over their differences, but the fundamental division remains.
Just as striking as the IMF's newfound flexibility was the rigidity of China's thinking. Despite all the uncertainties of the global economy — questions that are exacerbated by the leadership transition in Beijing — China decided that it would not send its top economic and financial officials to the meeting. While insisting that it was sending an "appropriate delegation," Beijing apparently decided that the dispute between itself and Japan over islands in the East China Sea was sufficient reason to absent its pre-eminent economic decision makers and representatives from its leading banks.
This decision tells us a lot about Chinese priorities. The idea that a bilateral territorial dispute takes precedence over international governance and managing the global economy indicates a lack of seriousness about its international responsibilities. Some have suggested that China's real complaint is a system of global governance that it did not build and feels no compulsion to support. Both explanations are short-sighted and immature. China's indifference to the larger consequences of its behavior ill-befits the second largest economy of the world; Beijing would be among the loudest voices condemning such behavior by others. It is probably too much to expect a self-criticism like that of the IMF from Beijing.