Policymakers leaving the 2012 Annual Meetings of the IMF and World Bank may have flown out of Tokyo with a feeling of greater sense optimism than they had when they arrived in the Japanese capital a week earlier, but uncertainties remain. The fact that the meetings were held in Tokyo was itself a reflection of that fragility: they had been scheduled to take place in Cairo but the Arab Spring put paid to that.
The overarching theme that ran though the meetings was the uncertainty over the outlook over the global economy. Under that cloud, there were many other concerns: the ongoing eurozone debt crisis; the outlook for financial markets; arguments over when – or if - a European banking union could put be place and what it would look like; the territorial dispute between the hosts, Japan, and their powerful neighbours, China; the outlook for the poorest parts of the world, facing higher food prices and rising unemployment; and the governance of both the IMF and the Bank. These questions dominated both the official debates and the informal chatter on the hallways.
Slowing growth
The meetings kicked off on a downbeat note as the two keynote IMF forecast documents – the World Economic Outlook and the Global Financial Stability Review – both contained dark warnings. The cuts in the forecasts for growth for almost all parts of the world in the WEO had been anticipated by experts. It quickly became apparent that some experts believed that even those lower forecasts could be overly optimistic.
One of the key threats remains bank deleveraging. After the years of accumulating debt on the balance sheets, banks in the West and particularly in Europe have been shedding core and marginal assets, especially in emerging markets such as Asia, Latin America and eastern Europe. While this is process is necessary for the long-term viability of the banking system, it is causing concern. At the meetings, the GFSR warned that European bank balance sheets alone could shrink by as much as $4.5 trillion by the end of 2013 in a worst-case scenario.
Exclusive interviews by Emerging Markets with leading economists revealed the level of concern among the world’s leading economists. Larry Summers, the former chairman of the White House’s National Economic Council, warned that the world faced a “lost decade” of economic growth unless policymakers on both sides of the Atlantic took action to boost growth rather than pursue austerity. The debate over the right policies to return the European economy to long-term sustainable growth continued but no definitive answer emerged. IMF managing director Christine Lagarde appeared to mollify the Fund’s stance by indicating that debt-laden countries such as Greece should be given more time to deal with its deficits. However after a reportedly angry response from Germany’s finance minister Wolfgang Schauble, the two policymakers presented a united front at a debate held during the meetings. However in the IMF’s final press briefing of the meetings, Lagarde and the chair of the IMF’s policymaking committee, the IMFC, pointed to the need for “growth-friendly” austerity. Delegates could be forgiven for leaving Tokyo with a lack of clarity over the correct prescription. Some, however, did leave with greater optimism than when they arrived. The Governor of the Colombian central bank told Emerging Markets that there were “huge challenges” but that the mood was “more positive” than it was six months ago.
Fiscal cliff
The renowned investor Jim Rogers picked up the “lost decade” in an exclusive interview – but added the plural. He noted that Japan had suffered 20 years of subdued growth after its bubble burst. “America will have a few lost decades,” he said. He echoed the doubt on the economic numbers coming out of the United States that indicated the strength of the recovery and the fall in unemployment.
At the heart of the concern is the co-called fiscal cliff – the mix of pre-programmed rises in taxes and cuts in spending that would be likely to push the US economy into a double-dip recession unless politicians on Capitol Hill worked with the White House after the November elections to strike a compromise deal. In the meantime the uncertainty acts as another drag on the recovery. Mexico, the US’s most immediate southern neighbour, warned it would be most affected if those negotiations failed. In his interview Summers was notably downbeat saying that while even a lame duck Congress would be able to “kick a can” down the road there were “no guarantees.”
Pimco CEO Mohamed El-Erian said that a “comprehensive” set of policies was needed to combat persistent economic woes in the eurozone and the US for which monetary measures were “either too blunt or ineffective.”
However in a piece written for Emerging Markets the economist George Magnus, now a senior adviser to UBS Investment Bank, said that the US model of innovation, advanced design and commercialization together with expected falls in industrial electricity prices would enable the US economy to stay ahead of China’s and that the latter’s low cost advantages were fading.
Submerging Europe
But even more than the outlook for the US, concerns over the efforts among European policymakers to finally put a floor under the crisis dominated the meetings. ECB president Mario Draghi had clearly managed to avert a catastrophe in the eurozone by promising to do “whatever it takes” and, if necessary to buy sovereign bonds of countries whose yields showed than normal monetary transmission had broken down. But as analysis of the issue ahead of the meetings pointed out, it was unclear whether the so-called Outright Monetary Transactions (OMT) would be able to break the negative feedback loop between economic output and confidence.
Hanging over the whole debate was the speculation over whether Spain would be the first country to use the OMT mechanism, which, Draghi had made clear, was conditional on further austerity measures. But many believe that Madrid will need to apply for a full bailout from the new European Stability Mechanism. In a briefing, Spanish finance minister Luis de Guindos said that pressure had eased during the meetings. “The pressure from the IMF has been reduced and the atmosphere has much more sanguine and more positive”.
But as he was speaking questions emerged on whether France would be next in line for market pressure over its high debt. Harvard university professor Kenneth Rogoff said that the French “seemed to believe that if just Germany would use its resources to guarantee everyone –potentially France as well – there’s no need for bigger changes.” Meanwhile, however, the jury was still out on whether Greece would be able to pull through, with policymakers expressing support, but market participants doubting the country would be able to stay in the eurozone. As Mohamed El-Erian, the CEO of Pimco, told Emerging Markets: “The population is nearing the point of exhaustion and complete rejection – economic, financial, political and social – that renders orderly political solutions very hard to sustain.”
The debate over whether Europe would be able to set up the banking union that many experts believe is vital for putting support under the euro was alive during the meetings. France reiterated its belief that the union could be put in place – or at least the first concrete steps of it – by the end of the year. Christian Noyer, governor of the French central bank, told Emerging Markets that banking union was essential to break the link between bank and sovereign debt. “I hope we will, collectively in the eurozone, be able to decide on this framework so that we can start on 1 January,” he said.
However doubts grew over the meetings. Hopes that European leaders would use Tokyo to push forward plans faded after the Swedish finance minister raised doubts over the plan while leading economists warned of a split within the EU. Anders Borg said that the new regulatory regime had to be inclusive and not penalize countries like Sweden that had higher bank requirements than elsewhere in Europe. Phillip Suttle, chief economist at the Institute of International Finance, said that disagreements over banking union could “split the European Union”. The 1 January deadline looked unlikely after Ewald Nowotny, the Austrian central bank governor, told Emerging Markets that regulation of EU banks by the European Central Bank – a core element of the banking union - would not “come into effect until the middle of 2013 at the earliest.”
Development agenda
With the economic uncertainty and fears of further eurozone defaults overshadowing the meeting, it might have been difficult for the World Bank to get its message out on the impact on the poor. However Jim Yong Kim, the new president of the Bank, used an exclusive interview with Emerging Markets, to want of the effect that uncertainty in the rich half of the world was having on the poor half. He urged eurozone politicians to live up to their promises and implement tough economic reforms amid growing evidence that the crisis had started to sap global economic growth and hurt the world’s poorest. He also used the interview to set out his three-pronged strategy: the eradication of poverty; the creation of jobs and employment opportunities; and a focus on global public goods such as tackling climate change.
One of Kim’s deputies, managing director Sri Mulyani Indrawati, warned the global slowdown threatened to turn the clock back on some of the achievements made in fighting poverty. She said that major emerging economies such as China were most at threat. She warned that the economic growth models that had seen hundreds of millions of Chinese people lifted out of poverty over the last three decades, putting the world on track to meet its Millennium Development Goal for poverty reduction, “was no longer working.”
The World Bank’s new chief economist, the Indian academic and former government adviser Kaushik Basu, said that tackling unemployment was a key issue as it was central to Kim’s key goal of eradicating poverty. One of Kim’s other deputies, managing director Caroline Anstey told Emerging Markets that the Bank was developing a new funding strategy to help post-conflict and fragile states. The proposal would guarantee these countries the long-term financing that they need to be able to put in place the institutions that will guarantee long-term growth rather than just a short economic boost.
China crises
The smooth running of the annual meetings was disrupted after a simmering row between Japan and China over the Senkaku/Diaoyu islands threatened to hijack the Tokyo event. It emerged that Beijing’s top financial representatives, finance minister Xie Xuren and central bank governor Zhou Xiaochuan had cancelled their trip to the meetings, and Japanese officials expressed dismay as what appeared to be an unprecedented move. The decision meant that the deputy central bank governor gave the prestigious Per Jacobbson lecture in place of Zhou. Kim used the development Committee press briefing to issue a direct and unprecedented appeal to Japan and China to avoid falling prey to conflicts at such a fragile time for the global economy. Emerging Markets had captured the intensity of the row in its analysis ahead of the meetings.
The outlook for the Chinese economy and the potential impact of its slowdown on both other emerging economies and the developed world was a key issue too. Professor Rogoff said in his interview with Emerging Markets that growth in China could slow to as little as 3% a year, which he said was a “distinct possibility” over a five-year period.
For many other emerging economies there was a debate over how any sort of slowdown would affect their growth potential. Brazilian policy officials insisted the country had a bright outlook and that a deceleration in Chinese growth might even help them as it would lower commodity prices as so relieve inflationary pressures. Larry Fink, CEO of Blackrock and one of the world’s famous investors, said that the strong rally in EM securities was only sustainable if and when China manages to deal with its economic problems. “It’s all about China,” he told Emerging Markets. But Augusto de la Torre, Latin America chief economist at the World Bank, said policymakers had to rebuild fiscal buffers in order to avoid being caught off guard by a slowdown in China, to which they are more exposed now than ever.
Getting governance right
Hopes that IMF member countries would be able to use their meetings to finalise a deal to increase the voting rights of fast-growing emerging economies at these meetings fizzled out. In the end, the IMFC committee was only able to say that it hoped that it would be able to secure sufficient votes next year.
Fears over trade and food
Trade protectionism was a big issue at the meetings as Emerging Markets had set out in an analysis ahead of the meetings. Experts warned that countries that imposed measures to restrict trade risk seeing them backfire as restraints on commerce could end up weighing heavy on domestic economies. Deteriorating global economic prospects have triggered more protectionism by the large trading nations, according to Simon Evenett, who is the founder of the Global Trade Alert network. He told Emerging Markets policymakers gathered in Tokyo must take action to stem the rise of protectionism among the world’s richest developed and emerging nations. In an interview with Emerging Markets, the head of the World Trade Organization, Pascal Lamy, said that sharp movements in exchange rates were acting as an “obstacle” to trade and that it was up to governments to decide whether to give the WTO powers to intervene over allegations of currency manipulation.
Food prices were always going to be high up on the agenda, especially for the World Bank, as Emerging Markets explained ahead of the meetings. A sharp rise in food prices could hit the most vulnerable developing countries hardest – especially those in Africa; the bank warned that policymakers may well have to prepare for the worst. With prices for corn rising sharply, production of ethanol should be stopped and the resources diverted to food before it's too late. The threat of an imminent outbreak of major global social unrest and rioting over high food prices has reached “boiling point”, and ethanol production must be stopped now, one leading expert has warned. Professor Yaneer Bar-Yam of the New England Complex Systems Institute (NECSI) said the tight outlook for food production made it essential that ministers took action to mandate curbs on the amount of corn going into the production of ethanol, which he said has risen from a 15% share in 2004 to around half this year.
Some good news
Ultimately the outlook for the global economy will depend on how effective policymakers are in dealing with the eurozone crisis. It is also hard to read the outlook until after the US general election and the handover of power in Beijing that takes place a few days later.
But delegates were able to leave on one bright note. The International Monetary Fund’s powerful policymaking committee announced measures to use extra resources to boost efforts to help some of the world’s poorest countries. Finance ministers and central bank governor members of the IMFC approve the injection of a $2.7 billion windfall from the sale of gold reserves held by the IMF into a special fund aimed at helping low-income countries.