IMF strives to get its multilateral mojo back
The IMF needs to take steps to bolster its reputation as the guardian of multilateralism, ahead of a possible meltdown in emerging markets that could put the Fund centre stage of any rescue effort.
“The world needs a new multilateralism.” The warning was stark and momentous given that it came from the head of the fiscal department at the International Monetary Fund, its deputy chief economist and general counsel just a few weeks before the Fund’s annual meetings.
The three senior executives were encapsulating a growing sense of pessimism among member states, financial organisations and commentators that the IMF was being sidelined by a rising tide of protectionism especially in the United States.
Vitor Gaspar, Jonathan Ostry and Sean Hagan hinted at this politically combustible issue without naming countries, saying: “The nations of the world have become less willing to take collective action. The system of global co-operation is currently under stress.”
But others put it more strongly and are happy to point the finger. Holger Schmieding, chief economist at Berenberg Bank of Germany, says that a transatlantic trade war “stoked by US president Donald Trump” poses the biggest threat to its otherwise modestly positive outlook for global growth and financial markets. “His disdain for rules, allies and multilateral institutions sow uncertainty that is bad for business,” he says.
That impact is already being felt. The decision by Trump to pull the US out of the Trans-Pacific Partnership trade agreement across much of the southern hemisphere, his insistence on the renegotiation of the Nafta trade pact with Mexico and Canada, and his imposition of tariffs of between 10% and 25% on steel, aluminium imports from the EU and China and a further 6,300 component items from China have unsettled trade flows.
Global Trade Alert (GTA), which monitors protectionism, has identified 567 trade distorting measures in 2018 up to September 12, more than at any point since it launched in 2009. To put this in context, there were 367 measures in 2009, which was seen at the time as a peak in protectionism. Co-ordinator Simon Evenett said it was almost certain 2018 would be the worst year on record.
World trade volume decreased 0.8% month on month in June, weakening growth in the second quarter of 2018 to zero from 1.2% in the previous quarter, according to the CPB World Trade Monitor. Alternative measures of trade have also continued to be downbeat. At around 4% y/y in May, growth in air freight traffic remains well below the pace of 14% a year ago. And the growth rate of sea container traffic was almost half its pace in May last year [see chart].
The negative impacts have not only been on trade. The United States has withdrawn from many global commitments, including the Paris climate agreement and the United Nations Educational, Scientific and Cultural Organization, and the Global Compact on Migration.
Ted Truman, senior non-resident fellow at the Peterson Institute for International Economics (PIIE) and a former assistant secretary at the US Treasury, said that the stress on multilateralism was not exclusively in the US. “It is fragmented all the way round from the European Union, eastern Europe and other parts of the world.”
But the reason for the weakening of the IMF’s position has not come so much from leaders such as Donald Trump and Hungary’s Viktor Orban thumbing their noses at the multilateral organisations, but from the groundswell of public opposition that has propelled them into power.
Voters are themselves questioning the benefits of international co-operation, and often for good reason. Economic inequality within nations is widening, especially in advanced economies. Many households
have shared little of the benefit from the economic recovery since the 2008 crash, and
communities have suffered losses of many jobs or even whole industries. “Voters are therefore readier to listen when politicians claim that global engagement prevents them addressing problems at home,” say Ostry and his colleagues.
The main causes for this are two counter-intuitive results of the explosion of free trade volumes since the post-Second World War settlement that gave birth to the IMF, the World Bank, the United Nations and the predecessor to the World Trade Organisation (GATT).
While inequality fell within countries, especially emerging markets, thanks to trade and technological innovation, it has fuelled greater inequality within many advanced economies — at least in the eyes of the public. Ostry says trade seems to get the lion’s share of the blame, making people “leery” of expanding trade further through ever more economic integration.
The other unexpected consequence is that the success of international co-operation has reduced the share of world economic activity taking place in advanced economies in Europe, the United States and Japan while increasing that of emerging markets. The benefits the US and other advanced economies derived from supporting global public goods such as international trade are now increasingly shared with other countries [see chart].
While it is the G20 countries that are mostly using protectionism they are not the only ones being harmed. GTA data show that while the majority of sub-Saharan Africa countries took no protectionist measures all of them were harmed at least once.
“Emerging markets are definitely implicated and hurt so there is a knock-on effect even though many small and medium-sized countries are not taking part in this,” says Evenett, who is also professor of economics at the University of St Gallen.
The issue is what can be done at this week’s meetings to curb the tide of protectionism and give a new platform for multilateralism. “The leadership of the institution can try to use exhortation and make proposals that might attract attention, but in some sense it is up to the members to decide if they want to use the IMF as a forum to move things forward,” says Truman at the PIIE.
He says the priority should be to use the coming 12 months to finish the process of increasing and reallocating members’ voting quotas. A review of the IMF’s quotas is to be completed by the fall of 2019 at the latest.
The Trump administration will have to decide whether to block or agree to any significant increase in quotas. If it does agree then it must choose whether to increase the US quota and pay in more money to maintain its capacity to block or veto major decisions in the IMF.
The US currently holds a 17% stake that allows it to block major IMF decisions that require an 85% majority, which might be diminished under quota reform. Currently the US looks minded to block it. In July Treasury secretary Steven Mnuchin told the House Committee on Financial Services that the IMF’s resources were “adequate”.
“One would hope that other countries would prevail on the US to be reasonable and perhaps encouraged by the Fund,” Truman says. The key constituency will be Europe. While members of the EU would be the largest losers from a successful revaluation of the quotas, the continent as a whole would be the biggest victim of a collapse of multilateralism.
“One would hope that at a minimum the US would not close the door or that other countries would prevail on them not to close the door,” Truman adds.
As well as sending a signal that multilateralism is alive and well it would also open the door to extra financial contributions to the Fund at what could prove to be a timely injection given the growing ructions in emerging markets. “Mnuchin has said IMF resources are adequate for now [but] in some sense quotas are about resources for the future,” Truman says.
The Fund has already committed $50bn to bail out Argentina, or 11 times that Latin American country’s quota with the Fund. Truman identifies seven countries of economic and political interest to the US that are potential borrowers from the IMF over the next several years: Brazil, Colombia, Indonesia, Italy, South Africa, Turkey and Venezuela.
If these countries received exceptional access to IMF financial resources at 11 times their quotas, as Argentina was recently granted, the total call on IMF financial resources would be $680bn. This is before considering whether Pakistan will come cap in hand to the IMF for a loan.
TRAGEDY AND HOPE
A September report from the Centre for Economic Policy Research (CEPR) says the weakening of multilateralism began during the financial crisis when the major Western central banks issued temporary bilateral swaps to each other that were converted into standing arrangements in 2012.
While swaps augment the emergency resources available in a crisis, they substantially alter the international financial architecture without formal international deliberation and agreement.
The report by four leading academics including former Chilean central bank governor Jose de Gregorio says this is a “troubling departure” from the principle of multilateralism that is the defining characteristic of the Bretton Woods Agreement.
“It is such a particular time with the US attacking multilateralism," says Charles Wyplosz, economics professor at the Graduate Institute in Geneva and one of the authors. “It is not now that thing will happen. We are more in the seed planting mode than suggesting urgent action.”
While emerging commentators will wish to use the Bali meetings to work with the IMF to stem the tide of protectionism Evenett fears this is a “vain hope”. He has only praise for what he calls the “robust and consistent stand” that the IMF and particularly managing director Christine Lagarde has taken. “They are doing the best they can for a membership organisation.”
He points to a stark contrast with 2009 when all countries accepted that protectionism was wrong. “That moral suasion has gone and that’s a tragedy,” he says.