Trump casts long shadow over IMF’s multilateral ambitions
The Western financial crises saw the IMF ride to the rescue. Now the storms have passed, poorer economies want the fund’s attention but may lack political unity to engineer long term change
Just over seven decades ago, America’s wartime president Franklin D Roosevelt gave a barnstorming speech to the US Congress to win its support for the creation of what would become the International Monetary Fund and the World Bank. “These proposals for an international fund and international bank are concrete evidence that the economic objectives of the United States agree with those of the United Nations. They illustrate our unity of purpose and interest in the economic field,” he said, speaking after the Bretton Woods conference that rubber-stamped their creation.
“What we need and what they need
correspond — expanded production, employment, exchange and consumption — in other words, more goods produced, more jobs, more trade and a higher standard of living for us all.”
Fast forward 72 years and sustainable growth, higher productivity, a better standard of living for all rather than for the few — and such a multilateral outlook — look in short supply. The idea of a global consensus on the recipe for driving further wealth, health and happiness is also lacking.
This week’s IMF meetings mark the 10th anniversary of the onset of global financial crisis, and it is far from clear that the world economy is enjoying Roosevelt’s cocktail of growth and employment.
Growth is rising from the recent anaemic levels but according to the IMF the world economy will average growth of 3.6% a year over the next five years, below the 5.2% in the decade before the financial crisis hit.
Unlike previous recessions that were followed by a period of strong growth as employers, financiers and workers shared in the benefits of a clear upswing in the business cycle, this recovery has instead brought its own problems and risks.
Chief among these is a weak productivity trend that continues to be a severe drag on strong and inclusive growth — largely because of ageing populations, the slowdown in trade and weak private investment since the 2008 financial crisis.
The IMF has estimated that if productivity growth had followed its pre-2008 crisis trend, overall GDP in advanced economies would be about 5% higher today. That would be the equivalent of adding a country with an output larger than Germany to the global economy.
Economic inequality is also a growing headache across the world. The cut in interest rates to close to zero and the trillions of dollars pumped into the monetary system via quantitative easing have tended to benefit households that were already better off thanks to higher house prices and gains on stock markets. A 2012 report by the Bank of England showed that 40% of the gains went to the richest 5% of UK households.
Marshall Plan II?
The combination of these individual problems has led to calls for a modern version of the Marshall Plan, launched exactly 70 years ago under which the United States provided financial support to help rebuild Western Europe after the Second World War.
The annual meetings of the IMF this week are — in theory — the obvious forum to resolve these issues. Finance ministers and central bankers or their deputies from almost 190 countries will be gathered under one roof.
However, it is highly unlikely that anything concrete will emerge when the final communiqués are published this weekend. According to Harold James, a professor of history and international affairs at Princeton University and an historian of the IMF, the fund has found it hard to recreate the role it had when it was founded.
Then the IMF was at the centre of a system that sought to maintain international financial stability by linking exchange rates to the US dollar with the fund acting as an arbiter of any changes.
“But today exchange rates are largely set by market forces,” he says. “The IMF has morphed into a combination of crisis manager, global economic monitor and policy consultant.”
The explosive growth in private capital has contributed to economic growth, seen a rebalancing of the geographical focus of economic activity and helped lift billions of people out of extreme poverty. But the growth of this capital, which is by nature unstable and volatile, has dwarfed the resources of the IMF that have steadily grown smaller as a percentage of world income, trade and financial flows [see chart].
Ted Truman, a non-resident fellow at the Peterson Institute of International Economics (PIIE), says the IMF will return to its traditional role of fostering global economic and financial stability, growth and monetary co-operation. “The world is affected by economic and political forces but probably for the first time since the early 1970s with Opec’s oil price increases, it is politics rather than economics that is driving the global outlook — how we manage trade, how the Europeans manage Brexit and then the Middle East situation.”
Deficits and surpluses
One worrying issue that is clearly in the economic sphere is the size of the current account surpluses and deficits held by some of the largest economies.
In its external sector report in the summer the IMF said that about a third of total surpluses and deficits globally were deemed to be “excessive… or undesirable”. It highlighted surpluses in Germany, Korea, the Netherlands, Singapore and Sweden and deficits in the US and the UK.
“The concentration of deficits in a few countries could raise the likelihood of protectionist measures, and the continued reliance on demand from debtor countries risks derailing the global recovery while raising the risk of a disruptive adjustment down the road as the gap between creditor and debtor positions grows,” says Luis Cubeddu, division chief of the research department of the IMF.
This has led to calls on Germany by US president Donald Trump among others to reduce its current account surplus by raising domestic wages and increasing its infrastructure investment and on the eurozone to set up a technical committee to take fiscal policy away from politicians. Ironically back in the 1940s the US, which then had a huge surplus, prevented the IMF intervening against surplus countries.
Chris Pissarides, Nobel laureate economist and professor at the London School of Economics, says the failure by the surplus countries to rein in their excessive savings is weighing on global demand.
“German fiscal policy is not at all what some countries still need,” he says, speaking in an interview on the sidelines of the Nobel laureate meetings in Lindau, Germany. “Why is there no demand? Because of German fiscal policies. There is austerity, there is low infrastructure spending and therefore companies are hesitating [on] investment.
“Where is expansion going to come from? It’s going to come from the surplus countries spending more. Germany has a bigger surplus even than China: they should spend it in the European economy.”
Eric Maskin, fellow laureate and Harvard University professor, calls for a technocratic council to be given the power to set eurozone government fiscal targets in the same way monetary policy has been delegated to the European Central Bank.
While the IMF meetings where the finance ministers of the G7 and G20 gather would be the ideal location to negotiate an accord, Maskin says it is stymied from forcing the surplus countries to alter their policies by a lack of political leadership.
“In the past you would get a very enlightened politician who would come out and give a big speech such as [John Maynard] Keynes at Bretton Woods, [European Commission president] Jacques Delors and [German and French leaders] Helmut Schmidt and Giscard d’Estaing. These people would give a big speech in a big forum but right now I can’t think of anyone.”
While IMF managing director Christine Lagarde has a lot of political and financial capital, the reality is it probably needs political leadership from a G7 country. The obvious candidate would be the president of the United States as the largest economy and biggest single shareholder in the IMF. But so far public statements by Donald Trump have indicated a tepid enthusiasm for multilateralism at best — and contempt at worst.
“It is true that some of his statements and some of the people around him are not much in favour of multilateralism,” says Truman at the PIIE. “On the other hand, with respect to the fund and the [World] Bank there has not been an obvious turning away from the institutions, and the longer the administration is in office the more likely it is to find that the fund is a useful instrument of US foreign policy.”
He says that the White House will nevertheless have to take some important decisions regarding the US funding for the IMF that will affect the way that the fund is governed.
A review of IMF quotas — the money that a member puts in that is linked to their voting power — is due to be completed by 2019. If this leads to a reform of the way the IMF is governed so that it gives more, say, to fast-growing emerging economies, this will mean that total quotas must be increased substantially.
The Trump administration will have to decide whether to block or agree to any significant increase in quotas. If it does agree then it has to 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. If it does not add to its quota then over time it will allow its quota to lapse.
What the administration decides on IMF quotas will have implications on whether the US participates in the IMF’s New Arrangements to Borrow (NAB) — payments from 38 members to supplement the fund’s resources — that comes up for its five-yearly renewal in 2022.
Continued participation after that date will require congressional authorisation. “That will be a really big deal,” Truman says. “The problem in terms of the calendar is that the groundwork requires a positive vote in Congress to guarantee [US] contributions beyond 2022 and that process starts as the next election is taking place.”
Given that the presidential election takes place in 2022, the NAB will be one of the new president’s first decisions whether or not the groundwork planning and negotiation have been done, Truman says. “That’s what I worry about.”
In the meantime, he says the development community is in “wait and see” mode to see what changes, if any, Trump will seek to impose on the IMF. “My guess is that the longer we go without an explicit [split] the more likely it is that they will find the fund a useful instrument of US policy.”
Shift to EMDCs?
But as the famous Kenyan proverb says, when elephants fight it is the grass that suffers. In the case of the IMF, the huge resources, skills and time that were focused on the northern hemisphere crises have diverted attention away from the needs of emerging and developing countries.
James Boughton, a former historian of the IMF and now a non-resident fellow at the Centre for International Governance Innovation, uses an analogy of the destructive impact of Hurricane Irma that swept through the Caribbean and the southern USA.
“Florida has suffered as much as $60bn of damage and millions of people have had to evacuate,” he says. “Those numbers are far larger than the numbers coming out of the Caribbean.
“But the devastating effect on small Caribbean islands is much greater because they are helpless, they don’t have the infrastructure and the ability to get food and medical supplies quickly the way that people do in Florida.
“Even if the damage is a lot less it will be harder to repair because of the lack of resources. The same thing happens on a larger scale when you get the huge problems we get right now such as climate change.”
However, he points out that there is a natural alliance over how the IMF is run between poorer countries and the fund itself, which does not want to be seen to be dominated by rich countries. The question is whether those poorer economies can seize the opportunity that will emerge if the US steps back from its leadership role.
Truman is pessimistic about whether emerging and developing markets would work together to drive through more radical changes to the fund’s governance, such as ending the convention that its managing director is always a European.
“Are we going to see an emerging market dominated agenda? No, because they can’t agree either. You saw that in the procedures for choosing an MD,” he says, pointing out that emerging markets had not been able to agree on a candidate to challenge Lagarde in 2015. “I suspect they are less coherent than the US and less coherent than Europe. And the US and Europe have a blocking majority on anything major.”
Seventy years ago, Roosevelt warned the world was standing at a point in history that was “full of promise and of danger”, saying it would either move toward unity and widely shared prosperity or move apart into necessarily competing economic blocs.
The IMF will certainly use this week’s meetings to flag up its worries over an equally bifurcated outlook now. The issue will be whether it can work with its membership to steer a course towards a more unified, multilateral world.