Washington DC: Even as the odds of the world staving off a fresh economic shock worsened and warnings from the International Monetary Fund (IMF) got shriller, the desired political consensus to forge a palliative continues to elude the conclave of finance ministers assembled here.
Though it is still early days, with the two-day meetings of IMF and the World Bank due to conclude only on Saturday, the initial signals from the US capital are muted. The problem is not the solution, almost everyone agrees on what needs to be done, but the desired political will to implement it is missing. This is unlike in 2008, when almost everyone was blindsided and were united in their reaction to the contagion.
IMF’s managing director Christine Lagarde signalled the problem in as many words in her first press conference after she took charge as the new chief following the controversial exit of her predecessor Dominique Strauss-Kahn.
“The set of solutions and methods to address the situation are quite well known. What is needed, and what certainly we hope to be able to help generate on the occasion of the annual meetings, is the political leadership, and the degree of synchronization that needs to happen for the path to recovery to be made possible,” she said.
The bland statement issued by the finance ministers and central bank governors of the Group of Twenty (G-20) countries on Thursday only reaffirmed these fears. The earlier enthusiasm is missing, largely because some regions outside of euro zone have not been impacted as yet. IMF’s forecast released on 20 September reports an impressive growth of 6.4% in emerging and developing economies, and only 1.6% in advanced economies in the current year.
Similarly, the BRIC (Brazil, Russia, India and China) nations failed to enthuse anyone with their one-page statement released on Thursday. While admitting that there was a need for “decisive” action, it provided only weak support to the idea of global rebalancing. The handiwork of China, whom most believe has to take the lead in effecting the rebalancing, was clearly visible. An insider, who did not want to be identified, disclosed that it took nearly four hours of negotiation to finalize the one-page statement. Unity at this stage is clearly coming at a premium.
Not surprising, therefore, that the onus for a solution has come from IMF, rather than the political body, G-20.
As a senior member of the IMF management team remarked, “The IMF is a technical body and not a political institution. The political initiative has to come from the ministers.”
Easier said than done. The structural adjustment programme that has to be undertaken by countries, as in the case of Greece, will cause what an IMF official described as “pain”. Obtaining the commitment of democratically-elected institutions is a political challenge no doubt.
“There seems to be an amazing sense of complacency. The only positive is that 18 months ago they were not even willing to see the problem. At least now they are united,” the same IMF official said.
Not only is the global economy dangerously poised, but so is the reputation of IMF. Lagarde has bravely positioned herself in the middle of things, leaving her open to criticism if things don’t assume the desired form. At the same time, the legitimacy of IMF, which is seeking a second wind, especially in forging solutions to such global problems, is also at stake.
While the epicentre of the present crisis is the euro zone, there is no reason to believe that other parts of the world will be spared over the medium term. The bigger worry is that most countries have exhausted most of their fire power battling a crisis, which IMF believes started five years ago.
So, any inclement turn in the global economic scenario may find policy planners, even in the so-called better-off regions, out of step. The Indian context, wherein economic growth is slowing, inflation is nearly in double digits and there are clear signs the government will miss its annual fiscal deficit targets, is a case in point.
Already there are warnings that countries may be tempted to resort to protectionism as they deal with shrinking global trade. The World Trade Organization on Thursday cut its estimates for the current year to 5.8% from its earlier forecast of 6.5%. Worse, it warned that there were serious downside risks to even these projections.
Addressing the press in the run-up to the annual meetings, Robert Zoellick, World Bank president, warned, “The thing we now have to be alert to is that given some of the dangers of drop-off in demand, I think it will be tempting for some countries to start to protect their manufacturing sectors, and in that environment you start to get a cycle of policies that become disruptive—as they were in the ’30s.”
In the final analysis, it is clear that the global economy, without an urgent intervention, is sliding into a fresh crisis. The financial markets are already betting that the conclave of finance ministers is unlikely to evolve an adequate response in time. But, will the politicians pull off a surprise?