Call them the “Wolfowitz meetings”. Last weekend’s spring meetings of the International Monetary Fund (IMF) and the World Bank were supposed to offer a forum to address global imbalances. Instead, the fate of Paul Wolfowitz was all anyone could talk about.
Would the World Bank president resign? Would he be sacked? Would he survive a scandal over his role in promoting his girlfriend and giving her a huge pay raise? Whether a man who acted in such a manner has the credibility to root out corruption in developing nations is another question we’re still grappling with in Asia. The reason: Wolfowitz, unfortunately, refuses to go away.
Sadly, the same is true of the imbalances World Bank- and IMF-meeting attendees should have been discussing. Thanks to the denial pervading the halls of power from Tokyo to Washington, the global system may be even riskier than it was a week ago. Its problems will merely fester below the surface a bit longer.
Japanese officials, for example, returned to Tokyo thinking they had got a green light to maintain a weak yen. US officials returned to Washington lacking urgency to reduce their current-account and budget deficits.
European policymakers headed home after making vague pledges for structural change.
Finance chiefs from the Group of Seven nations—which met on 13 April—chose to accentuate the positive, expressing confidence that global growth will reduce lopsided trade and investment flows. Demand in Asia and Europe, they said, is strong enough to offset a slowdown in the US, ease trade gaps and extend the strongest world expansion since the 1970s.
They were arguably the most positive remarks from the G-7 in the last four years. And yet, it’s hard not to sense a certain hollowness in the G-7’s words. That’s especially true when you consider the experiment with the so-called multilateral consultation IMF announced last summer.
At the time, the plan was for China, Japan, the euro area, Saudi Arabia and the US to brainstorm on correcting global imbalances.
Predictably, the most recent IMF meeting came and went without real progress on the endeavour.
Sure, officials claimed success. Rodrigo de Rato, the IMF’s managing director, said it was significant that the five economies have “willingly accepted a joint document and shared responsibility on global imbalances”.
De Rato’s deputy, John Lipsky, added: “There was agreement among each of the participants in the multilateral consultation that their proposals were in their own interests as well as in the general interest.”
Don’t believe the hype.
China, for example, said it would tolerate a stronger yuan provided the move unfolds in a “gradual and controllable manner”. It’s a safe bet the emphasis will be on “gradual” amid China’s need to employ its 1.3 billion-plus population. Same old, same old.
Euro-area economies and Japan agreed to modernize labour markets and strengthen competition. Again, how is any of that new? Ditto for the US’s pledge to cut its fiscal deficit and Saudi Arabia’s plans to boost investment in the oil sector. We have heard all of this before—often, in fact.
While a distraction, the Wolfowitz controversy may not deserve all the blame here.
The truth is that none of the nations involved are willing to take responsibility for the respective imbalances, pointing the finger elsewhere.
The US says Asians saving too much are behind the lopsided nature of global growth. Asians argue a lack of US savings is what has driven things so out of whack. Europeans blame their competitiveness problems on undervalued Asian currencies and a strong euro.
The reality is that there’s plenty of blame to go around, and finance officials probably didn’t mind that Wolfowitz’s woes diverted attention elsewhere. It’s a dangerous brand of denial that may come back to haunt policymakers should something go wrong in the global financial system.
Risk has been underpriced in markets on the assumption that with Asia booming and Japan and Europe growing, a US slowdown need not spoil the party in equity markets. Markets, meanwhile, are thought to have become so sophisticated and self-correcting that last September’s $6.6 billion implosion of Amaranth Advisors LLC barely made waves.
Likewise, “the official sector is now inclined to stop fretting about risks associated with the US external deficit and indeed to celebrate strong global growth that has accompanied the rise in the US deficit,” Brad Setser, director of research at Roubini Global Economics LLC in New York, wrote in his blog.
It’s one thing for investors to pretend all is well in the global economy. It’s another for public officials who ought to know better to engage in denial. What if the dollar crashes, as many analysts have been predicting? What if the so-called yen-carry trade blows up? What if there’s turmoil in China? What if a trade war between the US and Asia shakes up global markets?
Amid so many what-ifs, it would be comforting to see finance officials rolling up their sleeves to right the global economy.
It should be reason for concern that they aren’t. (Bloomberg)