IMF: the global rebalancer4 min read . Updated: 12 Sep 2010, 07:52 PM IST
IMF: the global rebalancer
IMF: the global rebalancer
At its most recent meeting in Toronto this spring, the Group of Twenty (G-20) agreed to disagree. Even though the world economy is desperately in need of rebalancing, its declaration was deliberately vague enough to accommodate any set of domestic policies that countries might choose. Everyone came away thinking that they had won, but the world largely lost.
World trade is highly imbalanced. Households in the US, having spent too much, are now weighed down by debt. Exporters in Europe and Asia have become excessively dependent on selling to the US and other, now-weakened, economies such as Spain and the UK. Myopic actions on both sides have helped entrench a longer-term pattern of behaviour that only makes it harder to move away from today’s unsustainable equilibrium.
As ever, change upsets the cozy status quo and the interests that benefit from it. For example, the real estate lobby in the US obviously has no desire to see government support for housing diminish, despite the fact that the US probably has far more housing stock than it can afford. Similarly, the export lobby in China has no interest in a strong renminbi, even though it is in China’s long-term interest to let its currency appreciate.
We keep hoping that somehow meetings of heads of state will magically produce the policies that will rebalance world trade. Unfortunately, the macroeconomic changes that countries must make involve actions to which even heads of state are unable to commit.
No US president can unilaterally agree to alter the pattern of government support and spending; that is a decision for Congress. Similarly, no Chinese president can unilaterally agree to allow the renminbi to appreciate faster; that is a consensus decision reached together with the various apparatchiks in the State Council and Communist Party. Moreover, the necessary reforms in both the US and China go well beyond these two steps. They require deep, fundamental changes.
So we are caught between a financially unsustainable pattern of global demand and the need for politically difficult changes in many countries’ domestic policies. All politics is local, and there is no local constituency for the global economy, so what triumphs often erodes global imbalances further.
The G-20 asked the International Monetary Fund (IMF) to prepare a road map for the policies that countries will have to follow to restore stable global growth. But neither the G-20 nor IMF can impose its will on national governments—nor should they. How, then, can we go beyond ritualistic meetings that do little to advance the global agenda?
Obviously, we need more political support for that agenda. Perhaps non-governmental organizations (NGOs) such as Oxfam or Mothers against Land Mines suggest a way. These movements use pressure from below to convince political leaders that there is domestic support for international agreement.
The ability of grass-roots movements to influence policy is set to increase. As the power of the Internet spreads through social and political networking sites, and as virtual democracy grows, this bottom-up influence is likely to grow. Those who want to influence political leaders must get used to convincing their masters, the people, directly.
Unfortunately, it is difficult for existing NGOs to take up the cause of popularizing global economic policy coordination. Unlike hunger or land mines, the cause of rectifying global trade imbalances will not touch the public enough to attract the donations that are necessary to keep NGOs afloat.
But there is an organization that could do the job: IMF. If IMF reoriented a substantial portion of its activities towards influencing the influential among the world’s public, it could have far more impact on global macroeconomic policy, especially policies followed by countries that do not need its loans, than it does today.
IMF is currently under-equipped for this task. If it is to improve its persuasive capabilities, it must learn to become more like grassroots activists, with punchy prose, clear policy recommendations, and TV-ready talking points. It must go directly to the public—including political parties, NGOs, and influential figures—in each country, and explain its position. IMF must also do more to enhance its presence on the Web and in school and university classrooms, especially as students are often the most receptive to ideas about global citizenship.
Above all, IMF must change how it is perceived from outside. It must be seen as an institution that respects each country’s sovereignty but works for the global good. A transparent and fair process of arriving at its policy recommendations, based primarily on convincing economic research and data analysis, will be essential. Countries will have to agree to accept and facilitate IMF’s direct engagement with their influential citizenry as long as it is carried out in good faith. IMF’s expression of its economic views to local public should then be protected by international agreement, much like embassies and their activities.
If we can make these changes— and one should not minimize the scale of the task—perhaps when G-20 leaders meet in the future, they will not think that their citizens have little interest in the outcome. Instead, they will have a political mandate to attend meaningfully to the welfare of the global economy.
Raghuram Rajan is professor of finance at the Booth School of Business, University of Chicago, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy
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