OF SUBSTANCE AND SPIRIT
After the International Monetary Fund-World Bank (IMF-WB) spring meetings last week, a fair question to ask is what’s next? If there’s anything that the world’s central bankers and finance officials could have brought home, it must be the IMF managing director Kristalina Georgieva’s summing up in her Global Policy Agenda.
And it is not exactly bright.
The Fund chief captured the sad news that the global economy has become more uncertain, that the tentative signs of restoration which emerged in the early part of 2023 have actually retreated. The outlook is many times riskier.
What is most disturbing is the observed deepening disconnect “within and across countries” alongside global fragmentation. Given the global dimension and the depth of the challenge, what is required is no less than a strong policy approach that leverages on commonalities among countries to face the shared challenges together.
Holding hands could not be more relevant than today.
As Ms. Georgieva asserted: “The world economy has proven remarkably resilient to the multiple shocks of the last three years, but it is yet to overcome the combination of weak growth and sticky inflation.”
Yes, the Fund can hold countries together to keep the response more global, or one that is not insular. With a membership of 190 countries bound by its Articles of Agreement, the Fund is authorized to conduct the surveillance of the international monetary system as well as the monitoring of the members’ economic and financial policies, provision of Fund resources as needed and delivery of technical support and financial services. Through its semestral meetings, the Fund is in a position to assess the current global situation, crystallize a common understanding of how the key pieces might play out, and the policy prescriptions that would make sense in a global context.
Indeed, a strong coordinated policy action is necessary today.
Three priorities have come out of the spring meetings.
First priority is to protect economic and financial stability to permit stronger growth, lower inflation and reduced debt burden, as well as motivate world trade. Second priority is to assist vulnerable countries to economic shocks through financial support and possible debt relief. Third priority is to secure our future prosperity by joint efforts to address climate change and digitalization.
While the Fund could always render its institutional support to member countries by way of macro-financial advice, financial support and capacity development to equip and strengthen member countries’ capacity to manage various shocks, it is crucial for all member countries to come and work together.
As a start, many big member countries should be prepared to see a more equitable reconfiguration of members’ quotas. The world has changed in the last 20 years, with some countries expanding their economic importance while the others have shrunk. Such should be mirrored in the quota structure.
With the US leading the opposition to the revision of the quotas, the Fund has effectively delayed a necessary restructuring of its members’ quota distribution since 2010. US is not prepared to accept possible dilution of its veto power over major Fund structural decisions. But even US Treasury Secretary Janet Yellen now agrees that while Fund resources appear sufficient to handle future crises, she believes the Fund “needs to follow through on its commitment to a new quota formula that is both fair and simple and primarily reflects the economic size of its member countries.”
Keeping the Fund as a quota-based institution will help make its resource level more predictable.
Should there be a final decision on the quota by the end of this year, it should be China which is expected to benefit the most given its second highest total output and highest international reserves level. For China, as our friend People’s Bank of China Governor Yi Gang correctly clarified, the quota issue is crucial “to fundamentally enhance the Fund’s legitimacy, effectiveness and representativeness.”
Another instance when we can work together is in pursuing some of the priorities that the Fund extracted from the debates during the spring meetings. For instance, preserving overall stability would require some enlightened policy on the part of some key economies in supporting countries against the risks of heavy debt burden and protectionist trade.
Additional richer economies could join in extending debt relief under the heavily indebted poor countries initiative of both the IMF and the WB. Interest-free loans and grants as well as concessional loans are accessible to the world’s poorest countries depending on their eligibility. What is required is their willingness and ability to undertake strategic reforms in their economies. The result is a very empowering fiscal space that leaves more room for undertaking infrastructure and social services than for debt servicing. Without doubt, this should translate into higher capacity to grow, manage debt and engage in expanded trade. Rich countries will not exactly be sacrificing a great deal because the smaller economies, once empowered, are good markets for their own products and services. This should be a win-win game for everyone.
Non-tariff barriers like quantitative and administrative restrictions, sanitary and phyto-sanitary measures and even countervailing duties by this time should give way to a more economically sound policy on international trade. Otherwise, restraining competition within economies would only serve those sectors enjoying regulatory capture, and across countries, preventing them from realizing higher standards of living from increased world trade.
True, working together in the macro-financial context could be a tall order because of strong economic interests involved. But recent events prove that political and diplomatic challenges are even more difficult to handle.
The prime example is the brave face that the G-7 countries, whose foreign ministers met in Japan a couple of days ago, should put up to project a united front against China. French President Emmanuel Macron just spewed out a firestorm by declaring that Europe should avoid “crises that aren’t ours.” How to override this would truly be a tipping point in the industrial countries’ commitment to the “international order based on the rule of law.”
Appeasing China and keeping the US guessing is not exactly the way to establish balance and stability in Asia. Political masters should be aware that their decision could ultimately shape the kind of macro-financial outcome this year and in the near future, even with handholding.