By Valentina Pasquali
In conjunction with the International Monetary Fund/World Bank annual meetings in Washington, Global Finance presents its annual IMF/World Bank Issue.
When the eurozone logged 0.3% growth in the second quarter of 2013, ending a streak of six consecutive quarters of contraction, the world breathed a sight of relief. Though emerging economies appear to be expanding at a slower pace than in recent years, the news coming from Europe, along with the sluggish but steady recovery in the United States, represents at least a preliminary indication that developed countries may finally have turned the corner from the deepest recession in a generation.
Against this backdrop of changing economic dynamics and mounting though cautious optimism, central bankers and finance, trade and development ministers from all over the world will descend on Washington, DC, in mid-October for the annual meetings of the International Monetary Fund and the World Bank. Discussions are expected to be wide-ranging, but a few issues are virtually unavoidable: fiscal policy in the framework of high unemployment; Greece’s ongoing bailout; financial regulations, particularly in Europe; and the highly unusual monetary policy that has been adopted in several developed countries, particularly the United States.
“This year’s meetings will be the first in some time when policymakers can actually discuss different paths for the future and ways to get there,” says Douglas Rediker, visiting fellow at the Peterson Institute for International Economics in Washington and former US representative on the IMF’s executive board from 2010 to 2012. “As we move into this next phase, it is very likely that differing positions may harden and consensus policy choices become more, not less, elusive.”
All eyes are on the US Federal Reserve and its chairman, Ben Bernanke: How the Fed chooses to time and pace the tapering of quantitative easing (QE) pursued over the past couple of years is bound to have repercussions around the world. Already, leaders from developing countries are complaining that their economies are suffering because of decisions made by officials thousands of miles away—in Washington.
However situations vary from country to country, it is not clear that the developing world can really speak with one voice at the meetings. “QE affects portfolio flows more than it affects FDI (foreign direct investment), and therefore countries that depend on FDI, like China, are less impacted than countries that depend on portfolio flows, like India,” says Manmohan Agarwal, an Indian economist who has worked for both the World Bank and the IMF and is now a senior fellow at the Canada-based Centre for International Governance Innovation.
“The bottoming out in Europe is emboldening EU and German officials who claim that austerity has ‘worked,’ but even in the best case, it is likely that Greece will require another debt restructuring.”
– Benn Steil, Council on Foreign Relations
Tensions between developed and developing economies over how to tackle policy questions that affect the world at large are long-standing and are likely to resurface again in Washington this year, though observers believe they will be more muted than in the past. Negotiations hit a wall in 2011, when the IMF’s European shareholders pushed for the appointment of French national Christine Lagarde to head the organization. “Developing countries are caught in a bind in the sense that, individually, they are very weak and therefore would like to have a stronger multilateral organization,” says Agarwal. “But if that multilateral organization is completely dominated by developed countries, it’s like being between a rock and a hard place.” Though there is no desire on their part to break from the IMF or the World Bank anytime soon, over the long term emerging economies might find other more suitable platforms, such as the G20, to explore alternatives to the current setup. Already on the table is a proposal for the creation of a BRICS bank, or South-to-South bank: an international institution that would specifically serve the development needs of emerging economies.
In the meantime, an IMF governance structure reform that was agreed on more than three years ago is still pending ratification by the US Congress. The plan would double the Fund’s equity capital and shift some power from developed to developing countries. Republicans in the House oppose it because, in theory, it would require the US to up its contribution to the IMF, although in practice—because of existing arrangements—it would only entail a shift of already-appropriated funds. “This has obviously been a bit of an irritant to other countries that have already approved these reforms and are anxiously awaiting revised representation to bring the board and quota share more in line with global economic realities,” says the Peterson Institute’s Rediker.
EUROZONE ACRIMONY
The IMF’s involvement in the eurozone crisis represents another sticking point. In July, Paulo Nogueira Batista, Brazil’s executive director at the Fund, openly opposed the disbursement of the latest installment of aid to Greece. The Brazilian government later recanted. But with rumors already swirling that Athens might need yet another bailout, and financial conditions in the developing world taking a turn for the worse, the issue has not been put to rest.
“I think [Batista] had a point, because the Greek economy is in shambles,” says Renato Baumann, director for international economic and political relations at the Institute for Applied Economic Research, a public foundation linked to the Strategic Affairs Secretariat of the Brazilian presidency. “But what could the alternative be? Are we just going to leave Greece to its own devices? I think this is out of the question. He should have raised the issue, which is real, in some other way.”
Though somewhat improved, Europe’s still-fragile economy constitutes a quagmire of its own. The banking sector needs shoring up and a framework of stronger financial regulations. Additionally, the crisis has long pitched supporters of opposing fiscal policies—aimed at helping the continent out of the recession—against one another, in the fierce debate over the benefits of “austerity versus growth.” This dispute is not yet resolved, and whichever way the tide turns might have profound implications for the future of eurozone economic stability. “The bottoming out in Europe is emboldening EU and German officials who claim that austerity has ‘worked,’ but even in the best case, it is likely that Greece will require another debt restructuring next year,” says Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations in Washington. “The question is whether Greece can be effectively quarantined, keeping defaults from spreading to Portugal, which would threaten the Spanish banking sector and in turn the entire European recovery.”
All in all, this year’s annual meetings of the IMF and the World Bank might avoid the sense of impending doom that characterized them in recent years, but there are still plenty of complicated questions about long-term global economic stability that need addressing. Especially if the expected monetary policy tightening in developed countries ends up triggering a financial storm in emerging markets.
With inflation on the rise and food prices spiking from India to Egypt to Brazil—a vicious cycle only made worse by growing political instability in the Middle East, which threatens the safety of the region’s residents and also negatively affects energy and commodity markets globally—these conditions could endanger such lofty efforts as the Millennium Development Goals campaign, led by the United Nations and World Bank, which aims to cut by half the number of people living in extreme poverty by 2015.
