Like Cassandra, the IMF’s Warnings Will be Ignored This Week
The International Monetary Fund will be back in the news this week. Excoriated in the 1980s as the symbol of international capitalism then hailed as saviour of the world economy during the global financial crisis, it is again struggling to find a role.
After being criticised for failing to spot any sign of the crisis and the subsequent recession in 2009 and 2010 - although it was far from alone - the IMF has since sought to balance its role as premier economic forecaster with that of an early warning system. A Cassandra with a PhD, if you like.
This week will see it publish its keynote World Economic Outlook (WEO) with forecasts for every region and country in the world on everything from growth to the likely volume of exports through to the year 2022.
As any forecaster knows, there is a good chance that few - if any - of those pinpoint predictions will turn out to be accurate. But they give a general sense of the direction of travel and, as such, will garner big headlines in Wednesday’s newspapers around the globe.
But at the same time the Fund will seek to inject several notes of caution.
finance ministers need, to borrow from President Kennedy, to mend the roof while the sun is shining
Its managing director Christine Lagarde, a former French finance minister who has run the giant institution since 2011, has given a flavour of the WEO in a speech last week. The long-awaited global recovery is “taking root”, she said and gave a clear indication that it would upgrade its outlook for global growth from the 3.5% for 2017 and 3.6% for 2018.
This good news will make it harder for Lagarde to hammer home her message that finance ministers need, to borrow from President Kennedy, to mend the roof while the sun is shining.
And the economy’s roof certainly has quite a few tiles, struts and beams missing. Top of the list is productivity which has stagnated across the West. Growth in the output of each worker is the key to economic growth but yet it has dropped to 0.3% per year, down from a pre-crisis average of about 1%.
Boosting productivity, a factor in lifting wages, requires, among other things, cutting red tape, increasing spending on research and development, and investing in infrastructure. Finance minister will doubtless nod, go away and continue to do precisely none of those things.
A third worry is excessive global trade and current account imbalances
Almost as worrying is the failure to implement wholesale reform of the global financial system whose behaviour was a key factor behind both the start and the spread of the financial crisis. Unlike the reforms that were put in place after the 1929 Wall Street Crash, the financial system is still in pretty much the same place it was. Banks remain undercapitalised and mergers and rescues have left us with fewer and larger banks than before; no one has gone to jail for any act of misfeasance; regulations in the US have been watered down thanks to heavy lobbying and may be diluted further under President Trump; the credit ratings agencies that endorsed what turned out to be highly risky bonds as AAA instruments are still hot-wired into the system.
A third worry is excessive global trade and current account imbalances - huge surpluses in China, Germany and many Opec states and record deficits in countries such as the United States and the United Kingdom - that threaten another bout of financial and exchange rate instability. China and Germany have not shown any willingness to increase domestic consumption and spending on imports that would be needed to bring more balance.
The irony is that taking action against surplus countries was exactly what the IMF was meant to be able to do: British economist John Maynard Keynes proposed at the Bretton Woods conference in 1944 that established the Fund, that creditor and debtor countries be penalised equally and symmetrically to avoid all balance of payments adjustment being placed on debtor countries. As the United States was then a surplus country its chief negotiator, Harry Dexter White, blocked the move. As a result, the burden of maintaining a balance of trade rests on the deficit nations, and there is no limit on the surplus that rich countries can accumulate.
History shows that it requires a major disaster such as the 1929 crash, the Second World, or the Global Financial Crisis to prompt serious financial and economic reform. Given that leaders missed the chance in 2009, the IMF can only carp from the sidelines - like Cassandra before the fall of Troy - and wait for the next systemic shock.
About the author
Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.
Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.
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