What the IMF Can DoA Commentary by Rodrigo de Rato
International Monetary Fund
First appeared in the International Herald Tribune
April 19, 2006
We live in a time of strong global growth, low inflation and buoyant financial markets. But many observers have been increasingly preoccupied of late with the possibility that rapidly growing global imbalances could lead to a worldwide economic crisis.
There is also concern about the failure of the international community to agree on a collaborative response to the problem. As the international institution charged with ensuring the stability of the global economy, the International Monetary Fund has a leading role to play in developing a response - a role that will be strengthened by current reforms.
The international community needs to work together so that the necessary actions are both politically feasible and economically effective - and the IMF, with its constituency of 184 member countries, needs to help foster that cooperation. That goal is a key component of a medium-term strategy for the fund, now being implemented, that I initiated last year.
The most visible aspects of global imbalances are the very large deficit in the U.S. current account and the correspondingly large surplus in the external accounts of other countries. These include the oil exporters, Japan, and the countries of emerging Asia, especially China.
In some countries, the surpluses have produced a large buildup of foreign currency reserves, while U.S. external indebtedness has grown rapidly. Meanwhile, Europe's economic growth has been hindered by unproductive product and labor markets. At the same time, Japan's recent rebound is helping to better balance global growth.
The IMF, together with others, has identified steps needed to reduce global imbalances: fiscal adjustment and measures to stimulate private saving in the United States, exchange-rate appreciation and policies to stimulate domestic demand in emerging Asia, and structural reforms to stimulate demand and improve productivity in Europe and Japan.
So far there has been little action, however. Some believe the problems will gradually solve themselves. Others emphasize the need for action - but by other countries. The danger here is that a disorderly adjustment of imbalances could be produced either by inaction or unbalanced actions.
So the question is how to get things done. The IMF can play a more effective role by moving beyond analysis. It needs to be more systematic and persuasive in the way it provides policy advice to its members.
First, the fund needs to focus - and publicize - advice to individual countries where economic developments or vulnerabilities may have significant regional or global impact. This includes an increased emphasis on financial markets, the foundation of many recent crises.
Second, the IMF's policy discussions with individual countries should be complemented by multilateral consultations. This would allow the fund to take up issues comprehensively and collectively with systemically important members and, where relevant, bodies like the European Union or the Gulf Cooperation Council.
Third, there must be more emphasis on exchange rates, and especially a more comprehensive assessment of the relationship of exchange-rate policies to national and international stability. Exchange rates have always been at the heart of the IMF's analysis of members' policies, but the time has come to refine this analysis and conduct it within a multilateral framework.
Fourth, emerging market countries are telling us that our existing lending programs do not meet their needs. In response, I have proposed that the IMF offer contingent financing in a predictable manner. This financing should avoid either stigmatizing countries or creating moral hazard - sending inappropriate signals to the markets about the safety of investments. It would be designed for members who might face balance-sheet vulnerabilities despite strong macroeconomic policies, sustainable debt, transparent reporting and a good policy track record.
Finally, the whole international community must feel it has a voice in the IMF. The time has come to change the pattern of voting rights to give emerging-market and other countries a greater say in IMF decision-making. In particular, greater weight must be given to Asia. The fund's effectiveness suffers if countries of growing economic importance are not adequately represented.
The debate about global imbalances is one of the most important of our time, as a disorderly resolution of these imbalances could spark a global recession. The IMF is prepared to be part of the solution, by taking measures that include reforms to make the fund more effective.