Why a New Multilateralism Now?
IMF News, December 11, 2018
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- Published: December 11, 2018
Overview
- Speech by IMF First Deputy Managing Director at the Bloomberg Global Regulatory Forum, London, December 11, 2018.
- Central question: Is the international community—individual countries and multilateral organizations—equipped with the resources, policy instruments, and regulatory frameworks to respond effectively to the next financial crisis?
- Key theme: Prepare now to “fix the roof while the sun shines” to prevent a systemic crisis and limit future recessions to “garden variety” downturns.
Risks to National Policy Responses
- Monetary policy:
- Past U.S. recessions have been met with 500 basis points or more of easing by the Fed; with policy rates so low in many places now, that response may not be available.
- Central banks may explore ever more unconventional measures, with uncertain effectiveness.
- Fiscal policy:
- Public debt has risen and, in many countries, deficits remain too high to stabilize or reduce debt.
- If the next slowdown creates unemployment and slack, multipliers will grow larger, restoring some potency to fiscal policy, even at high debt levels, but governments should not be expected to have the ample space they had ten years ago.
- Political resistance to stimulus may increase given high sovereign debt levels.
- Banking and bailouts:
- Financial regulatory reforms now call for bail-ins of owners and lenders; these new systems remain underfunded and untested.
- U.S. market backstops:
- During the Global Financial Crisis, impairment of key U.S. capital markets was contained by unorthodox Fed action supported by Treasury backstop funding; that capacity is unlikely to be readily available again.
- Policy implication:
- National options and public financial resources may be much more constrained than in the past—countries should sustain growth, limit vulnerabilities, and prepare for future shocks.
Five Key Policy Challenges
- First: “First, do no harm.”
- Examples:
- U.S. fiscal choices over the past year (spending increases and tax cuts) risk increasing the potential need for Fed tightening; raising deficits and public debt; and spending resources that might better be reserved to combat the next downturn.
- Escalation of tariffs and trade tensions: IMF estimate that if all threatened tariffs are put in place, as much as three-quarters of a percent of global GDP would be lost by 2020.
- Policy recommendation: De-escalation and dialogue; durable agreements to avoid intensification or spread of tensions.
- Second: China’s emergence as an economic powerhouse.
- Facts:
- China is described as a globally integrated $13 trillion economy (contrast with earlier $1 trillion when it joined the WTO).
- Policy recommendations for China:
- Stronger protections for intellectual property to benefit China as it becomes a world leader in technologies;
- Reduced trade barriers, especially related to investment rules and government procurement procedures, to produce cost-reducing and productivity enhancing competition;
- Acceleration of market-oriented economic reforms to make more efficient use of scarce resources.
- Theme: The “price of greatness is responsibility.”
- Third: Europe’s architectural and macroeconomic challenges.
- Observations:
- Forecasts show growth in the euro area and the UK falling short of previous projections, and modest potential growth going forward.
- The recent EMU agreement on reforms is welcome, but the absence of a common fiscal policy limits Europe’s ability to share risks and respond to shocks.
- Crisis response is constrained because too much power remains vested in national regulators and supervisors rather than an integrated continental approach.
- Policy implication: Push further to shore up institutional foundations so Europe can play a global role commensurate with the size and importance of the euro area economy.
- Fourth: Emerging markets’ divergence.
- Observation:
- Divergence between those that have not shored up defenses (including preparation for normalization of interest rates in advanced economies) and those that have used the recovery to address vulnerabilities.
- Risk:
- Recent capital outflows reflect markets judging perceived weaknesses; if global conditions worsen, outflows could increase and become more volatile.
- Recommendation: Use recovery periods to address underlying vulnerabilities and prepare for normalization of global financial conditions.
- Fifth: Role of multilateral institutions.
- Historical role:
- In nearly 75 years since the IMF was set up, the world has undergone multiple transformations and the IMF has been called upon to evolve and remake itself through successive crises.
- Current context:
- Rising doubt about globalization and discontent with multilateralism in some advanced economies makes modernization and reform of institutions fair and necessary.
The Multilateral Response and the IMF
- IMF lending capacity:
- During the Global Financial Crisis the IMF’s lending capacity was increased to about one trillion dollars.
- Lesson: The IMF went into the crisis under-resourced; avoid repeating that mistake.
- G20 commitments:
- The G20 in Buenos Aires underlined commitment to strengthen the safety net, with a strong and adequately financed IMF at its center.
- Leaders pledged to conclude the next discussion of IMF funding, the quota review, next year.
- Broader idea of “new multilateralism” (as articulated by IMF Managing Director Christine Lagarde):
- Dedication to improving the lives of all the world’s citizens and ensuring economic benefits of globalization are shared more broadly.
- Focus on accountable governments and institutions working together for the common good.
- Capacity to take on transnational challenges no single government can handle: climate change, cyber-crime, massive refugee flows, failures of governance, and corruption.
- Policy implication:
- Greater reliance on multilateral responses and the global financial safety net may be necessary if national tools are limited.
Key Takeaways and Policy Recommendations
- Immediate national priorities:
- Sustain growth, limit vulnerabilities, and prepare fiscal and financial buffers now rather than react later.
- Avoid policy actions that could aggravate future downturns (the “do no harm” principle).
- Trade and cooperation:
- De-escalate trade tensions, pursue dialogue, and seek durable agreements to prevent as much as three-quarters of a percent of global GDP being lost by 2020 if threatened tariffs are implemented.
- China and systemic responsibility:
- Encourage China to adopt measures (IP protection, reduced trade barriers, market-oriented reforms) to limit adverse global spillovers and support sustainable globalization.
- Europe:
- Strengthen EMU institutional foundations, consider mechanisms for common fiscal policy and more integrated supervision to improve crisis response.
- Emerging markets:
- Use good times to shore up defenses against shocks and prepare for interest-rate normalization in advanced economies.
- Multilateral institutions:
- Ensure the IMF and global financial safety net are adequately financed and modernized to meet future challenges.
- Pursue a “new multilateralism” focused on shared prosperity and capacity to address transnational threats.
Source: Speech by IMF First Deputy Managing Director, Bloomberg Global Regulatory Forum, London, December 11, 2018.