Martin Wolf: The Future of the IMF – F&D | The IMF at 75
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- Authors: MARTIN WOLF
- Published: June 1, 2019
Major transformations in the global environment
- Shift in global economic power:
- In 2000, advanced economies generated 57 percent of global output, measured by purchasing power parity.
- By 2024, according to IMF forecasts, that share will fall to 37 percent.
- China’s share will jump to 21 percent from 7 percent.
- The rest of emerging Asia will account for 39 percent of global output, compared with 14 percent for the United States and 15 percent for the European Union.
- Increase in great-power rivalry and deteriorating relations between Western powers and a rising China.
- Rise of populist politics in advanced economies, with increased suspicion toward technocratic expertise and international technocratic institutions.
- Slowdown or reversal of globalization:
- Example: dramatic decline in the foreign claims of euro area banks (Lund and others 2017).
- Prior to the transatlantic financial crisis, world trade volume grew almost twice as fast as world output; now trade and output grow at about the same rate.
- Emergence of outright protectionism in the United States.
- Technological change:
- Internet and advances in artificial intelligence bring new vulnerabilities and upheavals, including cyberattacks and massive shifts in labor markets.
- Increase in financial fragility:
- Ratio of debt to gross output has increased.
- Debt has shifted from the private to the public sector and to some degree from advanced to emerging market economies.
- Secular stagnation:
- Weak demand indicated by low inflation and ultralow real and nominal interest rates appears structural and likely to persist, limiting room for conventional or conventionally unconventional policy responses.
- Rising salience of climate change as a policy issue with important effects on development strategies and macroeconomic policies, particularly in poorer and more vulnerable countries.
IMF’s learning, adaptations, and expanded agenda
- Institutional adaptability and quality:
- The IMF’s most durable characteristic has been its ability to adapt to successive changes in the world, reflecting high-quality staff and usually competent management.
- Areas of improved practice:
- Revaluation after the transatlantic crisis of the impact of government spending cuts and tax increases on growth.
- Vastly improved surveillance of financial risks via the Global Financial Stability Report and World Economic Outlook and in work on member countries.
- Recognition that liberalizing capital flows carries risks as well as benefits.
- Reform in response to the euro area crisis:
- Worked with euro area institutions on country programs with some successes and notable shortcomings (notably Greece).
- Reformed the IMF’s lending framework for countries with high sovereign debt.
- Ended exemptions—from mandatory debt sustainability as a condition for Fund support—in the case of systemic crises.
- Engagement with fragile states:
- Stepped-up engagement requiring new and imaginative approaches to securing political and institutional transformation.
- Expansion of policy scope beyond historical competence:
- Taken up income and wealth inequality, gender inequality, corruption, and climate change.
- Noted the Fund’s valuable work on fossil fuel subsidies and the cost of corruption.
- Institutional weaknesses and constraints:
- Limited capacity to influence actions of countries with robust balance of payments positions or of the United States, the issuer of the world’s reserve currency, the dollar.
- Susceptibility to conventional wisdom and the influence of powerful countries; past underestimation of perils of financial liberalization.
Key challenges and priorities going forward
- Internal intellectual tasks:
- Reconsider monetary, fiscal, and structural policies in the context of ultralow interest rates, low inflation, large debt overhangs, and secular stagnation.
- Prepare for policy responses to the next downturn, including questions about mass restructuring of private or sovereign debt and the assessment of unorthodox perspectives such as “modern monetary theory”.
- Deepen engagement on political economy issues (for example, the politics of removing subsidies) and on the economic impact of artificial intelligence.
- Consider whether more staff expertise in the politics of change is needed and whether more staff should reside permanently in member countries.
- A detailed review of the IMF’s way of working is recommended.
- Three central external/institutional challenges highlighted:
- Voting shares and governance:
- Current voting shares: EU members (including the United Kingdom) currently have 29.6 percent of votes; the United States, 16.5 percent; Japan, 6.2 percent; Canada, 2.2 percent; China, 6.1 percent; India, 2.6 percent.
- Argument: Voting shares should be aligned with each member’s economic importance and reweighted, especially toward Asia, to maintain global relevance.
- Financial firepower:
- IMF’s lending capacity is currently just $1 trillion.
- Global foreign exchange reserves total $11.4 trillion.
- The disparity demonstrates perceived inadequacy of IMF resources and the perceived costliness of gaining access to them; moral hazard concerns exist but do not eliminate the case for adequate insurance and a robust safety net.
- Leadership and legitimacy:
- If the institution is to be credibly global, its top job cannot be permanently left in the hands of a European.
- Global institutions need the best global leaders, chosen openly and transparently with candidates required to submit platforms for the institution’s future.
- Overarching requirement:
- The IMF must remain relevant to all members by producing work of the highest intellectual quality and integrity, especially in surveillance, even if this sometimes irritates the subjects of the Fund’s judgments.
Final reflections: adaptability and the necessity of cooperation
- The IMF’s marriage of professionalism with a will to cooperate has made it a cornerstone institution.
- Adaptability will continue to be essential, but the Fund also needs a world in which dominant powers believe in professionalism, multilateralism, and cooperation.
- The IMF can guide but cannot shape the world; its fortunes will follow those of the international environment.
Martin Wolf: The Future of the IMF – F&D | The IMF at 75
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