Geopolitics Is Corroding Globalization

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As the IMF turns 80, Adam S. Posen argues that the IMF’s core macroeconomic mission must be pursued and prioritized as geopolitical fragmentation corrodes globalization.
Geopolitical politicization of international finance and commerce by China, the European Union, and the United States increases vulnerabilities for all but the largest economies to foreign economic shocks, arbitrary swings in current account balances, interruptions in access to dollar liquidity, and accumulation of unsustainable debt.
The IMF should emphasize its unique role as a multilateral conditional lender and a truth teller on international debt and monetary issues, seeking greater operational independence akin to central banks.

Core vulnerabilities remain inherent to international finance despite the move from fixed to flexible exchange rates:
- Exchange rate flexibility allows for monetary independence and low inflation but does not prevent sudden stops and financial crises.
- Foreign economic shocks continue to transmit with substantial effects on smaller and lower-income countries.
- Capital flows often drive large rapid fluctuations in current account deficits.
- Interruptions in availability of dollar liquidity can cause financial crises.
- Self-insurance by large-surplus economies—through currency manipulation or import substitution via subsidies and tariffs—reduces global growth and imposes recession adjustments on others.
The current cycle: cross-border distrust among the big three economies feeding demands for self-reliance and pressuring smaller economies to choose sides; the IMF may have a brief window to strengthen institutional independence before recurrent pressures mount.
For the first time since the 1980s, military conflicts directly involving major powers’ allies on opposite sides are occurring and are likely to continue, complicating IMF lending and neutrality.

Consistent surveillance of spillovers from self-insurance and politicized market access can yield substantial global benefits from small policy changes by large economies.
The IMF should chide the big three in precise terms—applying the same criteria, frequency, and public channels to each—to preserve legitimacy and avoid mutual nonaggression pacts that hide harmful policies.
Let other institutions address inequality, climate, and development, while the IMF focuses on cross-border spillovers, macroeconomic volatility, and debt/monetary issues.

Narrow the IMF’s mandate to core functions in exchange for greater operational independence in policy decisions; this would help insulate operations from geopolitical pressure.
Seek a mutual agreement among the US, the EU, and China to grant the IMF operational insulation with clear limits on its scope, assuring each that the others cannot exercise undue control.
Consider governance reforms:
- Increase IMF executive board ability to pass decisions by qualified majority voting to restrict the largest shareholder’s veto ability, with exceptions for long-term or quasi-constitutional issues.
- Maintain external evaluation and board accountability for goal setting and policy execution even as operational independence increases.

Adopt stricter and more consistent rules limiting IMF lending to economies at war (example contexts cited: Israel, the West Bank and Gaza, and Ukraine) to avoid perceptions of taking sides during ongoing conflicts and further splintering the world economy.
Provide special facilities or lending on common terms when simultaneous shocks affect many members, and insist that the big three economies change behavior or offset shocks.

Emphasize technocratic evenhandedness and consistent substance/process in member dealings to preserve IMF legitimacy when members are most vulnerable.
Trade scope in areas like longer-term development and global public goods—where others can contribute—for greater institutional independence in the IMF’s core mission of conditional lending and macroeconomic surveillance.
Treat enhanced operational independence as a prerequisite to effectively addressing climate change, pandemics, food security, technology competition, trade wars, real wars, and resulting mass migrations that produce simultaneous macroeconomic shocks across members.

The IMF should resist broadening its remit to pander to major shareholders and instead protect and strengthen its core conditional-lending and surveillance functions.
Greater operational independence, even if coupled with a narrowed remit, is essential to preserve technocratic multilateralism and to act as a bulwark against politicized bullying in market and financial access as geopolitics corrodes globalization.

Source: F&D Magazine, ADAM S. POSEN, June 2024.

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