Containers at Long Beach, California, United States, where current account deficit has reached 6 percent of GDP (photo: David McNew/Getty)
MULTILATERAL CONSULTATION
Today, that deficit has risen to more than 6 percent of GDP and is matched by large current account surpluses elsewhere, especially in China, Japan, and in oil-producing countries.
There are those who argue that these imbalances are sustainable and that the world economy will continue its impressive expansion (see "IMF Offers Compromise Path on Imbalances"). But many, including the IMF, do not think imbalances of this magnitude are sustainable in the long run and believe that action is needed to reduce them before they unravel in an abrupt and disorderly way.
Since 2004, the IMF's International Monetary and Financial Committee (IMFC) has called for joint action to address the risks posed by the imbalances. The IMFC Strategy, as these recommendations have become known, has evolved over time, reflecting the changing nature of the problem.
But in 2006, IMF Managing Director Rodrigo de Rato felt that more urgent action was required, and he suggested that the problem be addressed in a framework involving only the key players. The objective of the first multilateral consultation, as this process is now known, was to seek to reduce the imbalances while maintaining the robust growth enjoyed by the world economy in recent years.
New forum
The purpose of a multilateral consultation is to bring together a small group of countries to promote dialogue on and, eventually, a common solution to a particular problem of systemic importance. To ensure a free and frank exchange focused on policy implementation, the consultations are informal and confidential and involve only high-level policymakers.
The United States, China, the euro area, Japan, and Saudi Arabia all agreed to participate in the first round of multilateral consultations. Some of these economies were direct parties to the imbalances, through current account deficits or surpluses, and some represented large shares of global output. The IMF invited them to participate because those five economies could, as a group, play a major role in both helping reduce the imbalances and sustaining world growth at the same time.
"Looking ahead, the IMF's Board emphasized that the multilateral consultation would ultimately be judged by progress made in reducing global imbalances while sustaining growth, and by implementation of the policy plans."
The consultations began with discussions between IMF staff and each participant, followed by three meetings involving all five participants. The last of these meetings took place in March 2007. In mid-April—just ahead of the meetings of the IMFC—the five countries and the IMF issued a joint report.
In the report, the five countries stressed that reducing global imbalances is a multilateral challenge and a shared responsibility, and that an orderly unwinding of imbalances would benefit all countries in the world. They reaffirmed their commitment to the strategy that had been set out by the IMFC a year earlier and agreed to publish detailed statements of their policy intentions.
Policy plans
Taken together, these policy plans will help countries make significant progress in all the key areas of the IMFC Strategy. IMF staff estimates suggest that, once implemented, these policies could result in a reduction in the U.S. current account deficit of about 1-1 ¾ percent of GDP, accompanied by reductions in surpluses elsewhere.
On July 20, 2007, the IMF's Executive Board met to take stock of the experience with the first round of multilateral consultations and to draw lessons for the future. The 24 Directors, who together represent the IMF's 185 member countries, said the consultation had helped deepen agreement on a coherent medium-term approach that would help implement the IMFC Strategy. They particularly welcomed the individual policy plans of the five participants, which they said would help reduce imbalances while supporting global growth—even if those plans did not always match the level of ambition advocated by the IMF in its dealings with those countries.
The Directors felt that the publication of these policy intentions provided a valuable road map for the future that would enhance public scrutiny and help foster confidence that the international community was working together to address the problem posed by the imbalances. They accordingly viewed the consultations as beneficial from a regional and global perspective.
Monitoring will be key
Looking ahead, the IMF's Board emphasized that the multilateral consultation would ultimately be judged by progress made in reducing global imbalances while sustaining growth, and by implementation of the policy plans. In that regard, some of the IMF's Directors felt that specific time frames and benchmarks would have made it easier to monitor these plans.
In any case, IMF staff would continue to monitor progress both in Article IV consultations with the five countries and in the World Economic Outlook and the Global Financial Stability Report, the IMF's two flagship publications. The Directors also stressed that while the five countries will have to play a key role in facilitating an orderly adjustment, other countries also must play their part.
More generally, the Directors considered that the new approach constituted a valuable new instrument for enhancing and deepening the IMF's multilateral surveillance—particularly that involving medium-term problems of systemic or regional importance. Although it was too early to draw any final conclusions, the IMF's Board underscored the need to maintain operational flexibility. The Directors also noted that multilateral consultations were likely to be most effective when undertaken against the backdrop of significant analysis by IMF staff and discussions in the Board.
Finally, the Directors underscored that involvement of the Board and the IMFC at the appropriate time is crucial to enable the Board to conduct surveillance, give the process legitimacy, and allow the international community to assess results.
The author is a Deputy Director of the IMF's Western Hemisphere Department.
