Stewart M. Patrick

The Internationalist

Patrick assesses the future of world order, state sovereignty, and multilateral cooperation.

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Winter is Coming: Beyond the IMF-World Bank Spring Meetings, an Unfinished Battle for Reform

by Guest Blogger for Stewart M. Patrick
April 11, 2014

International Monetary Fund (IMF) Managing Director Christine Lagarde enters the opening of a news conference in Washington April 10, 2014 (Gary Cameron/Courtesy Reuters).


Below is a guest post by Claire Schachterresearch associate in the International Institutions and Global Governance program.

The Spring Meetings of the IMF and World Bank Group are underway in Washington, DC. The world’s top finance officials are painting the brightest picture of the global economy since the 2008 financial crisis: global growth is picking up, the United States’ recovery is gaining traction, and the future of the euro appears less precarious. But if one steps back to view the scene with a broader perspective, the portrait darkens. From slower emerging market growth to risk in China’s shadow banking sector to weak internal demand in the southern part of the euro area, the steady recovery of the global economy is hardly a sure bet. Unfinished economic and financial policy reforms litter the post-2008 landscape. A renewed commitment to improving the resilience of the global economy from domestic leaders and international financial governance institutions is critical.

Global economic stability remains at risk from six persistent challenges, each of which is within the power of the leading economic nations to address:

  1. China’s internal economic vulnerabilities. China’s announcement of further steps toward gradual market liberalization in 2013 was encouraging, but these reforms cannot compensate for the underlying structural weaknesses that could further slow China’s growth. Weak domestic demand and China’s dysfunctional credit system are particularly concerning. Shadow banking is now under more domestic and international scrutiny than ever, but if China’s leaders do not continue to push for greater oversight of unregulated lending, the economy will stumble, as will those emerging markets that export heavily to China, the destabilizing effects of which will be impossible to contain. How the Communist Party responds to the bankruptcies that are sure to come in the next year will be an important indicator as to the government’s commitment to reforming the banking system.
  2. The United States’ fiscal irresponsibility. When U.S. policymakers bicker endlessly over the federal budget, they risk delaying America’s recovery and jeopardize the United States’ position as a global financial leader. They also undermine the United States’ capacity to anchor the global economic recovery. The United States has an opportunity now to regain the trust of global investors. As the Fed moves toward more normalized monetary policy, U.S. policymakers should take the opportunity to normalize their fiscal policy deliberations. This would be a reassuring signals to Americans and the world that another destabilizing budget crisis will not be permitted.
  3. The structural weaknesses of emerging markets. The tightening of U.S. monetary policy means that the economic environment is only going to get tougher for emerging markets, especially Brazil, South Africa, India, Turkey, and Indonesia—the so called “fragile five.” These countries should prepare themselves for market conditions that could further undermine their growth prospects. Short-term, inefficient fixes, like raising interest rates, hoarding international reserves, and regional currency swap arrangements are far easier to implement politically than structural reforms to increase productivity. But such responses to slower growth will not increase the resilience of these markets in the long run. Emerging markets could better safeguard their own economies and global stability by reacting strategically rather than reflexively to the U.S. recovery.
  4. The unfinished recovery and reform of the euro area. Though the worst of the euro crisis has passed, growing imbalances between northern and southern countries do not bode well for a uniform return to growth. The European Union’s struggle for financial reform also lost momentum in the past year. A full recovery will not occur without a strong banking sector, which means that banking supervision reforms cannot be left to languish—a functioning Single Supervisory Mechanism, as well as securing consensus among member states on the parameters of the Single Resolution Mechanism and Single Resolution Fund, is imperative. If EU member states push ahead with moving supervision and support for banks to the supranational level, European political and economic integration will have a decent chance at survival and the prospects for a truly global economic recovery will improve.
  5. Increasingly unrepresentative international institutions. The failure of IMF members to implement the governance and quota reforms approved by the IMF Board of Governors in 2010 represents a significant step back. European resistance and the intransigence of the U.S. Congress has left Europe overrepresented at the Fund, which undercuts the legitimacy of the institution—as does the U.S.-European grand bargain of appointing the heads of the IMF and World Bank. Integrating emerging economies into international financial decision-making structures is long overdue, and the volatility of the new global economy clearly requires institutions with a deeper capacity to anchor the international monetary system. The advanced economies will have only themselves to blame if the next stage of the global recovery proves bumpier because influential actors (i.e., China, India, and Brazil) are increasingly frustrated at the stalled reforms.
  6. Global economic imbalances. Six years after the 2008 financial crisis began, destabilizing global economic imbalances persist. Current account imbalances between deficit and surplus countries—and the risks these pose to financial stability—have narrowed somewhat since 2008, but largely as a result of falling global demand and this decrease remains insufficient. The Mutual Assessment Process (MAP), which was launched by the G20 in 2009 as a mechanism to enhance economic policy coordination among G20 member states, has underperformed. The G20 should redirect the MAP to focus on the body’s core financial priorities, and reform the process’s deliberative procedures, thereby ensuring that a desire for consensus does not discourage member states from discussing the most divisive and potentially destabilizing issues.

Unfinished reform—whether of American and European banking supervisory mechanisms or the governance of the IMF and the World Bank— is becoming a depressing hallmark of the new economy. Global economic stability will be severely tested as a result. It is always easier to feel optimistic in spring time, but the global economy remains exposed to the elements, and inevitably, winter will come. The leaders gathered in Washington this week should not lose sight of the need to finish constructing improved mechanisms for better multilateral crisis management and policy coordination.

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