IMF/World Bank Meetings: In Search of a Consensus

This week’s Annual Meetings of the World Bank and IMF will have a lot of discussion but little action.  Here are five things that I anticipate will capture some headlines.

Growth is important...but what are you going to do about it?  I suspect that we will hear broad frustration from policymakers about the tepid global recovery.  Most expect a gradual global recovery to below average levels, as the scars from the financial crisis and weak policies constrain growth.  But there isn’t much on the table in terms of macro policies that can be debated and changed, and while there is a lot of structural work to be done (e.g., financial sector and labor market reform) we are unlikely to see much real progress on a growth agenda this week.

Infrastructure is (a public) good.  Everyone can agree that there is a critical need for additional infrastructure, but unclear what to do about it.  Private sector projects should be encouraged, but appear limited by legal and commercial considerations, and while there is a clear case for public provision of infrastructure ("public goods"), budgets are constrained and standards (including importantly environmental standards) limit governments’ capacity to respond.  The Fund calls for more efficiency and a push by countries that have the budget space.  Beyond that, the Chinese-led initiative for an Asian Infrastructure Investment Bank (AIIB), and to a lesser extent the slower-moving BRICs Bank, will be a focus.  There appears to be a great deal of energy behind the AIIB, but it’s hard to imagine it scaling up quickly without risking a major weakening of standards, poor project selection or “capture” by borrowing countries.  Can the AIIB collaborate effectively with the World Bank and Asian Development Bank and avoid fragmentation?

Is geopolitical risk a major threat to markets? As I have written, policymakers are concerned by the apparent disconnect between rising geopolitical risk and a benign market outlook.  The concern is legitimate, but there is little consensus that economic policymakers should say or do anything differently.  Still, this discussion will be an important part of the hallway debate.  There are broader questions here about the global economic architecture.  Are we headed towards comprehensive financial sanctions against Russia, and if so, would restrictions on the payments system threaten a basic “public good?”

Where is the IMF going on debt policy?  The Fund recently endorsed the introduction of new clauses in debt contracts, addressing the inter-creditor equity problems highlighted by Argentina’s legal battle with its creditors and strengthening the ability of distressed debtors to coordinate with their creditors on a solution.  This is all to the good, though it arguably would have happened even without the Fund’s involvement.  The real challenge— how do we encourage the quick transformation of the existing stock of debt (which doesn’t have the clauses) into new debt—is still to be addressed.  Look for some discussion this week of ways in which the official community can provide a push to efforts to swap old debt for new debt (through market exchanges) with the improved clause.

More broadly, the IMF continues to develop the case for new rules governing its lending, including a greater focus on extending the maturity of private debt when it is lending large amounts in risky situations.  I am not convinced that there is a problem in debt markets that needs solving, or that this is the solution.  The debate this week may instead focus on the so-called “systemic exemption,” which gives the major countries the ability to bend Fund rules for lending when systemic issues are in play (e.g., Greece, Ireland).   The IMF would like to constrain or eliminate that rule, and while I’m sympathetic, it is not realistic in my view to expect the major countries to tie their hands regarding how they respond to global crisis.

IMF reform (still) stalled.  There is growing international frustration with the failure of the United States to pass the IMF quota and governance reform package.  My read of the environment in the U.S. Congress is that the chances of passage this year are lower than ever before, so the international community will need to begin to talk publicly about what comes next.