from Macro and Markets

IMF/World Bank Spring Meetings: Three Questions

April 10, 2014

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The IMF/World Bank spring meetings start today, with a broad agenda and amidst significant global uncertainty.  A good discussion of the agenda is here  and of the Fund’s view is here.  Here are three questions on which I am looking for news, and perhaps even answers.

Have we lost confidence in our global growth story? IMF’s global outlook is reasonably sanguine:  the IMF forecasts global growth to average 3.6 percent in 2014--up from 3 percent in 2013--and to rise to 3.9 percent in 2015, led by a solid U.S. recovery. They argue that global headwinds from the great recession are receding, allowing monetary policy—both conventional and unconventional—to normalize.

Yet the hallway discussion will be on the new threats to global economy, most notably geopolitical tensions with Russia and in Asia, and what policymakers need to do to prepare.  Most significantly, an intensification of sanctions against Russia could have significant effects on trade and investment, and cause substantial deleveraging in global financial markets. With fiscal authorities for the most part having limited room to offset this shock, contingency planning likely will focus on central bank monetary policy and liquidity facilities (e.g., swap lines). Is this enough?

Beyond the evident cyclical risks, a broader question is whether we are too optimistic about trend growth.  In the emerging markets in particular, optimism about growth and convergence has been tempered by weakening performance and more adverse external conditions (e.g., capital outflows, falling export demand due to lower China growth).  From this perspective, the taper tantrum of last year is a false issue (though some emerging market policymakers will still raise it for domestic political purposes); communication is good and the Fed is well aware of the implications of its policies on the world (though they are always cautious in talking about their systemic responsibilities given their legal dual mandate on price stability and employment).  The real issue is whether domestic policies are supportive of growth aspirations. And if not, is there scope, economic and political (with elections coming up in a number of countries), to change policies to restore the momentum of growth? Or is the emerging market growth model broken?

How do we reform the IMF?  It appears that the main headline from these meetings will be a new effort to restart IMF reform. The disappointing refusal of the U.S. Congress to pass the IMF reform package will do long-run damage to America’s soft power and the ability to build consensus in difficult crisis resolution issues. But what is the solution? Ted Truman has an interesting idea for the Fund to end-run the U.S. Congress  but I think going around legislatures is too politically dangerous in the United States and elsewhere.  Perhaps more reasonable would be to “combine" the 14th and 15th quota review.  Translated, this means that the agreement would be set aside and a new negotiation begun.  The U.S. administration could commit to the negotiation with Congressional approval, deferring Congressional approval for a better day. Will the rising powers be satisfied with an approach that delays them having an appropriate representative voice in the organization?

Is low inflation a major global risk?  A few weeks ago, the IMF had a great blog on the risks for Europe from persistently low inflation (“lowflation”).  Their argument was, at its core, that even absent deflation, low inflation  raises real interest rates and the burden of debt, inhibits adjustment, and  weakens demand. While the issue is most salient for Europe, we could ask the question more broadly. Lower China growth and the turn in the commodity cycle is a drag on export prospects of many countries, particularly commodity-exporting emerging markets. Corporate leverage in Europe and emerging markets is dangerously high. High levels of unemployment remain a critical social and economic problem.  Are disinflationary pressures dampening global growth prospects?