The dark shadow that loomed over the IMF/World Bank meetings in Washington last month unexpectedly came in the form of the fiscal mess in the US.
That the US, the principal shareholder of the Bretton Woods institutions, openly flirted with a default on treasuries, degrading the benchmark for global asset prices, sent shockwaves across policy discussions of all stripes.
The effect was both symbolic and practical. US policymakers were effectively sidelined from official discussions thanks to the government shutdown, with senior policymakers from Africa to Asia complaining to Euromoney about a lack of access to US Treasury officials at the most important global gathering of financial officials of the year.
Largely thanks to the US gridlock and fewer fault lines in the peripheral eurozone economy compared with last year’s meetings, Europe was spared the limelight. Its fiscal and monetary woes were largely glossed over.
Olli Rehn, European commissioner for economic and monetary affairs, even had the cheek to cite exogenous risks to Europe’s recovery – the Federal Reserve’s tapering cycle and a slowdown in emerging markets – without mentioning unsustainable debt burdens in the EU core or periphery. There was also curiously little engagement with an IMF study released that week that concluded banks in Spain, Italy and Portugal might face up to €250 billion in losses on corporate loans over the next two years.
Instead, the spotlight shone on emerging markets: their growth prospects amid a disappointing pace of structural reform in recent years, and the impact of Fed tapering on high-yield regions. The sudden stop of capital this summer – raising the spectre of a balance-of-payments crisis in India and Indonesia, in particular – threw into sharp relief the volatility in capital-flow cycles, a fact often missed during the G7 monetary boom.
At the meeting, emerging market policymakers expressed exasperation at the volte-face in the market assessment of their economies’ external vulnerabilities and called for greater global monetary coordination, led by the Fed, to smooth capital-flow cycles as well as crisis-resolution mechanisms from the IMF.
These calls fell on deaf ears. Fed officials reiterated their domestic mandate and the view that monetary stimulus was supportive for global growth, while giving the green light to emerging policymakers’ use of capital controls.
For the IMF, it’s too little too late. Although the Fund has revamped its crisis-lending policies over the years, its intellectual leadership is now found wanting. The absence of seasoned Bric officials at the annual meetings, such as Brazilian finance minister Guido Mantega and People’s Bank of China governor Zhu Xiaochuan, confirms how the IMF’s role in global economic governance has failed to meet expectations.
For emerging markets, there is only one way to deal with the flaws in the international financial architecture: structural reforms on steroids. For the IMF, its lack of policies to address volatile capital cycles in less financially mature economies, such as India, Brazil and Indonesia, might herald long-term consequences: declining relevance in global governance, exacerbated by greater competition from bilateral swap lines and other multilateral institutions, such as the budding Brics development bank.