In April, the IMF began to gear up for a new role as the body through which international policymakers should address their concerns about the dangerous potential for a disorderly unwinding of global financial imbalances. Then, as managing director Rodrigo de Rato began to grapple with this new role, he noted that while conditions for the global economy appeared favourable, it was troubling that it was based on shaky foundations.
As the annual IMF/World Bank meetings get under way, Rato might reflect that conditions now look less favourable and the foundations even more shaky. We might be at the point where the unwinding everyone had hoped to avoid – a slowing US economy, with consumers pulling in their horns having exhausted the collateral value of their housing stock to back yet more borrowing and consumption, so removing demand for Asian exporters’ goods – is getting under way.
The last thing the rest of the world needs is for Americans to turn from borrowers into savers. The system whereby exporting nations are burdened by the need to invest their financial surpluses in lending to the US to fund purchases of their exports has been described by Larry Summers as a financial balance of terror.
Working through all this – balancing the burdens and requirements on different countries to boost domestic demand, rebalance their economies away from purely export-led growth, manage their financial surpluses and deficits, and appropriately gauge their reactions to currency movements and financial market disturbances that lie ahead – is enormously demanding, complex and increasingly urgent.
Multilateralism is not much in vogue, given the diplomatic isolation of the US. If Rato seizes the moment and his institution’s new role, the IMF, for years now a little credited institution with no significant role to play as monitor of or lender of last resort to troubled emerging markets, might yet have a huge part to play in preventing a new kind of world economic and financial crisis.