The International Monetary Fund has downgraded its outlook for global growth for this year and next, but that doesn't appear set to spur the big players in global trade to cooperate anytime soon. Indeed, as world economic leaders and financial policymakers converge on Washington from Oct. 15-20 for joint meetings with the World Bank, a lack of coordination is in the air. The meetings are likely to showcase declining collaboration, renewed attacks from some emerging countries about the IMF's lending terms and — given the absence of U.S. leadership — a threat to the fund's role in providing emergency financial assistance.
Slow global growth is spurring greater political discontent in many countries, creating challenges to the international economic and financial order. Heightened risks, disagreements on policy, a shrinking U.S. leadership role and the rise of new players like China portend increasing uncertainty in the world economy.
The Fund's Struggles
As economic leaders meet this week, here are some of the things we're watching for:
The IMF will have a hard time convincing big economies to collaborate. For the fourth time in a year, the IMF downgraded its 2019-2020 outlook by forecasting a "synchronized" global slowdown that will affect 90 percent of the global economy. In addition to continued easy money from central banks, the IMF has encouraged the largest economies to coordinate fiscal and monetary stimulus — much as it did during the last financial crisis in 2008-2009. With its exhortation, the IMF is looking at countries like Germany and others with "fiscal space," that is, a government's ability to increase spending on a long-term financeable basis.
That, however, is proving a hard sell in Berlin, which has already expressed concern that the European Central Bank's monetary policies will ultimately fuel higher inflation. And in the current global environment, many countries are unlikely to prioritize mutually beneficial approaches over those with immediate national payoffs that cater to domestic constituencies. Germany's aversion to new public borrowing, for example, is not abating despite negative real interest rates on bunds (Berlin's debt security bond) and parallels previous resistance to fiscal transfers in the eurozone.
Due to the ineffectiveness of continued loose monetary policy, it's imperative for the meetings in Washington to produce some innovative policy suggestions.
As such, due to the ineffectiveness of continued loose monetary policy, it's imperative for the meetings in Washington to produce some innovative policy suggestions. A careful parsing of joint statements, comments and speeches through the course of the week will provide insight into the differences and debates among the globe's major actors, especially Germany, other European economic powers, Japan and China.
The "Washington Consensus" will continue to fade amid attacks from emerging economies. The IMF's failing programs for Argentina and Ecuador, as well as its difficulties in negotiating a new program for Ukraine, will probably provoke new attacks from critics of the lender's existing market-oriented policy approach to financial distress. The fund's basic plan for economic stabilization and growth in crisis countries advises them to avoid unsustainable domestic credit and money creation by limiting government spending to what administrations can finance over the longer term. Austerity measures are never popular, and countries that implement the fund's programs almost always chafe at restricting domestic spending. Such discontent isn't a revelation, but the IMF's admission of policy errors on Greece and the impending collapse of its Argentina loan — the largest in the fund's history — could provide fuel to critics and sideline talk of more successful IMF-supported programs over the years. New Managing Director Kristalina Georgieva already countered some of the pessimism this week by highlighting the success of Egypt's IMF program, but more vociferous criticism could come later from Argentina and the G-24, a group of emerging economies.
The IMF's admission of policy errors on Greece and the impending collapse of its Argentina loan could provide fuel to critics and sideline talk of more successful IMF-supported programs over the years.
The IMF is looking at a funding crunch. More on the back burner is the question of IMF funding, even though it's critical to the organization's future. Bilateral lending of about $440 billion, more than 40 percent of IMF resources, expires at the end of this year, although lenders can extend their commitments until the end of 2020. There's also a multilateral agreement, the New Arrangements to Borrow, among 40 countries to provide an additional $250 billion in emergency funds when necessary, but that deal also expires in 2022. Otherwise, mandatory national contributions or quotas of $660 billion, which also determine voting shares at the organization, provide the remaining IMF funding.
Even if the 40 countries renew the New Arrangements to Borrow in 2022, the United States will not be able to continue without congressional consent; so far, the Trump administration has not taken a public position on renewal. For the moment, it publicly opposes a quota increase that would boost China's weight in the IMF. And unless Treasury Secretary Steven Mnuchin provides a strong signal of continued financial support during these meetings, bilateral lenders are unlikely to renew their full funding. That could leave the IMF strapped for cash if potential risks materialize just as many countries are lining up for urgent funding.
Overall, the lack of effective policy coordination among key countries during the current economic downturn, renewed skepticism about IMF remedies for economic distress and the possible need for crisis lending could eventually cripple the fund. And if that happens, China and others that champion state-led economic intervention will be waiting in the wings to offer their own funding.