This past weekend in Washington DC, as the economic leaders of 187 countries gathered for the Annual Meetings of the IMF and World Bank, the mood was tense. The world’s finance ministers and central bank governors were concerned because the global recovery is fragile. And uneven. And it is fragile because it is so uneven.
In the emerging markets of Asia, Latin America, and the Middle East, things are going pretty well. Even in Africa, many countries have returned to growth much faster than in previous recessions. In Europe, however, the recovery is sluggish. And in the United States, it remains subdued. The IMF’s latest economic outlook, released during the meetings, does not anticipate a "double dip." But there are risks.
High debt levels
The first risk is the very high levels of public debt in the advanced economies—the highest since World War Two. What is needed to restore fiscal balance depends, of course, on the situation facing each country. In the medium term, they all need to restore fiscal sustainability. In the short-term, however—and while the recovery is still fragile—it is a case of consolidate as much as you have to, and stimulate as much as you can. The greatest risk to fiscal sustainability at this point is that growth stalls.
A second and related risk is jobs. The world lost 30 million jobs during the crisis; and 450 million more people will enter the labor market over the next decade. So we need growth, but we need growth with jobs. This crisis will not be over until we see unemployment levels begin to go down.
The third risk is linked to the financial sector. We all know how this crisis began. We all know that a lot of promises have been made to fix the financial sector so it will not happen again. And while there has been progress in a number of countries and new regulations from the recent Basel III process, it is not enough. We need to ensure that those new rules are implemented. And we need better tools to resolve financial crises when they occur. The financial system is not yet safe enough.
On top of all this, there is concern that the strong international cooperation that was shown during the crisis is in danger of receding. After Lehman collapsed, we avoided a second Great Depression because the leaders and nations of the world came together and coordinated their response. We saw this when the leaders of the Group of Twenty industrialized and emerging market economies (G-20) met in London and Pittsburgh, for example. The most concrete action was the coordinated fiscal stimulus. And it worked.
Now, as we move into post-crisis mode, that spirit of cooperation seems not to be as strong. Perhaps the clearest indication of this were the headlines over the past week about “currency wars” and some countries seeking to devalue to gain competitive edge over others. And yet, we know that beggar-thy-neighbor policies do not work. There are no solely domestic solutions to global problems.
So, coming out of the weekend—after the meetings—was the atmosphere less tense? Yes...and no.
On the plus side, the economic leaders represented in the IMF’s governing body—the International Monetary and Financial Committee—found common ground on several important things.
- There was a strong commitment to “the rejection of protectionism in all its forms.” And an equally strong statement about the importance of “working collaboratively”—to ensure growth and to create jobs.
- There was a recognition of the need to go further on financial sector reform. And there was a call—which I welcome—for the IMF to contribute to this agenda in collaboration with other international bodies already at work in this crucial area.
- Also on the IMF, our membership asked that we focus our economic analysis even more on “spillover” issues—that is, the effect that one country’s policies might have on others. I believe that by doing this, bringing our unique cross-country experience to bear, we can contribute to helping resolve the tensions we have seen among countries, and to the global rebalancing that is so important for a sustainable recovery.
- It was also reiterated over the weekend that the voice and representation of the emerging market and developing countries in the IMF should be enhanced to reflect better their standing in the new global economy. We did not come to final agreement on these “quota and governance” reforms over the weekend, but we are not far off.
So the bottom line is that the world made some progress over the weekend. But we shouldn’t be too self-congratulatory. We are not yet out of the woods.
As I said earlier, we still have a long way to go to achieve sustainable and balanced growth, to bring back employment, and to make the changes necessary to reduce financial sector risks. Above all, we need to keep pushing, keep fighting, for cooperation. Why?
The IMF’s analysis indicates that improved economic policy coordination, over the next five years, could increase global growth by 2.5 percent, create or save 30 million jobs, and lift 33 million more out of poverty. With such high potential returns, can we really afford each to go our own way?
That question will be high on the agenda for the next G-20 leaders meeting to be held in Korea in November. So all eyes now turn from Washington this weekend to Seoul next month….