Against the backdrop of a bright global economic picture, the world’s top economic and financial leaders—who gathered in Washington April 14—15 for the Spring Meetings of the IMF and the World Bank—welcomed policy plans from the biggest economies to reduce the hefty global current account imbalances. They also backed steps being taken to implement a package of IMF reforms, including measures to modernize surveillance, better prevent financial crises, and give developing countries more of a say in running the institution.
The International Monetary and Financial Committee (IMFC), the policymaking committee of the IMF’s Board of Governors, welcomed the “continued strong, broad-based expansion of the global economy” and the greater balance in growth among regions. But it warned that “downside risks requiring continued vigilance arise from the possibility of a reassessment of risks in global financial market conditions, of a sharper-than-expected slowdown in the U.S. economy, and of a revival of inflationary pressures as output gaps close or if oil prices rebound.” The IMF is forecasting growth of 4.9 percent in 2007 and 2008, down from 5.4 percent in 2006, according to its latest World Economic Outlook.
Box 1.A plan for action on global imbalances
The five parties in the multilateral consultations outlined the following goals aimed at making further progress on an orderly unwinding of global imbalances in the years ahead:
China plans to reduce its external imbalances; boost domestic demand, particularly consumer demand, and rebalance investment and consumption; further promote balanced external sector development; speed up financial reform; and further improve the exchange regime “in a gradual and controllable manner.”
The euro area plans to further reform the product, labor, and financial markets.
Japan plans to reform the labor market, facilitate foreign direct investment in Japan, strengthen competition in key sectors, and further advance fiscal consolidation.
Saudi Arabia plans to increase spending on social and infrastructure investments and on expanding oil sector capacity.
The United States plans to further fiscal consolidation over the medium term; reform the budget process to contain spending growth; reform entitlement programs to strengthen long-term fiscal sustainability; adopt tax incentives to support private saving; increase energy efficiency; promote pro-growth, open investment policies; and improve capital market competitiveness.
Reducing global imbalances
Over the past year, the IMF has convened several rounds of multilateral talks aimed at sustaining world growth while reducing, over the medium term, global imbalances generated by the large U.S. trade deficit; surpluses in China, Japan, and oil-producing countries; and the need for structural reform in the euro area to boost economic growth. In a report to the IMFC on April 14, participants in the talks—China, the euro area, Japan, Saudi Arabia, and the United States—provided detailed policy plans elaborating steps already taken and those anticipated to support the IMFC’s strategy, adopted in 2004, to reduce global imbalances (see Box 1).
IMFC Chairman Gordon Brown, the U.K. Chancellor of the Exchequer, hailed the report as “a major advance” on a huge issue that has worried policymakers for many years. “The willingness of the participants to make commitments about the future is important in itself.” IMF Managing Director Rodrigo de Rato said that the multilateral consultations were a welcome process, one that would not have been possible “outside a multilateral institution like the IMF.” He added that if these policies are put into place, there will be significant effects on reducing global imbalances, not only for the five economies but also for the rest of the world. In fact, IMF First Deputy Managing Director John Lipsky told reporters on April 19 that policies outlined by the countries, if implemented, could reduce global imbalances by 1.0 to 1.75 percent of world GDP over the next four years from a baseline of about 6 percent—in other words, relative to what would be happening without these policy measures.
As for the risk of rising protectionism, the IMFC—which was briefed by World Trade Organization Director-General Pascal Lamy—welcomed the resumption of the Doha Round of trade talks and called on members “to work with a renewed commitment to urgently achieve an ambitious outcome.” Brown told reporters that “leadership and courage” were now needed to reach a solution and that rich and poor nations alike stand to benefit from a successful round. He noted that Lamy had stressed the importance of an aid for trade package so that developing countries would be in a position to benefit from a trade accord by having funds for infrastructure improvements almost immediately. At the Spring Meetings, the Group of Seven major industrial countries said that it would make $4 billion available by 2010 for this purpose.
“Fulfilling aid commitments such as those made at Gleneagles in 2005 is a very important prerequisite to create sufficient space for high social and infrastructure investment.”—Rodrigo de Rato
Progress on IMF reform
Another major focus over the weekend was how the IMF was progressing on its reform agenda—known as the Medium-Term Strategy—which was launched a year ago to enhance the IMF’s effectiveness and legitimacy. Both Brown and de Rato stressed that it was very clear that progress was occurring on all fronts.
Surveillance. The IMFC welcomed steps being taken to “strengthen and modernize IMF surveillance to ensure its effectiveness as globalization deepens.” It also called on the IMF Executive Board to continue to give priority to further work on all aspects of this reform, including updating the 1977 Decision on Surveillance over Exchange Rate Policies. It said the goal should be to “improve the quality of surveillance, its focus, candor, and evenhandedness.”
But statements from Fund members underscored the wide range of viewpoints on this issue. U.S. Treasury Secretary Henry Paulson insisted that, “for the IMF to remain modern and relevant, it must reinvent itself…. First and foremost, the IMF must fundamentally reform its approach to surveillance over exchange rates. Let us be clear: exercising firm surveillance over members’ exchange rate policies is the core function of the institution.” But Deputy Governor of the People’s Bank of China Hu Xiaolian said that “in strengthening surveillance, the Fund should be realistic and not overestimate the role of exchange rates. Biased advice would damage the Fund’s role in safeguarding global economic and financial stability.” And the Group of 24 (G-24) developing countries said that it remained doubtful that a revision of the 1977 decision was necessary. It noted in its communiqué following an April 13 meeting that “if the IMF has not been more effective in its surveillance (as the case of persistent global imbalances suggests), it is mainly because systemically important economies have not felt the need to follow the Fund’s policy advice.”
Quotas and voice. The IMFC reiterated the importance of implementing the program of quota and voice reforms adopted by the Board of Governors at the 2006 Annual Meetings in Singapore that was designed to take account of the growing importance of dynamic economies, many of which are emerging market economies, in the global economy, and help enhance the voice and participation of the low-income countries. It welcomed the broad consensus reached in the Executive Board on the legal framework of an amendment of the Articles of Agreement about basic votes. It also welcomed the initial discussions on a new quota formula and stressed the importance of agreeing to a formula that should be “simple and transparent” and capture members’ relative positions in the global economy. The G-24 stressed in its communique that “the adoption of a package of reforms aimed at increasing the voice and representation of developing countries remains of utmost importance for the legitimacy and effectiveness of the Bretton Woods institutions.”
IMF income. The IMFC welcomed the report by a committee chaired by Andrew Crockett, Chairman of JPMorgan Chase International, on how to better align the Fund’s income with its diverse activities. It underscored that ensuring a sustainable overall budgetary position “also requires action on the expenditure side. This now includes real spending reductions.” The IMFC said it was looking forward to the Managing Director’s proposals on a new income model.
The main finding of the report was that the current reliance on income from lending was no longer appropriate. Major recommendations for a new income model included broadening the Fund’s investment mandate, investing a portion of quota subscriptions, and establishing an endowment from a limited gold sale. In response to questions from reporters on the likelihood of gold sales, given past opposition from major shareholders, Brown said, “What I found encouraging today was that there were countries who previously had not been prepared to consider gold sales and who were prepared to do so now.” He added that “there is no doubt that the gold sales are potentially a part” of the package the Managing Director will put forward.
Emerging market countries. The IMFC welcomed recent progress in clarifying some key aspects of the design of a new liquidity instrument for market access countries. It called on the IMF to “accelerate its work on addressing the design challenges in developing an instrument that would enhance IMF support to these countries’ own strong policies and ensure that substantial and timely financing will be available, if needed, while safeguarding IMF resources and paying due regard to the interaction with existing IMF facilities.” The G-24 similarly urged the IMF to develop a new liquidity instrument “that would provide meaningful, reliable and affordable financial support to face capital account volatility for current and prospective emerging market countries.” But it said that although some progress has been made, a recent proposal heard at the Executive Board fell short of these objectives.
Box 2.Africa welcomes China’s greater involvement
African ministers attending the IMF–World Bank meetings welcomed greater involvement by China in Africa’s development, including its stepped-up trade and increased lending to the resource-rich continent. Sub-Saharan Africa’s exports to China rocketed to $19 billion, or 15 percent of the region’s total exports in 2005, from some $5 billion in 2000 and a negligible amount in 1990.
Antoinette Sayeh, Liberia’s Minister of Finance, said during a press conference that, in addition to receiving financial help, Africa could learn from China’s rapid development and its enormous progress in poverty reduction. N’Gandu Peter Magande, Zambia’s Minister of Finance and National Planning, noted that his country’s ties with China dated back to the 1960s, when it helped finance the building of a key African rail link. “For us, really, this is an old friend, and we think they’re an all-weather old friend.” Rama Krishna Sithanen, Mauritius’s Deputy Prime Minister and Minister of Finance and Economic Development, said China’s involvement was a good example of increasing cooperation between developing countries to complement the historical pattern of North-South trade.
Low-income countries. The IMFC stressed that the Fund should remain fully engaged in helping its low-income member countries achieve sustainable growth and address the macroeconomic challenges critical to the achievement of the UN Millennium Development Goals (MDGs). It called for “continued efforts to help countries reap the benefits of higher aid and debt relief, and avoid a new buildup of unsustainable debt.” At a press conference of African finance ministers on April 13, China drew praise for its growing role in providing financial and technical support (see Box 2).
The IMFC also thanked the External Review Committee on IMF–World Bank Collaboration, which was chaired by Pedro Malan, Chairman of the Board of Unibanco and former Finance Minister of Brazil, noting that it looked forward to proposals from the two institutions to strengthen collaboration.
Still-elusive poverty goals
At the IMF–World Bank Development Committee meeting on April 15, a major theme was the scaling up of aid, especially for Africa—which is not on track to reach the poverty MDG and looks likely to miss most of the other MDGs, according to the latest IMF-World Bank Global Monitoring Report. World Bank President Paul Wolfowitz told reporters that “the donors unfortunately now are in danger of not fulfilling their promises to increase aid and to double aid to Africa.” De Rato echoed this sentiment, saying that “fulfilling aid commitments such as those made at Gleneagles in 2005 is a very important prerequisite to create sufficient space for high social and infrastructure investment.” The committee, which was chaired by Mexico’s Secretary of Finance and Public Credit and a former IMF Deputy Managing Director, Agustin Carstens, noted that official development assistance (ODA) flows have grown in real terms over the past decade, but total ODA may have declined in real terms in 2006.