What to expect from the IMF, World Bank meetings
By Ian Bremmer
The opinions expressed are his own.
The IMF and World Bank meet this week at a delicate moment for the global economic recovery. First, the good news: Expectations for success won’t be tough to manage, because turmoil in the Arab world, the triple disaster in Japan, and Europe’s ongoing struggles have kept the meetings from grabbing much public attention. That’s a good thing, because as capital and liquidity return to the global economy and as emerging market powers begin to assert themselves with greater confidence on the international stage, the IMF and World Bank have lost some of their prominence.
In particular, the IMF is finding it increasingly difficult to play its traditional role of global surveillance body and lender of last resort, because multinational coordination is just not that effective these days. Newly enhanced voting leverage for leading emerging powers intended to better reflect the world’s true balance of power will only add to the institution’s dysfunction, as members increasingly disagree on whether and how to correct global imbalances. Expect to hear more calls from China, India, Brazil and Russia for an end to US and European dominance of these institutions, but don’t expect any “rebalancing” of rights and responsibilities to make international consensus any easier to achieve.
For example, in advance of the meetings, the IMF has produced a framework of policy options for countries now coping with large capital inflows. Several emerging states — including Brazil, South Korea, and Indonesia — have enacted capital controls in recent months. The IMF has endorsed the use of capital controls in cases where measures to strengthen banking systems and lower interest rates have already been adopted — a fundamental reversal of previous IMF policy.
Some emerging market governments have rejected the Fund’s new policy framework with arguments that the IMF should not dictate their range. The result will be animated discussion of the issue during the meetings, with little prospect that talk will lead to action. Meanwhile, the IMF’s endorsement of capital controls (as a measure of last resort) will provide political cover for some governments to use them as they see fit.
The IMF will also discuss setting up the surveillance mechanisms for global imbalances that were agreed at last fall’s G20 summit in Seoul, but here again there are deep disagreements. China, in particular, has no incentive to allow the IMF to evaluate the fairness of its currency policy — though Beijing knows that the Fund has no enforcement powers to act on what it finds.
In addition, the “internationalization” of the renminbi will likely be on the IMF agenda. China has taken some steps toward its stated goal of making the renminbi an international currency, but the near-term prospects for yuan convertibility are bleak, since such a move demands higher tolerance from Beijing for external influence on Chinese domestic economy than the leadership has ever permitted. China is allowing the yuan to appreciate gradually — in both nominal and real terms. This trend will likely continue. But Beijing will never commit to a clear timeframe for convertibility and will refuse to negotiate the currency’s value in international forums.
Participants in World Bank meetings will discuss the rise in global food prices, food security and potential policy options to address this issue, especially for the world’s poor, but any real push for concrete proposals will probably be delayed until the G20 meeting in Cannes later this year. Only there are we liable to see any agreement on limiting speculation on commodities. Even then, there won’t be a deal on how new restrictions might be enforced — though individual members may act against speculation on their own, either through local regulation, new taxes or outright restrictions. That will add considerable unpredictability to an already uncertain international investment climate.
The World Bank meeting is also likely to include discussion of policy implications of the World Development Report issued this week, which argued that international aid should focus less on health and education and more on promoting government stability through strengthening government institutions, police and justice systems.
It’s hard to imagine a more obvious sign of our turbulent times.
Ian Bremmer is president of Eurasia Group, a global political risk research and consulting firm.