The IMF exhorts its members to turn to longer-run problems while economic conditions are good. It points to risks that may undercut future growth and prosperity while welcoming central bank efforts to sustain economic activity by keeping interest rates low.
But investors then search for higher returns in market segments that are less closely regulated and more at risk of default. Banking remains the key institutional structure providing credit but with unregulated nonbanks expanding their reach, the IMF worries that the basis for a future crisis may be growing.
To focus attention, the IMF named those global financial institutions that it fears will not become profitable enough to build their capital to levels needed to survive a future crisis.
The aim is to remind regulators and legislatures in the largest economies that they are responsible for ensuring that their institutions become strong enough to play their central role in generating economic growth.
The message to the United States is clear: Do not deregulate too much. The U.S. financial system remains central to the health of the global economy, not just the U.S. economy. The IMF of course admonishes Europe to do better on strengthening its banks and chides China for very rapid and less supervised credit expansion.
To its credit, the IMF urges Germany to increase fiscal spending to help reduce imbalances within Europe and support growth throughout the continent. Countries with high debt levels are urged to bring deficits and debt down gradually, to avoid constraining growth.
Central banks are urged to communicate their intentions clearly to avoid overreactions to the end of monetary stimulus in some countries.
With economic conditions fairly good in much of the world, now is the time to “repair the roof” — the theme of this year’s meetings. By restoring fiscal strength and making economies more flexible, countries will have the future resources they may need to address unforeseen crises, deal with aging populations or the effects of climate change.
How are the finance ministers and central bank governors taking this message? They agree with the IMF’s general prescriptions and all point to what his or her country is doing to fix problems and prepare for an uncertain future.
But none of them are making new promises to take stronger steps or move more quickly to address economic weaknesses.
The IMF has little power to generate change in countries that do not need its financing. In that regard, the IMF has no ability to force Germany to spend more to create jobs and raise growth in Germany or Europe more broadly.
But the IMF’s voice does have an impact in many respects and these successes are key achievements:
Country budgets are now more transparent and revenue sources (or lack thereof) more apparent due to IMF work with its members.
More countries have established independent central banks focused on reducing inflation.
IMF scrutiny of major countries’ financial sectors has helped increase financial stability and lessen the likelihood of a financial crisis in one country spreading quickly to others.
IMF and World Bank efforts have continued to focus on achieving sustainable debt levels in low- and middle-income countries.
The IMF, along with the World Bank and other institutions, has helped countries draft laws and strengthen enforcement actions against money launderers and terrorist-financing arms.
These achievements have only been possible because country officials worked together to agree on common goals and how to achieve them — changing domestic laws where needed and asking the IMF, World Bank and other institutions to apply their resources and brainpower to help solve common problems.
The United States has often been the instigator of these and other initiatives at the international financial institutions, under both Democratic and Republican administrations. These proposals needed broad support for them to be adopted and be effectively implemented internationally.
The U.S. reached out to other countries to make the case that all countries would be better off if the IMF membership adopted these ideas. In addition, all countries are better off with more transparent government budgets, stronger central banks, less corruption and illicit financing flows.
Will that U.S. role continue? The undercurrent of their year’s annual meeting is that many country officials fear the U.S. is relinquishing its leadership on these issues, ceding leadership in the international institutions to countries that may not share the same open, transparent goals.
The progress that has been achieved in these many areas may fade without constant reinforcement from the United States and like-minded countries.
Sustaining relationships with partner countries and with the international institutions will help restore that role and reassure others of the U.S. commitment to a strong and stable global economy.
Meg Lundsager has been since 2007 the Executive Director for the United States portion of the International Monetary Fund.
BY MEG LUNDSAGER