Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Let’s Revive Multilateral Consultations
February 23, 2009
A new round of multilateral consultations, facilitated by the IMF and aimed at forestalling a protectionist backlash, could prove valuable (photo: Newscom).
GLOBAL ECONOMIC CRISIS
Dear IMF Survey:
With world economic growth for 2009 now projected to be a mere 0.5 percent, or around minus 0.7 percent in per capita terms, the ongoing crisis has taken on a truly global dimension requiring global remedies.
There is an obvious role to play here for international organizations, especially as regards containing beggar-thy-neighbor policies. Reviving confidential multilateral consultations between the five largest players in the world economy, as initiated by the IMF in 2006, could make an important contribution to forestalling harmful trade and currency practices.
Ominous signs
There are ominous signs that countries are taking, contemplating, or continuing unilateral action that will harm their trading partners and are likely to be answered by countermeasures. If one wants to make a comparison with the 1930s, this is the place to look. International cooperation has, of course, come a long way since the 1930s, and we now have forums in which to discuss the dangers the present situation poses. But we must make good use of our international organizations, which represent an important public good.
On matters of world trade, there is the World Trade Organization (WTO), which serves as a watchdog against protectionism and an arbiter of disputes. The WTO has it work cut out for it in the present dangerous situation.
More proactive role for IMF
The IMF, too, has an important role to play in counteracting economic policies that harm other countries, including misaligned exchange rates. The Fund has been trying, recently, to exercise its currency mission more vigorously. This has made it possible to designate a member country’s exchange rate as “fundamentally misaligned.” IMF management has also issued warnings against protectionist tendencies. All this is helpful, but I believe that a more proactive stance is called for.
The Fund should therefore revive the initiative it took in 2006 to discuss sensitive policy issues multilaterally, and on a confidential basis, among the world’s most important economic players. The first multilateral consultation dealt with global imbalances, with the participation of the United States, the Euro area, Japan, China and Saudi Arabia. The results were mixed, but the chances for progress may be better this time around.
Significantly, the new U.S. administration has expressed itself clearly in favor of multilateral cooperation. A new round of multilateral consultations, facilitated by the IMF and aimed at forestalling a protectionist backlash, could make an important contribution to global welfare.
While it would certainly be desirable for the Group of Twenty, at its meeting in early April, to warn against the dangers of protectionism and currency misalignment, the group is probably too big to make real progress on such matters. It is better for the Group of Twenty to focus mainly on the financial aspects of the crisis with the help of the Financial Stability Forum.
J. Onno de Beaufort Wijnholds
Former IMF Executive Director and former Permanent Representative
of the European Central Bank in the United States