In Search of Dynamism
How to Sell Global Re-Balancing
Raghuram Rajan
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CHICAGO – At its most recent meeting in Toronto this spring, the G-20 agreed to disagree. Even though the world economy is desperately in need of rebalancing, their declaration was deliberately vague enough to accommodate any set of domestic policies that countries might choose. Everyone came away thinking that they had won, but the world largely lost.
World trade is highly imbalanced. Households in the United States, having spent too much, are now weighed down by debt. Exporters in Europe and Asia have become excessively dependent on selling to the US and other, now-weakened, economies like Spain and the United Kingdom. Myopic actions on both sides have helped entrench a longer-term pattern of behavior that only makes it harder to move away from today’s unsustainable equilibrium.
As ever, change upsets the cozy status quo and the interests that benefit from it. For example, the real-estate lobby in the US obviously has no desire to see government support for housing diminish, despite the fact that the US probably has far more housing stock than it can afford. Similarly, the export lobby in China has no interest in a strong renminbi, even though it is in China’s long-term interest to let its currency appreciate.
We keep hoping that somehow meetings of heads of state will magically produce the policies that will rebalance world trade. Unfortunately, the macroeconomic changes that countries must make involve actions to which even heads of state are unable to commit.
No US president can unilaterally agree to alter the pattern of government support and spending; that is a decision for Congress. Similarly, no Chinese president can unilaterally agree to allow the renminbi to appreciate faster; that is a consensus decision reached together with the various apparatchiks in the State Council and Communist Party. Moreover, the necessary reforms in both America and China go well beyond these two steps. They require deep, fundamental changes.
So we are caught between a financially unsustainable pattern of global demand and the need for politically difficult changes in many countries’ domestic policies. All politics is local, and there is no local constituency for the global economy, so what triumphs often erodes global imbalances further.
The G-20 asked the International Monetary Fund to prepare a road map for the policies that countries will have to follow to restore stable global growth. But neither the G-20 nor the IMF can impose its will on national governments – nor should they. How, then, can we go beyond ritualistic meetings that do little to advance the global agenda?
Obviously, we need more political support for that agenda. Perhaps non-governmental organizations (NGOs) like Oxfam or Mothers against Land Mines suggest a way. These movements use pressure from below to convince political leaders that there is domestic support for international agreement.
The ability of grassroots movements to influence policy is set to increase. As the power of the Internet spreads through social and political networking sites, and as virtual democracy grows, this bottom-up influence is likely to grow. Those who want to influence political leaders must get used to convincing their masters, the people, directly.
Unfortunately, it is difficult for existing NGOs to take up the cause of popularizing global economic policy coordination. Unlike hunger or land mines, the cause of rectifying global trade imbalances will not touch the public enough to attract the donations that are necessary to keep NGOs afloat.
But there is an organization that could do the job: the IMF. If the IMF reoriented a substantial portion of its activities towards influencing the influential among the world’s public, it could have far more impact on global macroeconomic policy, especially policies followed by countries that do not need its loans, than it does today.
The IMF is currently under-equipped for this task. If it is to improve its persuasive capabilities, it must learn to become more like grassroots activists, with punchy prose, clear policy recommendations, and TV-ready talking points. It must go directly to the public – including political parties, nongovernmental organizations, and influential figures – in each country, and explain its position. The Fund must also do more to enhance its presence on the Web and in school and university classrooms, especially as students are often the most receptive to ideas about global citizenship.
Above all, the Fund must change how it is perceived from outside. It must be seen as an institution that respects each country’s sovereignty but works for the global good. A transparent and fair process of arriving at its policy recommendations, based primarily on convincing economic research and data analysis, will be essential. Countries will have to agree to accept and facilitate the IMF’s direct engagement with their influential citizenry as long as it is carried out in good faith. The IMF’s expression of its economic views to local publics should then be protected by international agreement, much like embassies and their activities.
If we can make these changes – and one should not minimize the scale of the task – perhaps when G-20 leaders meet in the future, they will not think that their citizens have little interest in the outcome. Instead, they will have a political mandate to attend meaningfully to the welfare of the global economy.
Raghuram Rajan is Professor of Finance at the Booth School of Business, University of Chicago, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.
Copyright: Project Syndicate, 2010.
www.project-syndicate.org
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AGK 05:52 08 Sep 10
Nico, I do agree with you about the interpretative way IMF examine the economic situation, but we still need organization like IMF. There will be imbalances and issues to be resolved. The very incapability of IMF to solve dose issues at present is confirmation for the neo-liberal bias you have noticed. The situation we are in is confirmation itself. But I strongly disagree toward your proposal for alternative ideologies. We had enough of this stuff. Just enough. It will be fine if we just get rid of the neo-liberal mantras. Once the crappy constrains imposed by the Church of The All-Mighty Never Mistaken The Very Best Market is gone, there will be space for more reasonable thinking and discussion.
manuelcc 08:42 08 Sep 10
It is a different view than that of Javier Solana, in the article just published in Project-Syndicate, entitled "The cracks in the G-20"In either case, as in the other, has long been appreciated that there is no global leadership, much needed at this time.
On the other hand, trade imbalances in a world increasingly global crisis cause to expand rapidly, eliminating or significantly reducing the possibility that some countries may help others.
May have to rethink the role of globalization, and analyze whether this degree of interconnection between the economies lead to a better or worse.
Manuel Caraballo Callero
Izadi AG economist
vn 02:17 06 Oct 10
The IMF's clout comes from its privileged access to data that member countries are prepared to provide in exchange for sound (and confidential) analysis and financial resources. If the Fund were to become an advocacy organization with punchy prose and TV-ready soundbites -- even if for a laudable global good such as prudent economic management and risk containment -- you can be sure that member countries would not be so willing to share critical information. Why would they risk being criticized (or lectured to) on TV? And wouldn't open discussion of sensitive issues by the Fund possibly trigger the very crises the IMF is supposed to avert? True, the Fund was unable to avert the last crisis -- although, in retrospect, warning signs were everywhere (as Professor Rajan's latest book, "Faultlines", so clearly describes). And perhaps the Fund could have helped avert it by being more candid in public about the risks being accumulated in the most powerful global economies. On the other hand, we will never know the counterfactual of how many crises have been averted by the Fund in the past through timely and discreet action. Making the Fund a more effective organization is in the interests of all countries, but asking it to behave like an NGO is not the way to get there.
hoppers13 03:14 06 Oct 10
I completely agree with Nico. As far as I know the IMF is still totally controlled by neomonetarists and Chicago School of Economics. So putting the same guys that pushed for the kind of globalization that produced "today’s unsustainable equilibrium" in charge of cleaning the mess they so eagerly worked for, doesn't really look like a graet idea. Even more so when Mr. Rajan asks for them to be given power even over governments that don't need (or don't want) their stranglehold loans.
Still this is a pattern we have seen repeated again and again in the last half century or so, hence, I'm looking forward to a whole lot more of unsustainability.
Nico 10:34 07 Sep 10
The IMF as a NGO styled advocacy group for neoliberal, supply-side economics of reversing the welfare state in the belief in the inherent allocative "efficiency" of the market system in a world of corporate capital? Oh, that's a winner! The IMF has no legitimacy with citizens in the developing world, it is surprising how many countries did everything in their power over the last years to avoid appealing to the IMF again for funds, and that was for a reason.
I think Rajan has this notion that the "interpretation" of facts is a neutral exercise, it clearly is not. The IMF has shown how it "interprets" facts, and its from a particular set of assumptions that have softened since the debacle of the 1990s and 2000s; but it is still unambiguously neoliberal. The IMF, if it wants to be a legitimate actor, has to radically democratize its governance so that alternative ideologies can have a fair hearing. Problematically, the IMF is beholden to the interests of Central Banks who are themselves beholden to the interests of finance capital, never mind that many of the academics and members of the IMF were, or are part of the financial complex. If we want a better alternative, we should be looking to the UN, not the IMF.
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