Australian Treasurer Scott Morrison will attend the IMF-World Bank annual meetings that kick off today (Friday 7 October) in Washington. Should we expect 'big' outcomes from these meetings? On past form, no. The best we can hope is that finance ministers come away a little wiser and a little more determined to implement much needed domestic policy reforms.
The lead-up to this year's IMF meetings has followed the well- trodden path of previous meetings: the IMF has warned the global economy is weak and fragile; it has lowered its forecasts for global growth; and IMF Managing Director Christine Lagarde has urged all countries to embrace policy reforms to lift growth. Nothing new there.
Since 2010 the IMF's initial forecast for global growth has been revised down in every forecast update. This may reflect the uncertainty confronting the global economy, but it also suggests IMF forecasters are either perpetual optimists or slow learners.
David Uren says there is a suspicion the IMF emphasises the negative risks to the global economy and downgrades its forecasts in an attempt to concentrate the minds of ministers on its reform agenda. If this is correct, the strategy isn't working.
Will anything new come from the 2016 IMF-World Bank meetings? The IMF's policy prescriptions will not be new. In one of the analytical chapters in the IMF's latest World Economic Outlook, it observes that the policies being pursued by central banks around the world are becoming less effective. Central Bankers, including in Australia, have been saying this for some time.
In her informal opening to the meetings, Lagarde called on countries to pursue a three-pronged strategy to revive growth, involving country-specific monetary, fiscal and structural policies. This is hardly new. The IMF has repeatedly recommended that countries should maintain accommodating monetary policies and those with budgetary room should increase spending – particularly on infrastructure – while all countries should pursue growth-enhancing structural reforms. [fold]
For example, in a speech 12 months ago, Lagarde recommended that 'advanced economies with room for fiscal stimulus use it to boost public investment, especially in quality infrastructure' and ' all countries need to upgrade their economic structures through reforms in labour and product markets, infrastructure, education, healthcare, and trade'. She is giving the same advice this year.
The latest 'spin', in a recent IMF paper ('Macroeconomic Management when Policy Space is Constrained'), appears to be aimed at trying to convince countries that they have not run out of policy options. However, IMF staff say countries need to pursue all three policy prongs in a mutually supportive manner and the response should be coordinated across all countries in order to maximise positive spillovers. Ambitious, but hardly new advice.
The IMF has been criticised for not offering bold, imaginative policy proposals that will get the global economy out of its doldrums. A former IMF official is reported as saying 'I don't hear anything interesting from the Fund that makes me want to sit up and take notice'. It would be unfortunate if finance ministers felt the same way, for there are no bold, unidentified solutions to the problems confronting the global economy. The problem is not the absence of interesting ideas, but the failure of national governments to implement the 'boring old' policy prescriptions. And the source of the problem is normally domestic politics.
The IMF's policy advice is politically difficult for most countries. Such structural reforms as deregulating labour markets, reforming tax systems and opening up product markets to greater competition are contentious. The costs of the reforms are usually borne by a few, but very vocal, vested interests while the benefits are widely dispersed across the economy.
Moreover, underlying the Fund's advice is that any increase in public spending – be it on health, education or infrastructure – will only be beneficial if it is efficient and well targeted. Easier said than done. The IMF acknowledges this and warns:
Experience suggests caveats for the success of the approach, especially for fiscal policies. Governments need to manage their spending with care. Infrastructure investment is an important case in point: poor productivity, cost overruns and delays have often marred such projects.
The challenge posed by the IMF's advice is not only for each country to tackle controversial structural reforms, but for them to do so at the same time in a coordinated fashion. As such it is not surprising that there is little expectation that the 2016 IMF meetings will represent a turning point for the global economy.
The best that can be hoped is that participants leave Washington with a greater appreciation of the need to confront politically tough, but badly needed, domestic policy reforms.
But there is a 'new' aspect to this year's annual meetings, and that is the increased emphasis on avoiding policies that will impair growth. The IMF normally focuses on what needs to be done to lift growth rather than on what needs to be avoided. Yet in her warm-up speech for this year's meetings, the first point Lagarde made was that ministers should follow the advice given to first-year medical students and above all 'do no harm'. As to what would do harm, Lagarde said that the rise of protectionism was a 'clear case of economic malpractice' that would destroy a clear driver of growth.
These concerns reflect Brexit and the rise of Donald Trump, who has pledged to impose punitive tariffs on imports from Mexico and China. The implications of a Trump presidency will no doubt be a key talking point in Washington, even if this is not explicitly acknowledged in the formal communiques. But there are rising protectionist pressures in many countries. Ministers attending the IMF/World Bank meetings may not be able to influence the views of Trump and his supporters, but they could share a common resolve to avoid the spread of 'economic malpractice'. If this was achieved, something significant would come from this year's meetings.
Photo courtesy of Twitter user george.brenner