The once and future global imbalance

By Phil Levy

The Pittsburgh G-20 meetings concluded with a call for strong, sustainable, and balanced global growth. Countries were going to get their acts together, to shape up, to mend their ways. And if they don’t? What if they just go with their own domestic political imperatives? Then someone will call them out, the leaders said.

But who? The International Monetary Fund, perhaps. After a meeting of finance ministers, the AP reported:

Four governments — including the United States and China — renewed promises to enact policies aimed at rebalancing global trade.

They said an orderly reduction in the U.S. trade deficit and trade surpluses in Asia would benefit the world by defusing protectionist trade action…

“It was agreed that a rebalancing of domestic demand growth across economies would be key to reducing imbalances…,” said the statement, issued on behalf of the group by the IMF.

China pledged to take steps to increase domestic demand, deepen financial reforms and increase the flexibility of its currency, a step long demanded by the United States and other industrialized nations.

Wait! This story is from April 2007, on the eve of the global financial crisis. (Plus ça change…). That meeting followed a 2006 agreement that the IMF would adopt a new surveillance system to identify misaligned exchange rates. The surveillance program essentially came to naught. This ineffectiveness was not due to any analytical weakness on the part of the good folks at the IMF. It turned out, rather, that big countries like the United States and China dislike being publicly criticized.

Of course, smaller nations share this distaste for criticism, but they usually have no choice. The IMF has leverage when it lends money. When a nation like Hungary or Iceland finds itself in serious trouble, it must accept IMF policy prescriptions along with the cash. The bitter memories of this cash/criticism combo from the Asian financial crisis of the late 1990s help explain why Asian countries have built up such substantial piles of exchange reserves; they want to ensure they are not in that position again.

Why should the IMF or World Bank care, though? Why not just call it the way they see it and let the big countries deal with their own bruised egos? Because the big countries are the IMF and World Bank. The leaders of the bank and fund spend their days reporting to boards of executive directors, seeking the boards’ approval for all they do. These institutions are not like the U.N. General Assembly — one country, one vote — the executive directors’ votes are roughly weighted according to the economic heft of the countries they represent.

This creates a dynamic that played out this week in Istanbul, where the bank and fund are holding their fall meetings. According to the Financial Times, World Bank President Robert Zoellick asked his governing council for an infusion of $5 billion. Without it, he said,

“[A]s we start to get towards the middle of next year we are going to start to face some serious constraints and we would have to ration…” He said uncertainty over future financing capacity was already affecting bank work with developing countries.

Developing nations voiced unanimous support for a capital increase.

But developing nations are not the ones paying the bills. Zoellick faced a much more skeptical reception from the British, the French, the Japanese, and the Americans. It is the major donors to which any bank president is beholden. This dependence did not stop Zoellick from making a relatively forthright speech about global imbalances last week at the Johns Hopkins School of Advanced International Studies, but the FT pictured him yesterday with his head in his hands.

The independence deficit of the IMF and World Bank is serious, but perhaps not the most significant obstacle to achieving global rebalancing through coordinated reform. Even if Bob Zoellick launched the kind of scathing critique of which he’s certainly capable, it would not suffice to bring serious cuts to U.S. federal deficits or to prompt revaluation of the Chinese currency. President Obama’s political prospects depend heavily on delivering a costly expansion of health-care coverage. The Chinese leadership’s legitimacy rests heavily on maintaining employment in the manufacturing sector. In each case, the domestic political stakes are far too high to be overcome by global opinion, no matter how blunt.

Change will come, of course. But it will be through average American voters worrying about borrowing from their grandchildren, or from average Chinese worried about the value of their massive dollar holdings. Right now, even if the IMF or the World Bank were to call out, those key constituencies aren’t listening.

Win McNamee/Getty Images