The annual meeting of the IMF and World Bank Group opened in Singapore last week. With a nod to those who found BGIE fascinating last year, this piece introduces two global economic issues which were discussed at the meeting this year.
Controversy struck the meeting even before it started. The Singapore government was heavily criticized by NGOs, international press organizations and even the World Bank for banning anti-globalization activists from the country over the duration of the meeting and for limiting the number of protesters allowed at the meeting site. World Bank President Paul Wolfowitz called these measures “authoritarian.” Singapore eventually relaxed the ban but this was overshadowed by worldwide coverage of the unsuccessful stand-off between a local opposition leader, Chee Soon Juan, and the police when Mr. Chee attempted to march to the meeting site. Over 600 activists also decided to create their own forum in the neighboring Indonesian island Batam.
Global economic conditions-slowdown in trade and economic imbalances
Rodrigo de Rato, managing director of the International Monetary Fund, warned that the global economic growth cycle may be close to its peak. “The best hope for continued high growth lies in further increases to international trade,” Mr. de Rato said in his opening statement to the world finance ministers and central bank governors last Tuesday.
Mr. de Rato gave three main reasons for the potential slowdown. First, high oil prices are likely to increase inflation. Second, protectionist sentiments are rising and there is a risk that barriers to trade will eventually choke off trade flows. He urged the G8 countries and emerging economics to return to the table and resume the Doha Round WTO negotiations.
Third, there is the continued risk of a sudden unwinding of the current account imbalances, which will lead to the dollar crashing. ECs may recall that President Summers spoke on the same issue last semester, in which he emphasized the enormity of the imbalances. The situation is even more urgent now that the U.S. has released data (on the same day Mr. de Rato was speaking) which showed that the current account deficit has widened in the second quarter once more, to $218B, although remaining constant at 6.6% of GDP. Treasury Secretary Hank Paulson told his fellow finance ministers at the meeting that fixing the global imbalances was a “shared responsibility.” While the U.S. works to reduce its fiscal deficit, Europe and Japan need to increase growth with structural reforms and China needs to allow its heavily under-valued currency to appreciate or float. The governor of the People’s Bank of China, Zhou Xiaochuan, however, defended his position by arguing that China’s foreign exchange reforms have made “significant progress.”
Emerging economies have in recent years demanded a greater say in the running of both the International Monetary Fund and the World Bank. This has turned into one of the major issues in the developing world. Last week, they saw some of their demands being met. The IMF increased the voting share of four countries-China, South Korea, Turkey and Mexico, in order to reflect their growing economic power.
The weight of each nation’s vote is tied to its quota or financial commitment to the IMF, which are in turn determined by the size of their economies and the currency reserves, as well as openness to trade and capital flows. India, perhaps surprising, did not see its voting rights augmented this time around. However, the IMF has promised a second round of reforms to overhaul the voting structure of all members within two years, in order to increase the share of voice among developing countries.
The World Bank, on the other hand, decided to give the 24-member executive board oversight to ensure that the Bank’s decisions are broadly based when it comes to determining if corruption should preclude countries from receiving World Bank funds. The World Bank president, Mr. Wolfowitz, had previously blocked more than $1B (USD) in investments in Africa and Asia on account of allegations of corruption, a move heavily criticized as penalizing poor people for the abuses of their governments.