IMF and global coordination

BEFORE the financial crisis of 2008, the International Monetary Fund (IMF) was in decline.
Demand for loans was low, leaving it short of revenue.
Asia remained leery of the IMF a full 10 years after the currency crises of the late 1990s. Its analytical talents remained high but downsizing placed them at risk.
The crisis changed all that.
It became clear that the IMF has a crucial role to play in dealing with crisis-induced instability. Moreover, because of the IMF’s broad and deeply embedded multinational expertise, its activities are central to achieving globally cooperative solutions to economic and financial problems.
Without such solutions, the system will tend to become periodically unstable, and to go off on unsustainable paths that end destructively.
We have just lived through one of these episodes.
The IMF is needed for several  key purposes. One involves crisis response.
In a global financial upheaval like our most recent one, capital flows shift abruptly and dramatically, causing credit, financing and balance of payments problems as well as volatile exchange rates.
Left unattended, these problems can cause widespread damage in a wide range of countries, many of which are innocent bystanders.
The system needs circuit breakers in the form of loans and capital flows that dampen the volatility and maintain access to financing across the system.
A well-capitalised IMF, much better capitalised than pre-crisis, should be able to fill this backstop – similar to what central banks do (and did in the crisis) to prevent a credit freeze and the inevitable and excessive economic damage that would result.
The new IMF flexible credit line performs this function for what amount to AAA-rated countries.
A programme that meets the needs of the more vulnerable countries is under construction.
The challenge is to find the right mix of pre-approval, limited conditionality and speed. At the same time, while getting the crisis response mechanisms right is important, it is not the whole story. The IMF is at the epicentre of large-scale global coordination challenges.
Having initially been shunned, it has assumed a key role in financing – and, more importantly, implementing – fiscal-stabilisation programmes for the European Union’s peripheral countries.
These programmes are needed to limit contagion and restore stability to the eurozone, pending deeper institutional reforms that address fiscal interdependency in the context of monetary union.
The most important issue on the global economic agenda – rebalancing and restoring global demand – is a coordination challenge par excellence.
The sudden reduction in excess consumption in the United States, as a result of the crisis, makes meeting this challenge all the more urgent. Without an effective rebalancing programme, growth will be sub-par and employment difficult to restore on a sustainable basis.
Government stimulus programmes are limited in their ability to restore demand.
The global economy needs the surplus countries to sustain growth and reduce excess savings – no easy task. It also needs deficit countries (and the advanced countries more generally) to develop and enact credible growth strategies that involve structural change as well as fiscal stabilisation.
The G-20 is now the priority-setting and decision-making body for this kind of challenge; the crisis having made it clear that the G-7 could no longer perform this function.
Major emerging economies are too large, and too important, to be left out of the search for globally cooperative outcomes. The crisis also convinced most of us that non-cooperative outcomes are likely to be distinctly sub-optimal in terms of growth, stability and sustainability. – Project Syndicate

*Michael Spence is professor of economics, Stern School of Business, New York University, and senior fellow, the Hoover Institution, Stanford University.