Leading countries secured a breakthrough in the governance of the global economy at the weekend, transforming the role of the International Monetary Fund and putting it at the centre of a more co-operative effort to resolve trade imbalances.
The IMF was given a mandate to start immediate negotiations between the countries with the largest trade imbalances. Its goal will be to secure agreements to reform economic and exchange rate policies to close trade gaps and prevent a global financial crisis. If successful, it could lead to big changes in economic policies, including an appreciation of China’s renminbi.
Causes of global imbalances will come under the spotlight in the first IMF “multilateral consultation”, including low levels of US savings, the inflexibility of the Chinese exchange rate and surpluses in Japan, Germany and among oil producers. Participating nations will use the IMF as a forum to seek solutions to these problems.
Rodrigo Rato, IMF managing director, said the IMF’s analysis would be published, putting additional pressure on countries to agree, since it would not have any tools to force policy changes.
All IMF members, including China, supported the new procedures. IMF members also agreed that some emerging countries should be given greater ownership and voting rights.
Mr Rato said the changes to the fund’s purpose in addressing global imbalances was “a very important step in the role of the fund in tackling global imbalances but also in producing an encouraging, co-operative response to global issues”.
IMF plaudits on imbalances deal
The US, in particular, is pleased at the growing recognition that its record trade deficit is the product of global forces, not just its own government deficit, and has to be resolved in a way that sustains global growth.
A senior US official said: “I think that surplus countries are beginning to understand that there will be no adjustment unless they are a part of it.”
Even senior G7 officials sceptical about the chances of progress were delighted. David Dodge, governor of the Bank of Canada, said there had been “strong support for building an IMF to do the job that it needs to do in the 21st century”.
But differences remained on the responsibility for the world’s trade gaps and the meaning of the IMF’s new surveillance role.
European Union ministers continued to insist that since Europe’s trade was in balance, the issue was primarily one between the US and Asia.
Zhou Xiaochuan, governor of the People’s Bank of China, warned the IMF’s governing body not to use multilateral surveillance as a mechanism to attack its exchange rate policies. “If surveillance is wrongly focused on an evaluation of the exchange rate level ... it will hardly be objective and certainly miss more fundamental issues.”
