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 IMF Meetings Should Target Double-Dip Risk: Mohamed A. El-Erian

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PostSubject: IMF Meetings Should Target Double-Dip Risk: Mohamed A. El-Erian   Thu Sep 16, 2010 10:48 am

Bloomberg--Many topics are being teed up for next month’s annual meetings of the International Monetary Fund and World Bank in Washington, a gathering that will draw about 190 country representatives. There is a substantial risk of disappointment, one that would be detrimental to the welfare of billions around the world over time. This risk can and should be minimized. To do so, the natural inclination for complexity must urgently be replaced by focused simplicity. This can be achieved by placing just one question on the agenda:

Why are economic policies in industrial countries proving so frustratingly ineffective? Already, there are too many examples of policy outcomes that have fallen well short of expectations. In the U.S. alone, just look at the high unemployment rate that persists in the face of unprecedented fiscal stimulus and the extended use of unconventional monetary policy. Witness the de-risking of household investment portfolios as individuals sell equities in favor of cash and bonds. Consider the massive cash balances being hoarded by large companies and banks. Normally, cash burns a hole in the pockets of Americans, especially when the Federal Reserve is aggressively using low interest rates to push us all to assume more risk. Not today.

In Europe, dramatic policy actions have failed to calm concerns about solvency risk in peripheral countries such as Greece, Ireland, Portugal and Spain. Risk spreads in these countries are worse than they were a few months ago, even after the much-heralded stress tests of banks, previously unthinkable support from the European Central Bank and exceptional funding from other governments and the IMF.

Japan’s Currency

Meanwhile, in Japan, the government has been forced to use currency intervention in an attempt to counter a rise in the yen that will further damp economic activity. The picture is no brighter on a multinational level. Global imbalances in trade and currency are again increasing, no matter the considerable rhetoric to the contrary. The IMF itself remains hampered by governance and representation deficiencies that are taking too long to fix.

Policy ineffectiveness matters a great deal. The longer it persists, the greater the challenge of restoring industrial economies to the path of sustained high growth and job creation. Investment in people, ideas and equipment would decline. Current and future generations would suffer. Human misery would worsen as more people fall through the increasingly large gaps in overly stretched safety nets.

Risk of Protectionism

The world also faces a high risk of a surge in protectionism as governments struggle to balance the economically desirable with the politically feasible. A focus on the ineffectiveness of economic policies would, I believe, lead to swift progress in three key areas:

-- Understanding the complexity of the problems facing industrial countries.

It’s not just about demand; it’s also about structure and debt overhangs. The responsiveness of the economy is being challenged by consequential changes in what drives growth and wealth at both the national and global level. The resulting tensions can’t be addressed just through cyclical fiscal and monetary policies. They urgently require structural measures aimed at improving the responsiveness of the economy while also protecting the most vulnerable parts of society.

-- Formulating policy that breaks free from ad hoc, piecemeal and reactive patterns.

A proper package of measures would help decision makers around the world regain the policy initiative and attain critical mass.

-- Communicating a multiyear economic vision that is closer to the realities being felt by most on the ground.

Policy makers need a greater buy-in from their citizens, who, according to polls, currently doubt their seriousness and effectiveness. The IMF and World Bank meetings could align increasingly divergent national narratives with a single, common question. The resulting clarity also would put industrial countries in a better position to call on emerging economies to assist in improving the global economic outlook.

You need only look back to the October 2008 meetings of the IMF and World Bank, and the London G-20 summit that followed six months later, to witness the power of focusing on a common question -- in that case, how to respond to a global financial crisis with coordinated emergency actions. It would be tragic if the Washington meetings went to waste and the well-being of billions was left to face the possibility of greater erosion. Let’s not wait for a double dip in industrial countries and a deflationary trap to regain the commonality of purpose needed to create a pathway for more effective policy making.

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