While the new managing director of the International Monetary Fund (IMF), Christine Lagarde, spoke of rediscovering the “spirit of Bretton Woods” at the annual meetings of the Washington, DC-based international financial institutions (IFIs), India’s Prime Minister Manmohan Singh reminded the United Nations General Assembly in New York on the same day that the world had changed a lot from the days of Bretton Woods, and the IFIs and the UN system needed to catch up. Reserve Bank of India Governor D Subbarao summed up the proceedings at the annual meetings very well when he said “the headline message” of the annual meetings was that in dealing with the twin threats of a recession in the US and a sovereign and banks’ debt crisis in the euro-zone economies “we are rapidly running out of time, and may, therefore, be running out of solutions”.
Both Ms Lagarde and Dr Subbarao referred to the “negative feedback loop”: “between weak growth; weak balance sheets among sovereigns, banks, and households; and inefficient political commitment.” Dr Subbarao made the interesting point that while in 2008 the world was better placed to respond to the crisis and did, in fact, respond with greater determination and co-ordination, in 2011 such reassurance was lacking. In 2008 governments were better placed to deal with a problem emanating from the private sector, while in 2011 the private sector is wilting under government inaction and fiscal constraints. Given the dual threats of a recession and a debt crisis in the transatlantic economies, the inaction by developed country governments poses a dangerous threat to the global economy.
The only words of hope and optimism at the annual meetings were in the communiqué adopted by the International Monetary and Financial Committee (IMFC): developed countries would seek to “build confidence and support growth, and implement clear, credible and specific measures to achieve fiscal consolidation” while the euro zone would do “whatever is necessary to resolve the euro-area sovereign debt crisis and ensure the financial stability of the euro area as a whole and its member states”. The IMFC also agreed that “surplus countries”, a code word for China, must do more to stimulate domestic demand and adopt more flexible exchange rate policies.
Reflecting the new thinking within the Fund, Ms Lagarde spoke about the importance of “inclusive growth” and the need to “protect jobs”, concerns that in the past were foreign to IMF thinking when it dealt with crises in developing countries! Ms Lagarde’s ability to revive the “Bretton Woods spirit” would largely depend on her ability to encourage new thinking within IMF, get more funds for IMF so that it can lend more effectively, and, most importantly, make its surveillance mechanism more transparent and more effective with respect to developed economies. An IMF that can only bark but has no bite will not be able to regain its credibility. Finally, Dr Subbarao’s wise words, “when confidence is hit, even strong fundamentals do not matter”, are as much a wake-up call for the West as for India.
