Elliott: WTO moribund, IMF and World Bank reluctant to confront Trump
Finance ministers and central bank governors gathered in Bangkok for the annual meeting of the International Monetary Fund at a moment that has, so far, refused to become a crisis. Two big regional wars are destabilising prices and supply chains everywhere. Businesses and consumers are absorbing a serious energy shock. Rising inflation has made it more expensive for governments to finance their debts, and China and the United States are at loggerheads over trade.
Larry Elliott, a Guardian columnist, writes that it is something of a miracle the officials in Bangkok are not dealing with a full-blown crisis, and that this is not like the autumn of 2008, when the meetings took place during the worst of the global banking meltdown. The IMF is right, Elliott writes, that countries have shown resilience coping with so many headwinds, and that it could have been worse — a lot worse. There was even some good news for the United Kingdom, with the IMF upgrading its growth forecast for this year and praising the British government for its deficit-reduction plan.
That better-than-expected performance breaks with historical precedent, Elliott writes: oil shocks of the magnitude witnessed since the start of the Iran war have had a marked and immediate impact in the past. He gives three reasons growth has remained robust and inflationary pressure muted this time. First, the massive amount of investment in the development of artificial intelligence, which has been particularly important in the United States, comfortably the fastest-growing member of the Group of Seven year on year. Second, countries have drawn on inventories of oil, alleviating the loss of crude from the Middle East; had stockpiles not been run down, Elliott writes, oil prices would have risen even more sharply. Third, China’s economic strategy relies on exporting cheap goods to the rest of the world, bearing down on import prices elsewhere.
The flashpoints, in Elliott’s account, are everywhere. The situation in the Middle East is deteriorating, with the conflict spreading to Saudi Arabia. Oil stocks are running low, and Donald Trump has got the United States into just the sort of forever war he used to rail against. The downside of cheap Chinese goods is that they threaten manufacturing jobs in the West, with Germany especially vulnerable. Massive US investment in AI has pushed up the cost of borrowing and resulted in shortages of capital for non-AI sectors. Governments are under pressure to rein in spending or raise taxes in the hope that bond markets will be impressed by their efforts to cut budget deficits.
Warnings from Kristalina Georgieva, the head of the IMF, and Andrew Bailey, the governor of the Bank of England, on the need to run a tighter fiscal ship come at a time when voters want politicians to do more, not less, Elliott writes. There is little appetite for a new era of austerity, and finance ministers know it. If they follow through on the tough talk and deliver painful measures, Elliott writes, the backlash is likely to be brutal.
Just as big a problem, Elliott writes, is the need to boost national self-sufficiency at a time when global supply chains are stretched and fragile. The student protests in India and France highlight the pressures on states to intervene. Yet the capacity of states to act effectively is much weaker than they care to admit.
At a time when globalisation is in retreat, a strong system of multilateral cooperation is needed to cope with the strains. Elliott writes that none currently exists: the World Trade Organization is moribund in this new age of protectionism, and the IMF and the World Bank are reluctant to call Trump out for his erratic behaviour. The idea that a new era of partnership will flower under a new US president is, he writes, for the birds. The problems of multilateralism run far deeper than that: the liberal world order the IMF and World Bank have presided over since the end of the second world war was dysfunctional long before Trump arrived in office.
Richard Kozul-Wright, a former UN official, makes that case in a paper due for publication next month. Kozul-Wright argues that the IMF and World Bank, created at the 1944 Bretton Woods conference, may still be operational but have lost their connection to the New Deal principles laid out 82 years ago — state intervention in the running of economies, active industrial policy, the pursuit of full employment and help for poor countries to develop. “Instead, they have in recent decades pursued an agenda which encourages footloose capital, bolsters (and protects) private profit, and reduces the policy space available to governments,” Kozul-Wright writes. “As a result, they have acted as hand maidens to an age of rising inequality, debt distress and heightened anxiety.”
Elliott points to the IMF’s own lending programmes as an illustration of that argument about policy space. Help comes with strings attached: an insistence on tax increases and spending cuts that are frontloaded, so that half the measures are implemented in the first year and two-thirds within two years. The IMF argues this “tough love” has a higher chance of success, Elliott writes, although its view of what constitutes success is limited and primarily means that a borrowing country does not need another IMF programme in the next three years — not that living standards are improving or that fewer people are in poverty.
Elliott sets out what a return to New Deal principles would deliver: more policy space for governments to develop strategies tailored to their own needs, a boost to public investment, a new Marshall plan to help poorer countries cope with the climate crisis, and a serious attempt to tackle debt distress. His judgment is that none of that has a chance of happening any time soon, and that as a result the world will become hotter, more fractured, more prone to conflict, less equal and a lot angrier.
The IMF is worried that the limits of this resilience may soon be tested, and Elliott writes that it is right to be worried. Peace in the Middle East would bring oil prices tumbling down, but unless that happens quickly a long winter lies ahead. This looks more like a crisis postponed than a crisis permanently avoided, he concludes. A lull before the storm, in all probability.