The IMF and the Global Economy

While browsing around the morning news, I came across a somewhat unsettling headline: "IMF sees 'Alarmingly High' Risk of Deeper Global Slump." This post, originating on Bloomberg's website, detailed the most recent global growth forecasts and projections compiled by the IMF. Sadly, the findings seemed to be even more dismal than many had expected. According to the statistics, the world economy is expected to grow only 3.3% this year, which is the slowest rate since the 2009 recession. The IMF further stated that there are "'alarmingly high' risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent." In its World Economic Outlook report, the international lender noted that the big question is whether this is more normal, albeit uncomfortable, economic turbulence, or whether this expected slowdown in growth indicates something more lasting. The factor that the IMF predicts will tip the scales? According to the same report, "the answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges."

After reading about the IMF and discussing it a bit in class, the last statement got me thinking about some of the problems the IMF might face, as well as its overall effectiveness as a sort of global economic authority. First of all, I found it interesting that the slowing of overall international growth can be due to the actions within a very specific region or regions of the world. Certainly, huge economic powers like the UK, European Union, and the US are major players within the global market and are often at the heart of many economic activities. But, the sheer level of their influence is made starkly clear here. If they do not heed the recommendations of the IMF, economies and markets all across the world will suffer.

Within the report, the IMF "called for U.S. policy makers to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession." Moreover, "Europeans must follow on their commitments for a more integrated monetary union, and many emerging markets can afford to cut interest rates or pause tightening to fight off risks to their economies." As the skilled economists predict, the EU and US must adopt specific strategies of economic growth before the global economy can recover from its current slump. Though these strategies certainly would not cure the problem--indeed, they may not have much of an immediate impact at all--they would likely lessen the duration and severity of the current slowdown.

Interestingly, these clear policy recommendations from an authoritative body are easier said than done. In both of these economies, but especially within the US, the recommended changes are highly politicized and debated. Because these changes are not actions that can be accomplished by the Fed alone or by the European Central Bank, there must be a large element of governmental compliance on the fiscal policy side. After reading this portion of the report, I immediately thought back to the importance of the economy in the upcoming election, as well as the veritable war being raged between the strategies of the two parties. On one hand, Romney has tended to champion tax cuts and increased consumer spending, but Obama has advocated for a more robust tax system and increased governmental spending. While both candidates have the primary goal of improving the domestic economic outlook, it is clear that their respective positions will also have an impact on the pace of the global economy as a whole.

Certainly, the IMF's recommendations are not aimed at a specific side of the party line, but rather have the goal of improving the state of the world's economy. As such, its prescriptions ought to be taken seriously.  The outcome of the US elections, however, may determine much more than who will govern the country for the next four years--it may determine whether the US helps or hinders international growth and recovery. While things are, of course, not this simple in reality, it is equally interesting and alarming to see how far-reaching the effects of domestic fiscal policy decisions can be.

In the same vein, I also wondered if major economic powers have a certain burden of cooperation or economic behavior. Though countries like the US, UK, and Germany are entitled to their own occasional downturns, recessions, and stagnant periods, these dips have much more influence on the world economy than perhaps a depression in Zimbabwe. As such, the expectations of their economic performance and policy responsibility must be much higher. A few ill-formed decisions or, as referenced above, party-driven mandates, may have an almost unfair effect on the state of global markets. This could happen if one of the countries were to impose significant protectionist policies as well. Its domestic economy or industries may benefit in the short term, but the rest of the world would be, in effect, screwed over. Therefore, because these powers have such leverage on the international economy, there must be at least an unspoken expectation that they adopt responsible strategies, remain essentially open for trade, and generally heed the advice of the IMF.

Through this consideration, however, I noticed an underlying implication of the IMF's powerlessness. It can make any recommendation it wishes, but it seems that even the most economically-floundering country could choose to turn a blind eye to them and instead fiddle while Rome burns. While the IMF is certainly an important authority when it comes to lending and economic stability, it cannot ultimately force any of its member countries to comply with its fact-based suggestions. Many times in the article, there were "calls to action" or "urgings," but never anything stronger. At the end of the day, it falls to the government and banking system within a country to consider IMF recommendations and make final decisions. And, when these decisions are tied up in political divisions and heated opposition, a guarantee of implementation is far from achievable. Thus, as the elections approach and the candidates' economic strategies continue to butt heads, one hopes that both have an eye to the international economy as well. The methods for stimulating growth will be markedly different depending on who is elected, and it will be quite interesting to see how they compare to the IMF's recommendations and what effect they have on global economic activity.