In revising down its projections for growth, the International Monetary Fund on Tuesday confirmed that western countries continue to battle persistently sluggish economies and, in some cases, financial instability. Meanwhile, the more dynamic emerging and developing economies are making greater strides in closing gaps in both income and wealth. All this translates into a “three-speed world” that complicates existing challenges.
The findings will inform this weekend’s discussions in Washington, as officials from around the world gather for the semi-annual meetings of the IMF and World Bank. They would be well advised to go beyond the important issue of how individual countries emerge more quickly from their malaise. They should also spend some time on the implications of this new configuration for the west’s ability to project and deploy economic power globally.
The revised IMF projections confirm what virtually all analyses agree on: with western economies struggling, unemployment will remain alarmingly high in some countries, budgets will be stretched and poverty will deepen in the most vulnerable economies.
In such circumstances, western governments will naturally be inclined to become even more insular. Compelled to place domestic issues ahead of international ones on their policy agendas, they will generally be less willing — indeed, in some cases, less able — to influence economic developments elsewhere.
To the extent that this trend continues, which in the absence of significant reforms is likely, it speaks to more than a secular global realignment. It also affects the world’s ability to manage crises, maintain international financial and economic standards, co-ordinate policy responses and operate a comprehensive set of cross-border checks and balances.
This situation is even more fragile when one considers the west’s hold on global economic governance. At the IMF, even the most modest reforms are hampered by national political challenges in western countries. Accordingly, their retrenchment inevitably entails a weakening in multilateralism.
So far, reactions in the rest of the world have been mixed. A few countries seem indifferent but most fall along different points on a continuum ranging from exuberance to despair. For some, the shift means a world full of unprecedented opportunities; others, however, worry about navigating a world with weaker external economic and financial anchors.
Financially robust countries, such as China, are losing no time. They are expanding their global footing, foreign ownership, diplomatic alliances and economic influence — particularly in Africa, Latin America and the Middle East.
Mostly, this enables productive activities that otherwise could have been undermined by a lack of financing. In some cases, however, outcomes run counter to longstanding multilateral practices, falling short of established international standards for scrutiny, prudence and accountability. Environmental and anti-corruption initiatives are among the areas that risk being undermined.
Then there are the nations where existing domestic weaknesses are immediately compounded by the erosion in western interests. Their dependency renders them particularly vulnerable to any sustained reduction in financial aid and technical assistance. This is particularly acute for countries, including in the Middle East and Africa, going through delicate political transitions while also lacking the potentially stabilising influence of external institutional and financial anchors.
We should not totally despair about this second set of countries. Just recall the response of a Brazilian official in the mid-2000s when asked why, this time around, his country had finally emerged from its multidecade phase of recurrent crises and economic disappointments. In addition to the importance of President Luiz Inácio Lula da Silva’s leadership and the broader engagement of society at large, he noted Brazil’s recognition that the US focused its attention after the terrorist attacks of September 11 2001 away from its “back yard”. As such, officials felt less comfortable about relying on a timely American-led rescue.
Those countries that are either indifferent or yet to recognise continuing shifts in the global system are vulnerable. They could easily fall victim to hidden currency wars and changes in international capital flows.
This weekend, the goal of officials meeting in Washington should be to address the acute problem of those European economies that lack not just growth but also a viable growth model. And they should not stop there. They should also spend time trying to understand the evolving nature of cross-border economic influence in order to facilitate the productive engagement of capital and ideas from the emerging world while minimising the risks of lowered global standards.
The writer is the chief executive and co-chief investment officer of Pimco