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Can the IMF avert a global meltdown?
Ken Rogoff




When world financial leaders convene in Singapore on Sept 18 for the joint World Bank/International Monetary Fund meetings, they must confront one singularly important question. Is there any way to coax the IMF's largest members, especially the United States and China, to help reduce the risks posed by the world's massive trade imbalances? ... Incredibly, the US is now soaking up roughly two-thirds of all global net saving, a situation without historical precedent.

While this borrowing binge might end smoothly, ... most world financial leaders are rightly worried... Indeed, if policymakers continue to sit on their hands, it is not hard to imagine a sharp global slowdown or even a devastating financial crisis. ...

Though the comparison is unfair, it is hard not to recall the old quip about the IMF's relative, the United Nations: When there is a dispute between two small nations, the UN steps in and the dispute disappears. When there is a dispute between a small nation and a large nation, the UN steps in and the small nation disappears. When there is a dispute between two large nations, the UN disappears.

Fortunately, the IMF is not yet in hiding, even if some big players really don't like what it has to say. The IMF's head, Rodrigo Rato of Spain, rightly insists that China, the US, Japan, Europe and the major oil exporters (now the world's biggest source of new capital) all take concrete steps towards alleviating the risk of a crisis. ...

[S]uch steps might include more exchange-rate flexibility in China, and ... a promise from the US to show greater commitment to fiscal restraint. Oil exporters could, in turn, promise to increase domestic consumption expenditure, which would boost imports.

Likewise, post-deflation Japan could promise never again to resort to massive intervention to stop its currency from appreciating. Europe, for its part, could agree not to shoot its recovery in the foot with ill-timed new taxes such as those that Germany is currently contemplating.

Will the IMF be successful in brokering a deal? The recent catastrophic collapse of global trade talks is not an encouraging harbinger. ... Fortunately for Mr Rato, addressing the global imbalances can be a win-win situation. The same proposed policies for closing global trade imbalances also, by and large, help address each country's domestic economic concerns.

For example, China needs a stronger exchange rate to help curb manic investment in its export sector, and thereby reduce the odds of a 1990s-style collapse. As for the US, a sharp hike in energy taxes on gasoline and other fossil fuels would not only help improve the government's balance sheet, but it would also be a way to start addressing global warming. What better way for new US Treasury Secretary Hank Paulson, a card-carrying environmentalist, to make a dramatic entrance onto the world policy stage? ...

If today's epic US borrowing does end in tears _ and if world leaders fail to help the IMF get the job done _ history will not treat them kindly. Instead, they will be blamed for not seeing an impending catastrophe that was staring them in the face.

Let's hope that on this occasion in international diplomacy, the only thing that disappears are the massive global trade imbalances, and not the leaders and institutions that are supposed to deal with them.