Concern at IMF
Populist wave worries Lagarde
As finance ministers and central bankers from 189 countries converge on Washington this week for the International Monetary Fund’s semiannual meetings, the group faces a wave of antiglobalism from the U.S. and other large members that threatens to undercut its very mission.
Experts say the shift toward populism and nationalism — underscored by President Trump’s election and the United Kingdom’s vote to leave the European Union — is likely to dominate discussions at the meetings of the IMF and World Bank, which formally begin Friday.
“This move toward a retreat to nationalist policies cuts right at the heart of the IMF’s mission of promoting multilateralism and global cooperation,” said Eswar Prasad, a professor of trade policy at Cornell University and former head of the IMF’s China division.
The IMF provides loans to struggling countries and works to ensure global financial stability, while the World Bank assists poor and developing nations.
The movement toward nationalism has gained traction just as the global economy finally seems to be picking up in earnest. For years after the 2008 financial crisis and recession, IMF Managing Director Christine Lagarde said, the “uneven” global recovery largely benefited the U.S., China and emerging markets until some of those markets, most notably Brazil and Russia, were walloped by plunging prices in the commodities they exported.
But the eurozone’s economy is perking up, the U.S. remains on a path of moderate economic growth and rising commodity prices are beginning to lift the fortunes of those struggling emerging markets.
“We see a global economy that has a spring in its step,” Lagarde said in a speech last week, her most upbeat assessment in years. In January, the IMF predicted the global economy would grow 3.4% this year and 3.6% in 2018, up from 3.1% last year.
“But,” she added, “just as we see this momentum unfolding, we also see — at least in some advanced economies — doubts about the benefits of economic integration, and about the very architecture that has underpinned the world economy for more than seven decades.” Warning of “clear downside risks,” she identified “the sword of protectionism hanging over global trade.”
Trump has threatened to slap Chinese and Mexican imports with big tariffs. His intent is to lower the U.S. trade deficit with those countries, part of his vow to bring back some of the hundreds of thousands of U.S. manufacturing jobs lost to those countries the past two decades.
Meanwhile, the U.K.’s “Brexit” from the European Union, which will take two years to negotiate, is expected to disrupt trade relations between Britain and the rest of the 28-nation bloc.
The IMF, by contrast, espouses a policy of free and open trade, in part to lift up emerging and developing countries and promote solid overall growth in a world in which nations are increasingly interdependent.
A prime example of the clash, Cornell’s Prasad said, is Trump’s assertion last week that the dollar is “getting too strong.” A strong dollar hurts U.S. exports by making them more expensive for overseas customers. But a weak greenback makes imports more expensive for U.S. consumers.
Similarly, hitting China and Mexico with tariffs may provide some short-term boost to the U.S. economy but is likely to spark retaliation from those countries, hurting American exports and ultimately leading to more U.S. job losses than gains, Prasad said. The U.S., he said, would be better served working to convince China to provide more access to its market, which still is largely inhospitable to foreign shipments.
Protectionist trade policies also foment uncertainty that can hamper investment, Prasad said.
“Global companies are (more comfortable) in environments that promote global connections,” said Nancy McLernon, president of the Organization for International Investment. “Policies that shut down global connections will make the U.S. less competitive.”
In his budget outline, Trump proposed cutting $650 million over three years in funding for lenders such as the World Bank. Congress still must pass any spending blueprint.
This week, IMF and World Bank officials and foreign ministers are likely to press U.S. representatives for a clearer picture of U.S. trade policy and funding plans, said Edwin Truman, former assistant Treasury secretary for international affairs. But with key Treasury posts still unfilled, “They probably won’t get much in the way of answers,” he said.
However, Trump and other administration officials have toned down their anti-trade rhetoric in recent weeks.
“Given the fact that Trump has not been as America-First as people feared, there’s hope for moderation,” Truman said.