Joint measures are needed to reduce global payments imbalances that could unwind in an abrupt and disorderly way unless coordinated action is taken, IMF Managing Director Rodrigo de Rato said on a May 22–25 trip to Europe and Southeast Asia.
“Neither changes in Asian exchange rates nor fiscal adjustment in the United States alone can defuse the problem of global imbalances. What is needed is a coordinated international effort to rebalance growth and demand,” he said in a speech on May 22 to an Austrian National Bank seminar in Vienna.
“Global imbalances must eventually unwind. The risk is that they will be unwound in an abrupt and disorderly way. For example, there could be an abrupt fall in the rate of consumption growth in the United States, perhaps triggered by developments in the housing market. Or a disorderly adjustment might be triggered by developments in financial markets,” de Rato stated. “Recent changes in exchange rates are in the right direction to help aid the adjustment process and, so far, have been orderly. But if investors become suddenly unwilling to hold U.S. financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt depreciation of the U.S. dollar and increases in U.S. interest rates,” he added.
IMF as coordinator
At the Spring Meeting of the IMF in Washington, D.C., in April, the policy-setting International Monetary and Financial Committee of the Board of Governors asked de Rato to pursue multilateral consultations to help curtail the imbalances in an orderly way.
“These multilateral consultations will be something new for the IMF and for our members,” de Rato stated, “and they will be an important vehicle for analysis and consensus building. They will enable the Fund and members to address vulnerabilities that affect individual members and the global financial system within a framework that helps overcome some of the hurdles to individual action by emphasizing the benefits of joint action, with benefits for all.”
He told reporters that the IMF would examine what specific issues needed to be addressed. The IMF would then initiate discussions with certain countries or regions to work out how the issues could be resolved collectively.
Later, during a visit to Singapore, de Rato said that there was a broad consensus among policymakers on the measures needed to reduce global imbalances. “Most policymakers around the world agree that what is needed is fiscal adjustment and measures to stimulate private saving in the United States, further exchange rate appreciation and measures to stimulate domestic demand in some countries in emerging Asia, and structural reforms to stimulate demand and improve productivity in the nontradables sector in Europe and Japan,” he stated. “But this consensus has so far been translated into only limited action.”
This is where the IMF could help through a coordinated multilateral approach, de Rato said in a May 24 speech to the Economic Society of Singapore. The Fund’s role as a trusted independent source of analysis and advice would enable the major players to move more quickly beyond diagnosis of the problems, to prescriptions for how to fix them, he added.
The Managing Director emphasized that the process of curtailing the imbalances must be consensual. “It is only going to work if all of those involved want to participate and are convinced that the actions they jointly agree to take are in their own best interests. It will also take time. Global imbalances are a complex problem, many years in the making, and the point of this exercise is not to come up with a quick adjustment—an abrupt adjustment of global imbalances is just what we want to avoid,” de Rato said.
He said the aim was to launch “a benign sequence of events” that would allow global imbalances to unwind in an orderly and gradual way. “The necessary condition for success is voluntary, multilateral action over time,” he added.
De Rato was visiting Singapore for talks with senior officials ahead of the IMF–World Bank Annual Meetings to be held there in September. He also visited Malaysia on May 24.
During the trip, de Rato repeated assurances that, by September, the IMF would make specific proposals to address the issue of member countries whose Fund quotas do not adequately reflect their economic weight.