The IMF plans to follow up on its first multilateral consultation, aimed at reducing imbalances in the global economy while maintaining robust world growth, by monitoring the policy commitments of the five major players involved: China, the euro area, Japan, Saudi Arabia, and the United States.
IMF estimates suggest that, once implemented, these policies could result in a reduction in the U.S. current account deficit of about 1-1¾ percent of GDP, accompanied by reductions in surpluses elsewhere.
In July, the IMF’s Executive Board met to take stock of the experience with the first round of multilateral consultations, conducted between June 2006 and March 2007, and to draw lessons for the future. The 24 Directors, who together represent the IMF’s 185 member countries, said the consultation had helped deepen agreement on a coherent medium-term approach that would reduce the imbalances while supporting global growth.
In 2000, when the IMF first warned policymakers that imbalances in the global economy could derail global growth, the U.S. current account deficit stood at 4 percent of GDP. Today, that deficit has risen to more than 6 percent of GDP and is matched by large current account surpluses elsewhere, especially in China, Japan, and oil-producing countries.
There are those who argue that these imbalances are sustainable and that the world economy will continue its impressive expansion. But many others, including the IMF, do not think imbalances of this magnitude are sustainable in the long run and believe that action is needed to reduce them before they unravel in an abrupt and disorderly way.
Since 2004, the IMF’s International Monetary and Financial Committee (IMFC) has called for joint action to address the risks posed by the imbalances. The IMFC Strategy, as these recommendations have become known, has evolved over time, reflecting the changing nature of the problem.
But, in April 2006, imbalances were still growing, and IMF Managing Director Rodrigo de Rato felt that more urgent action was required. He suggested that the problem be addressed in a framework involving only the key players. The objective of the first multilateral consultation, as this process is now known, was to seek to reduce the imbalances while maintaining the robust growth enjoyed by the world economy in recent years.
A new forum
The purpose of a multilateral consultation is to bring together a small group of countries to promote dialogue on, and, eventually, a common solution to, a particular problem of systemic importance. To ensure a free and frank exchange focused on policy implementation, the consultations are informal and confidential and involve only high-level policymakers.
The United States, China, the euro area, Japan, and Saudi Arabia all agreed to participate in the first round of multilateral consultations. Some of these economies are direct parties to the imbalances, through current account deficits or surpluses, and some represent large shares of global output. The IMF invited them to participate because those five economies could, as a group, play a major role in reducing the imbalances and sustaining world growth at the same time.
A mirror image
The current account deficit of the United States has been matched by surpluses elsewhere, particularly in emerging Asia and in oil-exporting countries.
Source: IMF staff.
The consultations began with discussions between IMF staff and each participant, followed by three meetings involving all five participants. The last of these meetings took place in March 2007. In mid-April—just ahead of the meetings of the IMFC—the five participants and the IMF issued a joint report, in which the participants stressed that reducing global imbalances is a multilateral challenge and a shared responsibility, and that an orderly unwinding of imbalances would benefit all countries in the world. They reaffirmed their commitment to the strategy that had been set out by the IMFC a year earlier and agreed to publish detailed statements of their policy intentions.
A set of policy plans
Taken together, these policy plans will help countries make significant progress in all the key areas of the IMFC Strategy. At their July 20 meeting, the IMF’s Executive Directors particularly welcomed the individual policy plans of the five participants—even if those plans did not always match the level of ambition advocated by the IMF in its dealings with those economies. The Directors felt that the publication of these policy intentions provided a valuable road map for the future, enhancing public scrutiny and helping foster confidence that the international community was working together to address the problem.
Monitoring will be key
Looking ahead, the IMF’s Board emphasized that the multilateral consultation would ultimately be judged by progress toward reducing the imbalances and sustaining global growth, and by implementation of the policy plans. In that regard, some of the Directors felt that specific time frames and benchmarks would have made it easier to keep track of implementation. IMF staff will continue to monitor progress both in Article IV consultations with the five economies and in the World Economic Outlook and the Global Financial Stability Report, the IMF’s two flagship publications. The Directors also stressed that while the five economies will have to play a key role in facilitating an orderly adjustment, other countries must play their part.
More generally, the Directors considered that the new approach constituted a valuable new instrument for enhancing and deepening the IMF’s multilateral surveillance. They underscored that involvement of the Board and the IMFC at the appropriate time is crucial to give the process legitimacy and to allow the international community to assess results.
IMF Western Hemisphere Department and member of the IMF’s multilateral consultations team