Finance ministers will gather in Washington later this week for the six monthly meetings of the IMF and World Bank, with a G20 meeting tacked on the side. With the Australian budget on 3 May, Treasurer Scott Morrison will not be attending. Will he miss much? Not likely. When it comes to these meetings, the saying of US baseballer Yogi Berra comes to mind: 'It's like deja-vu all over again'.
The meetings have developed a predictable pattern.
In the lead-up, the IMF Managing Director gives a speech saying global growth is too low and fragmented, risks are growing and countries need to implement stimulatory macroeconomic policies to support growth in the short run and structural reforms to lift long-term growth prospects. She also says that global cooperation is required more than ever. Part of the established pattern includes the IMF lowering its forecasts for global economic growth in advance of the meetings.
Unfortunately, the other constant is countries ignoring the warnings from the IMF and continuing with their existing policies. Things will be no different this week.
True to form, on 5 April the Managing Director, Christine Lagarde, delivered a speech entitled 'Decisive Action to Secure Durable Growth'. She warned that global growth was too slow, too fragile and the risks to its durability were growing. Her policy prescription involved accommodating monetary policy, more growth friendly fiscal policy and an acceleration of structural reforms. In addition she said now was the time for greater global cooperation.
Lagarde delivered a similar speech prior to the September 2015 IMF/World Bank annual meetings, with the title 'Managing the Transition to a Healthy Global Economy'. It was the same story prior to the April 2014 IMF meetings when the Managing Director warned that the global economy could be heading for years of sub-par growth if there is not sufficient policy ambition. Lagarde's speech prior to the April 2013 IMF meetings had the same message, warning that global growth is not expected to pick-up and 'we are seeing new risks as well as old risks'. She gave her usual call for more decisive policy responses by all countries.
As noted, part of the established lead-up to IMF meetings is the Fund lowering its forecasts for global growth. Again true to form, the IMF has signalled that it will likely do the same prior to this year's meetings.
The IMF's forecasting record is embarrassing. The chart below, which comes from the 2016 Economic Report of the US President, illustrates the IMF's persistent downward revision to its forecasts since 2010. It has been described as the 'most depressing chart in the world'.
The other regular feature of the IMF meetings is that notwithstanding the Managing Directors repeated calls for more decisive policy action, it has had little or no impact on the policy choices of countries. Things will be no different this month.
Why haven't countries heeded the IMF's warnings and followed its policy prescriptions?
In some cases this is because countries do not agree with the Fund. For example, Germany is solidly opposed to the Fund's call that it should adopt more expansionary fiscal policy. But in the majority of cases the problem is that governments cannot win the domestic political battles needed to implement the IMF's policy recommendations. This is particularly the case with structural reforms, such as liberalising product and labour markets and introducing reforms to domestic tax systems.
However the IMF is not always helping its cause. Steve Grenville has observed that more accurate forecasts by the IMF could have improved the policy debate and resulted in better outcomes. In addition, the IMF's predictable and repeated warnings about global risks has seen its message blunted over time – a case of the boy who cried wolf.
This is unfortunate, because the risks to the global economy currently identified by the IMF Managing Director are real and are rising – particularly in the political domain. As Lagarde has warned, the global economy is beset by an array of political risks, from terrorism to the UK's potential departure from the EU. The IMF's chief economist, Maurice Obstfield, has warned of the trend in Europe to reject economic integration in favour of national solutions. But this trend is not limited to Europe. The call at the moment is to build walls between countries rather than take them down.
A key risk not mentioned by Lagarde is the US presidential elections. The Donald Trump phenomenon maybe on the wane, but the inward looking policies and protectionist pressures he is advocating are rising in the US and elsewhere. The IMF Managing Director says now is the time for 'leadership and cooperation'. However in the current political climate it is difficult to see the US providing the leadership necessary to engender greater cooperation. This is a risk that should be exercising the minds of finance ministers when they meet in Washington this week. Unfortunately, it will likely be a case of 'deja-vu all over again'.
Photo courtesy of Fickr user International Monetary Fund.