The New IMF Head Should Look to the Future, Not the Past
The main direction of lobbying for the IMF’s new managing director is unfortunately showing the weak side of that organization, not its strong one.
Serious economic commentary already knows the greatest challenges of the next period. It is only necessary to open a business paper to review them. In the next decade, the world economy will pass through the greatest changes in almost a century.
Within a decade, China will overtake the US as the world’s largest economy. In the same time frame, Brazil, in parity purchasing power terms, will become larger than any EU economy, with the possible exception of Germany. India will overtake Japan to become the world’s third-largest economy.
The world is deriving huge benefits from this growth in developing economies. In China, 630 million people have been taken out of internationally defined poverty in three decades. India has the potential to achieve the same. In the last decade, Africa has enjoyed significantly accelerated economic growth after a period of relative stagnation.
Rapid economic expansion in China, India, Brazil and other developing countries is statistically the largest source of world growth. The acceleration of international economic expansion that results can create GDP increases and job growth in developed countries.
But rather than taking advantage of these openings, some shortsighted circles in developed countries are treating them as a threat. Instead of judging the situation from the key point of view of how to increase the absolute standard of living of their populations, they see it from the angle of “maintaining ranking in the world” - which involves attempting to prevent others reaching the level of prosperity they have already achieved. Instead of seeing the situation of the world economy as a win-win one, they see it as a zero-sum game.
Professor Danny Quah, of the London School of Economics, in an article in The Global Herald, summarizing his research on the shifting center of gravity of the world economy, characterized such thinking very well:
“As the East continues to rise in economic strength, debate in the West grows increasingly alarmist. Invariably, the focus is how to respond; invariably, the focus is what is best for the West. But shouldn’t the global community be asking instead, what is good for the world?…
“In the alarmist scenario, the West is overtaken in the next 10 years: So, how much… disruption in the East’s development trajectory is justified for the West to remain Best?… The shifting global economy has improved the well-being of humanity for the last 30 years: to overturn or even slow these changes now for short-term domestic gain can reveal only a tragic failure of global political vision.”
The real test of leadership of the IMF, the most significant international economic body, is to help prepare the world economy for the transformation that is taking place - both via practical measures and leading opinion. The aim should be to help create prosperous, democratic and peaceful development for all.
But instead of dealing with the most powerful trends in the world economy, discussion on the qualifications for IMF managing director remains excessively preoccupied with problems of the past, which were entirely predictable.
For example, the argument that the new head of the IMF must be a European because of what may be termed the “Euromess” - the debt crisis currently affecting Greece, Ireland, and Portugal. Far from this being a consideration in favor of a European running the IMF, it is a compelling argument against.
The present mess in Europe’s economy was entirely predictable. In an economy as large as a continent, there is no way to prevent unequal productivity development. As this means some regions of such an economy become more competitive than others, there has to be a way to regulate the resulting unevenness. This can either be done by flexible exchange rates, as used to occur in Europe, or by budgetary transfers between different parts of the country - as occurs in the US or China. But if exchange rates are fixed, and there are no major budgetary transfers, then increasing unevenness and crisis are inevitable.
To show such a crisis was entirely predictable there is no need to alter one word of an article I wrote 15 years ago predicting present events.
“There are two possible, coherent ways to regulate relations between the different European economies. One is to create a de facto or a de jure European federal state, with a sufficiently large budget to pursue an effective regional policy… The other model is that of adjusting economic relations between European states by means of exchange rate movements…
“[The Treaty of] Maastricht… proposes to create the most fundamental features of a common state - a single currency and a central bank. But it does not deal with the huge regional and sectoral implications of this.
“The process that would unfold with the creation of a single currency by this method may be predicted with certainty. Substantial parts of the EU… will be pushed into severe recession if they join. There will be sharply deepening regional imbalances and inequalities.”
Precisely the predicted has unfolded. Why therefore should EU leaders, including Christine Lagarde, who failed to foresee the economically elementary, be regarded as the most suitable guardians of the world economy - rather than a representative of a developing country such as India, China or Brazil, which are running the world’s most successful economies?
John Ross is Visiting Professor at Antai College of Economics and Management, Shanghai Jiao Tong University. This article originally appeared today in China Daily. Republished with the kind permission of the author.
Discussion
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Comment by: C. Flower
Jun 7th 2011 at 12:06
I’m curious as to why this article was chosen for republication in Irish Left Review.
It apparently holds a positive view, overall, of the IMF, and reduces discussion of the economic crisis to the single issue of global imbalances.
The IMF operates as a facilitator of greater global imbalances through asset stripping and austerity programmes in “weaker economies”.
What has this got to do with socialist analysis ?