The dangers of policy drift
Apr 14 2014
The meetings also signalled yet another wasted opportunity for enlightened and aggressive policy leadership at a time when the global economy desperately needs better steering.
Despite a significant policy to-do list that includes boosting global economic growth and returning to a more balanced policy mix, it shouldn’t really surprise anyone that yet another high-level gathering of policymakers from around the world failed to come up with anything of major significance.
The Group of Eight is paralysed by the stalemate over Russia’s annexation of Crimea. Sanctions imposed by the west have yet to be much of a deterrent to Russia. Meanwhile, the financial bill facing the west for stabilising Ukraine is getting larger day by day — and that doesn’t yet take into consideration the even bigger amounts that would be required to put Ukraine back on a solid growth path and help underpin sociopolitical stability there.
For its part, the Group of 20 remains quite far from consensus, even a fragile one, on how best to allocate policy responsibilities for the much-needed rebalancing of the global economy.
As illustrated by an unusual public exchange last Thursday at the Brookings Institution between former Federal Reserve chairman Ben Bernanke and Reserve Bank of India governor Raghuram Rajan, there isn’t even common agreement among top economists on the effectiveness and spillovers of past policies. (Rajan criticised quantitative easing and what he regards as excessive US-centrism at the Fed, prompting Bernanke to take Rajan to task for being so dismissive of the growth potential of “unconventional monetary policy.”)
On paper, the US remains best positioned among the major countries to lead a more fruitful consensus-building effort. IMF data and projections released ahead of the meetings confirmed that the US economy continues to heal and gradually pick up momentum, also acting as a stronger locomotive for the global economy. It has also made more progress than others in rehabilitating its public and private balance sheets. And it is the least exposed to the most visible geopolitical risks.
Yet the US’s standing and credibility on the global policy stage was dented by yet another refusal by Congress to sign off on a set of IMF reforms that have already been approved by virtually every other country in the world —so much so that there was even some suggestion, albeit quite unrealistic, that the reforms would proceed without the US’s participation.
It’s worth noting that the proposed IMF reforms —which include enhancing its resources and partially updating member countries’ voting powers to better reflect the realities of today’s global economy — entail neither new US funding commitments nor any dilution of its power within the institution. Instead, highly polarised domestic politics in the US — and, of course, a dysfunctional Congress — are again finding a way to unnecessarily complicate the economic situation.
All of which translates into more of the same: a global economy that grows but remains imbalanced and fails to attain escape velocity; weak global economic governance that precludes much-needed policy coordination; and financial markets that remain dependent on the continued support of experimental central bank policies (the longer-term implications of which are still unknown).
As they all go home, policy makers around the world may feel tempted to temper such disappointments and risks with one comforting thought: Absent a major policy mistake or a large market accident, the pivotal global policy challenges will not change much between last weekend and when they next gather again en masse in autumn.
But by then, regrettably, the solutions will be more difficult — as will policymakers’ ability to pursue delicate policy balances.
(Mohamed El-Erian is the chief economic adviser at Allianz SE. He’s chairman of Barack Obama’s Global Development Council, a Financial Times contributing editor, and the former chief executive officer and co-chief investment officer of Pimco)