Millennium Post

Global concerns over reforms holdup

World finance ministers and central bankers staged a somewhat contentious debate over the negative spillovers from unconventional monetary policies of richer nations distorting the financial sector in emerging and other countries, at the Fund-Bank Spring Meetings (April11/12) in Washington. Also, notably, USA, the largest economy and quota-holder, was roundly denounced by most nations for delaying reform to empower the Fund with greater credibility and legitimacy.
Whatever the status of global recovery across the world, which was the main focus of policy-makers, two socially disruptive concerns highlighted in the deliberations were the continuing high unemployment both in advanced and developing countries, and rising income inequality. An expert macro-economic study drew attention to a finding that 85 richest people owned half the world’s wealth.

IMF itself is now at the forefront with research papers suggesting how rising inequality hampering growth can be mitigated with tax and spending policies designed to help achieve redistribution ‘at a minimal cost to economic efficiency’.

The communiqué of the International Monetary and Financial Committee (IMFC) of Finance Ministers urged that high unemployment, especially among the youth, and rising inequality should be addressed by removing structural impediments to inclusive growth.

While global recovery yet remains fragile and uneven, IMFC committed itself to ‘creating a more dynamic, sustainable, balanced, and job-rich global economy’ as paramount collective goal. ‘We will implement ambitious measures to sustain the recovery, proceed with structural reforms, place government debt on a sustainable track, promote financial stability, and reinforce cooperation to manage spillovers’

The listed priorities included enhancing the quality of public spending, promoting growth potential including through a stronger role of women and older workers in the economy and guarding against financial risks in the context of prolonged monetary accommodation.

Quantitative Easing became a hot topic at one of high profile meetings held to coincide with Fund-Bank session. Taking centre stage, India’s Reserve Bank Governor Dr Raghuram Rajan railed against ‘competitive quantitative easing’ by both advanced and emerging economies which, he said, were being taken without regard to their spill-over effects across borders. This created exchange rate volatility and led to other financial distortions.

Lack of clear communication from the US Federal Reserve in autumn last year caused a global market volatility and resulted in capital outflows from emerging economies.

The Fed, which had begun its tapering of bond purchases gradually from January, has now followed up with clearer communications on its intent and the likely start of normalizing the near zero interest rates.  But the Fed signals are that its Federal Funds rate (key lending rate) could begin to edge up from the middle of 2015.

Whatever the ‘innate legitimacy’ to resort to such unconventional monetary policy (UMP) vis-à-vis domestic economy, Dr Rajan pointed out, such policies get prolonged even after repairing their markets, serious concerns existed about making an easy exit from such policies and the spill-over effects across borders affecting several emerging and other economies.

Dr Rajan called for a stabler international monetary policy and a broader system of providing funds to countries in case of emergency. There were mixed reactions among central bankers and financial specialists as many did not seem to go along with Dr Rajan on his generalized criticism of UMPs though the idea of a global safety net was well-received.

Indeed Dr Rajan made it clear that he did not speak with India in mind as the country has made necessary policy adjustments and had had large inflows of capital over the last few months. India was also now buffered by substantial foreign exchange reserves. But the point about the spillover effects of UMPs had been raised earlier too by Finance Minister P Chidambaram.

An earlier than expected normalization of the Fed’s monetary stance has already begun to push international interest rates, which again could have spillover concerns as India makes efforts to regain growth momentum over the next twelve to fifteen months.

The IMF is now fully seized of the urgency of setting out the framework for ‘Monetary Policy in the New Normal’ in the post-crisis situation though the Fund itself has been supportive of monetary policy accommodation for economies in recession as well as those running into vulnerability of deflation, which was the case with Japan until two years back.

Eurozone’s inflation has been too low for comfort for monetary authorities and IMF backs more supportive intervention by the European Central Bank (ECB).

Convening a high-level conference a day after IMFC meetings with senior central bankers, academics, and private sector representatives, the Fund’s Managing Director Ms.Christine Lagarde sought guidance on the contours of monetary policy once the economy and the financial system have settled into their post-crisis normal.

‘The world is continuing to change. Monetary policy, and central banking, will not go back to what they used to be once the crisis is finally behind us’, she said but also noted that without the  decisive steps taken by central banks in recent years, the world economy would today be much worse off. A new great depression was avoided. Participants said the independence of central banks to maintain price stability must be protected,  despite potentially wider mandates and new institutional arrangements.

Thus, the Fund would be mulling over in the coming months on issues like autonomy of the central banks and their mandates (price stability etc), monetary independence in an increasingly financially inter-connected world, financial stability considerations and targeting of longer-term bond yields in normal times.

Lagarde said the challenge now would be ‘to preserve what works while making changes where needed’ IPA
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