In the midst of a worldwide financial crisis, Kent Hughes, director of the Program on Science, Technology, America, and the Global Economy at the Woodrow Wilson Center, questioned a distinguished panel of economists whether the resources the G-20 conference promised the International Monetary Fund and the World Bank would be sufficient for sustainable economic stability. Clyde Prestowitz, founder and president of the Economic Strategy Institute, argued that the resources pledged to the IMF will only be sufficient if the IMF reforms its institutional roles and expands its geopolitical influence. Adam Posen, deputy director of the Peterson Institute for International Economics, added that the United States and Western Europe's disproportionate control in IMF and World Bank affairs has damaged its capacity to address the totality of the global financial crisis.
The U.S. Dollar in Global Markets: Can the Economy Survive While the Dollar Weakens?
Prestowitz argued that the Chinese proposal to review the role of the dollar in international finance should be seriously considered by U.S. policymakers as the rule of the dollar has hurt global economic interaction. He also noted that since the U.S. has the ability to print the dollar it has allowed it to be financial irresponsible.
A diminishing role of the dollar is not necessarily a threat to the U.S. financial system, argued Posen. Dollar pricing at the advent of the 20th century was accompanied with that of the British Pound sterling. Thus, Posen argued, the dollar may have to share power with other currencies such as the Euro and Chinese Yuan but is not necessarily threatened by them. The Yuan's pricing capacity is diminished, nonetheless, by investors' distrust of Chinese government control of its country's financial sector.
Regulation and Review of Financial Institutions: The IMF and World Bank's Role in Shaping Financial Practices
Both Prestowitz and Posen agreed that Secretary Geithner's request for an international review of United States financial institutions would be beneficial. Posen pointed out that the Financial Sector Assessment Program, a joint IMF and World Bank macroeconomic effort to review global financial systems, was blocked by the Bush administration but Secretary Geithner's lifting of that restriction allows the IMF and World Bank to identify strengths and vulnerabilities of U.S. financial systems. While expanding the FSAP's reporting to other members in the international financial grid may help improve the situations, more must be done by the IMF and World Bank to stabilize the system.
Posen noted that an international regulator like the one Germany is proposing will never be accepted by the majority of the G-20 countries. While many G-20 countries may be willing to cede portions of their financial sector to greater international review and regulation, few are willing to denationalize their banking systems.
Current Account Deficits and Currency Imbalances: Facing the Consequences
Prestowitz explained that the basic premise of reducing the current account deficit is that the United States will produce more than it will consume. In order to fill drop in demand created by greater U.S. saving, surplus countries including China, Germany, and Japan will need to consume more, potentially creating better export markets for the United States. While many economists have recommended that the U.S. seek to increase exports to the developing world, Prestowitz cautioned that many developing countries do not have proper credit or financial infrastructure for to support added consumption. .
Posen argued that global imbalances in current accounts will be gradually reduced if the US savings rate is restored to a stable level of between five and seven percent. He believed the demand gap is largely a byproduct of excess consumption by U.S. consumers. China is already shifting to domestic growth with its large stimulus package. Posen stated his belief that Germany's export-reliant economy has served them poorly in the past and warned that their dependence in demand in other national markets is not sustainable.
Prestowitz outlined the importance of developing a model of global economic growth while reducing environmental degradation. As trade deficit countries will begin to shift production back home, they must not forget the dangerous global effects that industrial production creates. For this reason, Posen added, the US should lead the way for a cap and trade system and carbon pricing legislation.
Free of its Faults: Does the IMF's History Factor Into its Current Role?
A question was posed by the audience as to whether the IMF should apologize for its past failures and its misplaced trust in the Washington consensus on international trade and financial policy. Posen argued that the IMF has recently rethought a lot of its practices and how it approaches financial technical assistance.
An attending representative from the IMF agreed that the longstanding belief that the U.S. knows what is best for the world has been shattered, but for a country to request IMF funding it must be willing to concede some defree of national financial planning. Thus, the notion of government ownership of the financial sector is challenged when a country moves toward IMF supported free market systems.
Drafted by Andrew McNamara, STAGE Program
Kent Hughes, Director, STAGE Program