Meeting in St. Andrews a year ago, at the depths of the global economic downturn, the G-20 finance ministers and central bank governors initiated a "mutual assessment process" (MAP) to evaluate their objectives and the global consistency of their policies.
In the Gyeongju meeting of October 23, the G-20 participants took another major step by calling for the Fund to "provide an assessment as part of the MAP on the progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate, and other policies." No doubt for the IMF this was a great achievement, but the mandate also entails a heavy responsibility, because it designates the Fund as the watchdog of international policy coordination. But the question of whether the IMF will have the political support to help prevent noncooperative actions is hard to answer.
The endorsement by the G-20 of the IMF's work came partly in the form of a plan for so-called "spillover assessments" of the external impact of domestic policies of some large countries. The new step reflects a commitment to shift the discussion from a bilateral to a multilateral format, as a way of preventing frictions among member countries. Still some doubts remain about the effectiveness of the spillover exercises' ability to get countries to respond, especially if they are carried out as part of normal Article IV Review conducted annually by the IMF. The call by the IMF managing director for discussion by the IMF Board on the timing of the exercise is welcome news.
Only if every country complies with its commitments to cooperate will the toolbox envisioned in the G-20 communiqué produce the necessary multilateral consensus on what is to be done and what is to be avoided. A debated question today is whether establishing ceilings on payments imbalances, as recently advocated by Treasury Secretary Timothy Geithner, might produce a more effective coordination to overcome divergent payment positions of member countries.
The instruments set forth in Korea should suffice, at least in principle, to accomplish the task of convergence. According to the IMF World Economic Outlook projections last October, current account imbalances in some major areas of the world are likely to increase in coming years. This is not the case of the euro area, which in the IMF forecast scenario displays a remarkable equilibrium of current payments now and in the next five years. On the contrary, a very alarming feature of the IMF forecasts is the persistence of the imbalances both in the United States and China. In particular, the US current account deficit is projected to persist, with a slight increase from the current –3.2 percent of GDP to –3.3 percent in 2015, while China's surplus is expected to increase to 5.1 percent of GDP next year, up to a striking 7.8 percent in 2015.
If this destabilizing scenario is to be avoided, countries will need to stick very rigorously to the MAP discipline. If they do not, putting agreed caps to external imbalances might perhaps do the job. Arguably, if countries complied with the MAP, caps would not act as a binding constraint, as they would be overridden by the spontaneous convergence to equilibrium that the supervision by the IMF would help to achieve. In any case, it should be remembered that persistent disagreement and frictions on the caps proposal might undermine the credibility of the cooperative process, thereby damaging the progress so far achieved in reassuring the markets.
Caps to limit external credit or debt positions, with penalties on positions exceeding the tolerated threshold, were envisioned in Keynes's Clearing Union proposal almost 70 years ago, and were effectively utilized in the successful experience of the European Payments Union during the 1950s. That proposal was aimed at enhancing the symmetry between creditors and debtors, by distributing the burden of adjustment equally. At least in theory, coordination based on targets rather on instruments can be viewed as more desirable.
The idea that international coordination may take the form of an "agreement on norms or objectives so all parties are assured that some of their actions are aimed in the right direction" was advanced by the economist Richard Cooper and by a number of other scholars more than 20 years ago.1 In today's world, agreeing to limit excessive payment imbalances would help avoid the problems associated with the disagreement about the empirical relationship between the external value of the currency and the current account. Such an agreement would halt the endless disputes over the right level of the equilibrium exchange rate between surplus and deficit countries.
1. Martinez Oliva, J. C., and S. Sinn. 1988. The Game-Theoretic Approach to International Policy Coordination: Assessing the Role of Targets. Weltwirtschaftliches Archiv Band 124, Heft 2.