Wednesday, April 16, 2014

The Dangers of Policy Drift

No market-moving news, and no significant economic signals. That's what traders should conclude this morning after a weekend full of policy meetings, communiques and news media commentaries that attended the conclusion of the annual spring meetings of the International Monetary Fund and the World Bank.
The meetings also signaled 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 policy makers from around the world failed to come up with anything of major significance.
The Group of Eight is paralyzed 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 stabilizing 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 criticized quantitative easing and what he regards as excessive U.S.-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 U.S. 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 U.S. 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 U.S.’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 U.S.'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 U.S. funding commitments nor any dilution of its power within the institution. Instead, highly polarized domestic politics in the U.S. -- 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 policy makers' ability to pursue delicate policy balances.
To contact the writer of this article:
Mohamed A. El-Erian at
To contact the editor responsible for this article:
Timothy L. O'Brien at

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