Leadership, And That Fickle IMF
Yesterday’s policy prescriptions become today’s economic threats.
An excellent article by Peggy Noonan in the Wall Street Journal assesses the dismal state of political leadership in the West. The upcoming US Presidential contest between Joe Biden and Donald Trump offers the most dispiriting example, not just because of the abysmal quality of both candidates, but also because of the tabloid-style, partisan media coverage. Noonan provides plenty of other examples from the gossipy memoirs of assorted UK politicians. And a cursory look across the rest of the western world confirms that we are governed by politicians devoid of vision and substance, alarmingly unequal to the looming economic and geopolitical challenges. Noonan rightly emphasizes the dangers that this poor leadership poses to national security, emboldening already aggressive adversaries and competitors.
The IMF Spring Meetings show that the leadership provided by elite international economic institutions is not much better.
The IMF noted with relief that recent global economic performance has proved surprisingly robust, chiefly thanks to the US and India. But it promptly proceeded to warn of dismally weak productivity and sub-par global economic growth for the rest of the decade. IMF Managing Director Kristalina Georgieva warned that we might face a “tepid twenties” — catchy, if not especially threatening. Nothing new here. For most of the past twenty years the Fund has systematically predicted darker days ahead. And as always, the rhetoric is a lot darker than the actual growth forecasts. Pessimism sells, and it makes a better case for why people should pay attention to the IMF’s advice.
This time, however, it’s the justification for the pessimism that made me spill my coffee. As the Financial Times reports,
The fund’s pessimism is built around a view that years of low interest rates following the 2008 global financial crisis led to a misallocation of capital that kept inefficient zombie companies in business and stopped investment being deployed into more promising and profitable activities.
That’s a bit rich. A few years ago former IMF head Lagarde (now President of the European Central Bank) touted the benefits of negative interest rates for the global economy, supported by the Fund’s own analysis. At the time the global economy was comfortably humming along at 3.3%, a shade stronger than now, and about to accelerate to a 3.7% average in 2017-18. The Bank for International Settlements, moreover, had already pointed out that financial bubbles can undermine long-term productivity and growth by causing…yes, a misallocation of capital.
Source: IMF, World Economic Outlook, April 2024
The IMF also expressed concern about the mountains of public debt, posing a risk to financial stability and limiting governments’ room for maneuver. Yet in 2020, with debt levels already high, IMF director Georgieva was urging governments to borrow even more to combat the Covid pandemic — or rather, to combat the effects of the disastrously misguided lockdowns deployed against the pandemic.
Yesterday’s policy prescriptions become today’s economic threats.
provides a more constructive take on the IMF meetings in his latest Leading Thoughts, which I recommend as a counterpoint to my view. His blog offers a very good overview of the risks to the outlook as well as a positive assessment of the IMF’s latest prescriptions. I remain a lot more critical; in my view most of the current key economic challenges arise from misguided policies that the IMF actively encouraged over the past decade and a half.Leadership requires looking at least a few steps ahead. Policies should be calibrated weighing their long-term consequences against the actual magnitude of today’s problems — and thinking about their potential unintended consequences.
Amateurish political leadership becomes a national security threat. Fickle economic leadership undermines global economic stability and growth potential.
The word ' Leadership' itself has lost meaning in today's mad 'wiifm' world. Globally, 'thinking a few steps ahead' has made way for knee jerk reactions and perceived quick-fix solutions to every problem.
I bemoan the directions our world is moving in!
All excellent points, Marco, and I hope your coffee didn't stain anything important! But while we all wish for more visionary leadership at all levels, I always feel like the IMF is trapped by the limited visions of its political masters.