Archive for the ‘IMF’ Category

A Concert of Great Powers

April 1, 2009
President Obama announces his Af-Pak Initiative.  Source: CNN
President Obama announces his Af-Pak Initiative. Source: CNN
Metternich   Source:  Wikipedia
Portrait of Prince Metternich Source: Wikipedia

Keeping nuclear-armed Pakistan out of the hands of radicals should be a central goal of U.S. foreign policy.  Like a nuclear-armed Iran, control of the Pakistani government by believers in a radical ideology would be one of the worst scenarios for U.S. interests and for the safety of the world.  Weapons of mass destruction will proliferate, but ensuring that basically conservative governments (like China’s and Russia’s), regardless of ideology, remain the custodians of these weapons should be on overriding international priority.  In terms of furthering this objective, President Obama’s “Af-Pak” initiative last week, and its focus on preventing Al Qaeda and the Taliban from taking control of Pakistan, should be applauded.

However, what is missing from this initiative is greater emphasis on multilateralism.  The world is fast slipping from America’s “unipolar moment” after the fall of Communism to a dynamic multipolar world of rising and declining powers.  The sooner the U.S. recognizes this and couches almost every foreign policy initiative in terms of getting the great powers to work together to solve global problems, the more likely this power shift will occur peacefully.  The only goal perhaps more important to U.S. interests than preventing WMD proliferation is this peaceful shift to multipolarity.  Such a shift, characterized by consultation and coordination, would provide the best mechanism for solving the world’s problems, including WMD proliferation.  True, you cannot put the brakes on America’s myriad foreign policy initiatives as new institutions of multipolarity are erected, but you can tailor policy with multipolarity in mind and use the bully pulpit to promote reform of the machinery of diplomacy.

In fairness, President Obama’s Af-Pak initiative did include a call for a Contact Group, including NATO, the Central Asian states, Gulf nations, Iran, Russia, India and China.  Yet this was more of an afterthought to a unilateral initiative.  Notwithstanding Movement Obama’s ever-present language of renewal – from the “new politics” and “transformational leadership” of the campaign to recent calls for a “new day” for Afghanistan and Pakistan and a “new partnership” with (as well as a “language of respect” and a “hand of friendship” toward) the Muslim world – Obama’s foreign policy remains much the same as that of his predecessor, the guy he so single-mindedly excoriated. 

The Obama team argues that they will be smarter and more focused than their predecessors, and perhaps the Af-Pak initiative will bear this out.  However, the new thinking required in foreign policy is not yet apparent in this administration (granted, it is still early).  We have thus far been treated to clever rhetoric, including cute, new metaphors, such as the “reset” button on U.S.-Russian relations.  Besides being another backhanded criticism of Bush, the “reset” metaphor fails to acknowledge that the “software” of U.S.-Russian relations remains the same.  Since the end of the Cold War, the West (led by NATO and the EU) has been unable to resist the temptation to extend its influence to Russia’s doorstep.  If Obama’s “reset” constitutes cooperation, not confrontation, discussion, not unilateralism, then he would in fact be installing new software in relations with Russia.  

Still, we need a point of departure in American foreign policy.  Some adjustment of global institutions is under way, including altering voting rights at the IMF, utilizing the G-20 forum instead of the G-7, discussing reform of the U.N. Security Council.  The president should raise the profile of this process, calling for new diplomatic machinery.  He should seek a Concert of Great Powers, similar to the Concert of Europe erected in 1815 by the victorious powers in the Napoleonic Wars.  

The Concert of Europe that included Great Britain, Russia, Prussia and Austria, and after a few years, France, the vanquished aggressor, prevented major wars for forty years and a global conflagration for nearly a hundred.  The Concert involved periodic international congresses and a recognition of the national interests of the great powers and the need for a balance of power.  The vice grip that Wilsonians have had on U.S. foreign policy thinking over the last century has precluded such an approach.  Likewise, neo-conservative unilateralism cast aside any close cooperation with other great powers.  It is time that realists put these ideologies in their proper place.  FDR had proposed something like a Concert of Great Powers after WWII, with his “Four Policemen,”  the U.S., U.K., USSR and China.

Kissinger has pointed out that balance of power politics without at least some international agreement on values cannot produce stability.   Yet agreement on shared values is difficult to achieve.  To an extent, the Concert of Europe included this component.  The powers agreed that territorial adjustment would only occur through consultation.  The three members of the Holy Alliance – Prussia, Russia and Austria – agreed on the principle of monarchical legitimacy, while France and Britain demurred.  Nevertheless, the governments of the day found enough shared values to make the Concert work for decades. 

There is much that the great powers today – both rising and declining – can agree on.  They all participate with vigor in the global economy.  They are all active members of international organizations and parleys, such as the U.N. and various regional fora.  They are all relatively conservative in that they do not seek substantial territorial aggrandizement and are essentially peace-loving.  None seeks the elimination of any other sovereign state.  Yet there are substantial exceptions and areas of disagreement.  China opposes self-determination for Taiwan; Russia would like a free hand in its near-abroad; America intervenes in local hotspots if certain principles are violated.     

A commitment to working through a Concert of Great Powers would present challenges and ethical quandaries for American policymakers, and would be difficult politically.  The U.S. Congress enjoys grandstanding on moral issues.  The president is required by law to produce public documents on international affairs that sometimes irritate other powers, such as the report on China’s military that was released last week, and the State Department’s Human Rights reports, released in late February.  These reports have a great deal of utility and can encourage ethical behavior in the world.  Nevertheless, cooperating closely with such rising powers as China, Russia, India, Brazil, Mexico, Turkey, Indonesia, Egypt and Saudi Arabia should become at least as high a priority as sermonizing to the rest of the world about ethics.  

This would mean, not giving up our values, but moderating the vehemence of our pursuit of them.  It would mean recognizing that cooperating with other great powers holds out the prospect of solving complex regional problems and maintaining global peace and prosperity, worthy moral objectives as well.  Pursuit of great power accord might be worth the short-term toleration of unfortunate ethical lapses of other powers.  It might require the U.S. to put religious freedom and democracy lower on the list of priorities than coordination with the great powers.  It might mean pushing allies to do things that might seem unfair, in order to solve a conflict that would garner broad international support.  In the end, resolution of local conflicts that attracts the support of the great powers would be eminently more stable than the alternatives.   

The world has a large number of international and regional fora, including the UN (both the General Assembly and the Security Council), NATO, the G-20, the Asia-Pacific Economic Cooperation forum, Organization of American States, Organization of the Islamic Conference, African Union, Arab League, the EU, the Shanghai Cooperation Organization, the IMF, World Bank and regional development banks, and the WTO, among others.  What do we do with all of them? 

These groupings and institutions should not necessarily be replaced by other machinery.  However, a regular forum for the great powers, both rising and declining, to meet and discuss issues, and perhaps in time, to confront aggressors and solve regional problems, is needed.  Whether this could take place through an existing vehicle, say, the G-20, or the U.N. Security Council (revamped to include new members), or even through regular bilateral discussions and ad-hoc parleys, such as the North Korea six-party talks, such diplomatic coordination would be critical to a peaceful transformation of the international system.  

This approach does not preclude the U.S. from giving voice to its values — promoting democracy, human rights, and private enterprise.  It simply suggests that the best way to pursue these ends in the long run is through a peaceful coordination of the interests of the great powers.  Again, sometimes the emotionally-satisfying sermonizing we Americans enjoy can be counterproductive to the very aims we seek.  Though more intensive diplomatically, especially in the near term, this approach over the long term could lift the burden of global stability off the solitary shoulders of the United States.  

It is unclear what the initial steps this administration should take to usher in a multipolar world.  President Obama is traveling to Britain this week for the G-20 summit, not a bad time to launch such a discussion.  Updating the existing machinery, already under way, is not a bad beginning.  Let’s hope that Movement Obama remains true to its rhetoric and seeks renewal in American foreign policy.


G-20: Forum of the future

March 19, 2009

The G-20 is the forum of the future.  See its web site at When the international system is in transformation because of a significant shift in the relative power of nations, as it may well be now, this shift could take place with violence or with a flurry of effective diplomacy.  Either way, the new, rising powers will take new, important positions in world affairs, with some authority relinquished by the powers in relative decline. 

G-20 Summit, November 2008.  Source: Wikipedia

G-20 Summit, November 2008. Source: Wikipedia


In late 1999, the G-7 called for the convening of the G-20, which was to include the 19 largest economies of the world plus a representative of the EU.  More or less this is what it contains today, with some adjustment to reflect population and regional diversity.  G-20 finance ministers and central bank governors have met periodically to discuss and coordinate economic policy, even though the forum is much more unwieldy than the G-7.  The IMF and World Bank attend as well.  Given the increasing importance of the larger, rapidly growing emerging economies included in the G-20, especially to international trade and financial flows, this will be the forum of the future, and the G-7, the traditional rich countries’ club, so prominent in headlines in recent decades, should wither on the vine.  A rotating troika of members manages the agenda of the G-20.  If such rising powers as China, India and Brazil are accorded greater influence in the world through such fora as the G-20, the IMF and other IFIs, the UN, the WTO, and in bilateral relations between states, their rise can occur peacefully.  Likewise, their rise could blaze a path for other rising powers, including Iran, which could eventually be integrated in global institutions that promote peace and prosperity.

The global financial crisis convinced Western leaders to call a summit of the G-20 in November 2008, one which Bush hosted and Obama declined to attend, but which produced an agenda to address the crisis.  On March 14, following a ministerial-level meeting of the G-20, a communiqué and an annex on lending were issued, providing an updated agenda for the next G-20 summit on April 2 in England.  Stay tuned…


IMF: Stepping Up

March 18, 2009

The IMF has been stepping up to help solve the global financial crisis.  Only a few years ago, it was experiencing an identity crisis and was under fire from many corners.  This post addresses the IMF’s changing role and shows a chart detailing its planned redistribution of voting rights that will ensure greater representation of such rising powers as China, India, Korea, Brazil and Mexico.

In the G-20 communiqué of March 14, the IMF committed to implementing the changes in voting rights agreed in April 2008 and to reassess again these rights by 2011.   Likewise, the IMF has provided financing to beleaguered emerging markets, in addition to its research and policy prescriptions.

While the much-maligned IMF has made a few tactical mistakes over the years (including at times calling for fiscal austerity at the wrong times), in my view, it has been engaged in saving the world and helping the planet’s most impoverished people access the global economy. I am an unabashed booster of the IMF, having followed the organization’s work closely for more than a decade as a country risk analyst.  Since its inception in 1944, the IMF has gone from providing balance of payments support to industrialized countries trying to maintain fixed exchange rates, to providing financing attached to economic policy conditions to developing countries, to functioning as a global economic think tank and economic data collection and monitoring authority.    

As any bureaucracy, the IMF seeks to find a useful role for itself in changing circumstances.  A few years ago, when most major emerging market economies were accessing the international capital markets on their own, the IMF and its observers wondered “Whither the IMF?”  What would its future role be in a world of flexible exchange rates (with a reduced need for balance of payments support) and financially-sound emerging markets?  Should it become an official international rating agency?  Should it be a financial crisis early warning authority?  Should it offer policy prescriptions to the advanced economies, given that global imbalances were a trigger for the current crisis?  Was it becoming an anachronism, given the voting power skewed in favor of European countries?

Now, with the current crisis, it has a central role again.  Those emerging market countries with large external imbalances (many in Eastern Europe), glossed over by many analysts during the recent boom, have received IMF loans.  Hungary, Ukraine, Belarus, Latvia, Serbia, Armenia and Iceland all have received IMF financing of late.   With capital flows from advanced to emerging countries drying up, the international financial institutions, led by the IMF, are stepping up.  The crisis points up the need for augmenting the resources of the IMF and the other IFIs.

Likewise, the IMF should be applauded for moving ahead with its plan to redistribute voting rights toward emerging economies that have seen their relative size increase dramatically in recent years.  In April 2008, the changes in voting rights shown in the box below were agreed.  Likewise in the G-20 communiqué of March 14, the IMF was encouraged to stay on schedule to review voting rights changes needed to reflect economic realities by January 2011. 




IMF:  Changes in Voting Shares


Percentage point change from pre-Singapore to post second round

Post second round voting share
(In percent)

Top 10: Positive Change from































Top 10: Negative Change from

United Kingdom






Saudi Arabia












United States












Source:  IMF Finance Dept., from March 2008 proposal.

IMF: Review of recent literature on the financial crisis

March 18, 2009
Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Source: Wikipedia

Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Source: Wikipedia


The IMF, in an effort to play a useful role in resolving the current financial crisis, has produced research and commentary on the crisis that is available on its website,  This important analysis of IMF staff can help policy practitioners and observers cut through the fog of media coverage and the associated tendency toward populism.

On March 6, the IMF produced a quantitative of the impact of fiscal expansion on government debt levels, forecasting a whopping 25% rise in debt/GDP in advanced countries by 2014!  The IMF outlined four general principles of longer-term fiscal solvency — making the stimulus temporary, undertaking medium-term commitments to reducing fiscal deficits, implementing structural reforms to raise GDP growth, and reforming health and pension programs.

In spite of skyrocketing debt levels expected, the IMF argued forcefully in two papers that sizable fiscal stimulus is needed to get the planet out of this mess. In “The Case for Global Fiscal Stimulus,” also released March 6, and “The Size of the Fiscal Expansion: An Analysis for the Largest Countries,” released February 1, the IMF discusses the likely effect of fiscal stimulus on global growth (a positive jolt of up to 2.25% in 2009) and the impact on the largest countries’ debt levels.  China, the US, Canada and the UK have room to undertake substantial stimulus, while there is less such room in Continental Europe, India and Japan, due to already high debt levels.  With the US contemplating the largest fiscal stimulus, appropriate given the deterioration in growth expected and the fact that weakened banks mean lower multipliers, it is likely to have a debt/GDP ratio in excess of other large economies, with the exceptions of Japan and Italy. 

In “Lessons of the Global Crisis for Macroeconomic Policy,” released February 19, the IMF finally argues that monetary policy should not just be geared towards fighting inflation, but also toward preventing asset price speculation.  Asset price booms in the stock market and especially in the real estate market were the proximate cause of the current crisis.  This is somewhat maddening to me because, after following emerging market crises for years, ones that often involved asset price booms, from Mexico to Asia, I came to the conclusion that monetary policy should take into account asset price run-ups and external imbalances (trade deficits).  Yet the prevailing wisdom at central banks throughout the nineties and much of this decade, epitomized in the knighting by Queen Elizabeth of Sir Alan Greenspan, was that monetary policy couldn’t prevent asset price bubbles and must solely confront goods price inflation.  This IMF paper argues that only asset price bubbles financed by debt should be attacked with monetary policy.

In a paper on the lessons of the crisis for financial regulation, released February 4, the IMF calls for expanding regulation to include hedge funds and other institutions, increasing capital requirements in good times, coordinating regulation, and tracking “interconnectedness” to limit systemic risk.


In “Initial Lessons of the Crisis for the Global Architecture and the IMF,” released February 18, the IMF bemoans the lack of policy coordination among nations in addressing the crisis, which I would take issue with.  Could coordination be better? Sure.  But, compared to the 1930s Beggar-thy-neighbor policies, the coordination of liquidity injections, fiscal stimulus, and bank rescues this time around seems pretty good so far.  What we must be vigilant about, and the U.S. looks worrying in this respect, is a protectionist reaction.  The IMF also calls for augmenting its resources and those of other IFIs, a sensible objective.  With only $250 billion available (that is, before the latest disbursements), and another $100 billion on offer by Japan, this appears modest relative to the task.

Finally, I point to a paper I have applauded before, “Systemic Banking Crises: A New Database,” from November 2008.  It details banking crises over the last thirty years across the globe and concludes that a targeted recapitalization of banks (i.e., a bank bailout) can limit losses in output.