After the most difficult decade in its history, life should be looking up for the International Monetary Fund as it hosts the world’s finance ministers and central bankers in Washington DC this week. The global economy is at last picking up speed. Financial markets look more stable. The US is running at full employment, China is expanding strongly, and the eurozone is going through one of its better periods. Spring is in the air, according to the Fund’s managing director, Christine Lagarde.
Privately, the mood in Washington is less ebullient. The IMF has its doubts about whether the pick-up in activity – which has only been possible because central banks have kept interest rates at record lows since the deep slump of 2008-09 – will endure. It points to the vulnerability of debt-laden American companies to rising borrowing costs, to the credit bubble that has kept China’s economy booming, and to the €1tn of non-performing loans weighing down banks in the eurozone.
These are all timely warnings. Any one of the risks identified by the IMF could trigger a global downturn at a time when the political consequences of the last recession are still reverberating. The IMF fears that a fresh dose of unemployment and a renewed squeeze on living standards would intensify populism, nationalism and protectionism – and it is right. For some time, the IMF has been pumping out reports warning that rising inequality represented a danger, not least because it was bad for growth. Its latest World Economic Outlook, its half-yearly update on the state of the global economy, contains a chapter highlighting how workers have been getting a smaller share of national income since the early 1990s.
The problem is that the policy response to these trends – including that of the IMF itself – has been inadequate. While the IMF’s macro-economic department has been urging a softer line on austerity, the teams sent in to sort out crisis countries have prescribed the same old medicine – cuts in wages and public spending, with a diminished role for collective bargaining. Brexit was one manifestation of the political backlash that inevitably resulted from the failure to ensure that the fruits of economic growth are more evenly distributed. The IMF has not really changed its view that leaving the European Union will be bad for the UK, despite revising up its growth forecasts twice in the past three months. It thinks that the economy surfed through the second half of 2016 on a wave of consumer credit, but will still suffer longer-term damage. This will be reflected in the fund’s annual health check on the UK, which was due to take place next month but has been delayed by the general election to later in the year.
The IMF exemplifies the sort of elitist global organisation that Trump has railed against on the campaign stump
Donald Trump’s victory last November is another manifestation of the same political forces, and a much bigger threat to the IMF. Theresa May has pledged to keep Britain open to trade; Trump campaigned on a protectionist ticket at odds with everything the Fund stands for. A political gulf has opened up between the body created to sort out global economic problems and its biggest shareholder, the United States. The IMF exemplifies the sort of elitist global organisation that Mr Trump has railed against on the campaign stump. Long-term critics of the IMF have been lined up for top international jobs at the US Treasury. For years, the IMF has been fending off critics from the left who saw it as the embodiment of neoliberalism and the Washington consensus. It is now being assailed by opponents from the right who think that by bailing out countries in trouble rather than leaving matters to market forces the IMF makes matters worse, not better.
Ms Lagarde has been waiting to discover exactly what Mr Trump plans for her organisation. The lack of action so far signifies very little because the administration has had other things – repeal of Obamacare, a package of tax cuts, Syria and North Korea – on its mind. For the moment, Ms Lagarde is keeping her head down, hoping that in time Mr Trump will see the worth of her organisation. Past Republican presidents have appointed officials with a mission to cut the IMF down to size, only to support action in an emergency. Events matter more than people. But the IMF would be well advised to come up with some solutions to the problems of the people who voted for Mr Trump. Telling a car worker in Michigan that the answer to the loss of his job is to retrain as a care worker is not going to cut it. Either with the car worker or with the president.