Up Front

Web Chat: Previewing the IMF and World Bank Annual Meetings

Homi Kharas

On October 6, Homi Kharas, current Brookings senior fellow former chief economist at the World Bank and author of the recent book Delivering Aid Differently, previewed the upcoming annual meetings in a live web chat moderated by Seung Min Kim, assistant editor at POLITICO.

12:29 Seung Min Kim: Welcome to our weekly chat. Today, we’re talking with Homi Kharas, current Brookings senior fellow and former chief economist at the World Bank, on the upcoming IMF and World Bank meetings in Washington. Welcome, everyone.

12:29 [Comment From Eric: ] How much progress has been made towards global economic recovery? How are the conditions in Europe impacting this process?

12:31 Homi Kharas: The global recovery is actually proceeding more rapidly than had been anticipated earlier this year, with strong growth being registered in Germany, Japan and the UK. World trade has recovered almost to its pre-crisis level. The risk however is that this growth is still fragile and may peter out in the latter half of this year.

12:32 [Comment From Jennie: ] How do you think the IMF should approach currency stability? Is there cause for a multilateral currency agreement?

12:34 Homi Kharas: One of the key issues today is the shift from reliance on external demand to reliance on internal demand in many countries. This is sometimes referred to as rebalancing of the global economy. Currency changes are part of the process of this rebalancing. In theory, flexible currencies, at least among major countries, both advanced and emerging, would be desirable to help manage this rebalancing. In practice, many countries have a fear of floating–a worry that they will not be able to control the currency movements in a gradual fashion. That’s why they prefer some degree of currency stability.

12:36 Homi Kharas: Currencies are best considered as a multilateral issue. What is important is not the value of one currency against another but the cumulative effect of one country’s currency against all others. That means the IMF should have a significant role in thinking about appropriate currency levels that support global growth and stability. It has started to do this through its multilateral surveillance instrument, but so far has had limited impact.

12:36 [Comment From Laurie: ] Do you think IMF governance reform is likely? If so, what specific changes are on the horizon?

12:40 Homi Kharas: IMF governance reform is essential and likely. The broad parameters are clear. Dynamic emerging economies will receive a greater share of quota (equivalent to shares in the IMF) and more representation (chairs) on the Board. The real issue is how much more and who will give up the quota and chairs to permit this to happen. Along with a number of other governance changes, like reform of the IMFC and perhaps changes in the method of selection of senior managers, including the managing Director, the idea is to give merging economies much more voice in the running of the IMF.

12:41 Homi Kharas: Because of the very political nature of IMF reform, it may be an issue that is best resolved at the leaders level. Look to the G20 to break any impasse if agreement cannot be reached during this week’s Annual Meetings.

12:41 [Comment From Figaro Joseph: ] Have the IMF/World Bank considered stopping giving loans to countries altogether, countries that they know will never be able to repay? Have the Fund and the Bank ever considered disbanding themselves?

12:43 Homi Kharas: As far as I know, no country has ever not repaid either the IMF or the World Bank, although a few countries have had arrears for periods of time. Without the IMF or the World Bank the effects of the great Recession would have been far worse. That is why responsible leaders in the major economies increased IMF resources substantially last year and recapitalized the World Bank and other international financial institutions.

12:43 [Comment From Edward Ruiz: ] When thinking about the effectiveness of poverty eradication, to what degree are banks thinking and acting in response to the influence that organized crime has on prolonged poverty? I am thinking specifically in terms of human trafficking and the impact this crime has on prolonging poverty.

12:46 Homi Kharas: Banks now have much more information on their clients thanks to the efforts of the Anti-Money Laundering and Counter-Terrorist Financing provisions that have been established in most countries, including developing countries. It is much harder now for organized crime or others to use the banks to move their money around the world.

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12:46 [Comment From Delucaj2: ] Has there been any credible studies which document discernable preconditions and specific programs that we know actually led to individual countries increasing GDP or per capita income?

12:49 Homi Kharas: A major effort on growth was published last year. The Growth Report was a product of a commission chaired by Economics Nobel Laureate A. Michael Spence. It is a summary of almost one hundred background studies and country case studies on the policies that have lead to sustained growth in developing countries. You can find the report and its background studies on the Growth Commission web-site. This is probably the most authoritative study on the subject.

12:49 [Comment From Bjorn: ] Dear Homi, During the MDG Review Summit we saw leaders put a lot of emphasis on issues of inequity and growing disparities both within and between countries, and how it can be mitigated. Do you expect to see similar messages coming out from the Annual Meetings?

12:53 Homi Kharas: The Annual Meetings will probably concern themselves more with aggregate growth and the current weakness in the global economy in the short term than with income inequality, although some scholars, like ex-IMF Chief Economist Ragu Rajan have argued forcefully that the two issues are linked. However, there is concern about the millions of people in poverty and who suffer from malnutrition and hunger. A new Global Agriculture and Food Security program was launched earlier this year. In the second round of proposals, 22 countries have submitted requests for $1 billion in funds to improve their small-holder agriculture. But the Fund only has $130 million left. There is a big financial shortfall. I hope there will be discussions on how to fill this gap.

12:53 [Comment From Yewon Kang: ] what key issues will the East Asian leaders will raise at the IMF and World Bank meetings and possibly at the G20 summit in Seoul?

12:56 Homi Kharas: East Asian leaders have several concerns. First, they worry about the safety of the financial assets that they have accumulated in the form of foreign exchange reserves. They will want assurances about the long-term fiscal health of major countries. Second, they are concerned about the rhetoric on “competitive non-appreciation” that seems to have risen and that is aimed primarily at East Asia. Third, they are keenly interested in the reform of the IMF as they stand to gain the most from the change in quotas being discussed, given that they have the most dynamic economies in the world today.

12:56 [Comment From Ellen: ] Do you think the IMF Board will be reduced to 20 chairs? If so, when. If not, why.

12:59 Homi Kharas: I don’t think the number of chairs will be reduced. The idea is to give greater voice to developing countries. But developing countries are a diverse group. Some are dynamic, emerging economies. Others are poor, as is the case for many sub-Saharan African countries. Small, middle income developing countries have their own issues. The IMF needs to be aware of and attuned to the concerns of all its members, and the best way is to have them represented at its Board. The current Board, with 24 members, has not proved to be too large to be manageable, so the need for inclusion of more voices will probably lead to a compromise keeping the current Board size of 24.

12:59 [Comment From David Bosco: ] How would you assess the prospects of a “grand bargain” on IMF governance?

1:01 Homi Kharas: I think that if a Grand Bargain is to be made it will have to be at the Leaders’ level. Luckily, there is such an occasion coming up at the G20 Summit in Korea, so I would look to that occasion to reach full agreement on changes in IMF governance.

1:01 [Comment From Sergio: ] What do you think about the Euro monetary system and the debt of many European countries, such as Greece, Spain, Portugal, and Italy?

1:03 Homi Kharas: Many European countries like the ones you mention have debt levels that are too high given the reduced growth prospects they now face. All of them have introduced major reforms to return to positions where resources balance spending commitments, but they need time to implement them and financing to get through the transition. The IMF is playing an important role in Greece.

1:03 [Comment From Sarah: ] Do you anticipate pressure from the US in terms of any rmb revaluation to increase? and what would you think the reaction (diplomatic, economic) to that would be?

1:08 Homi Kharas: The US and other countries are concerned to make sure that the questions on currency alignments are viewed in a multilateral context and that there should be movement toward a system of exchange rates that supports sustained and balanced growth. Our current system does not appear to be generating the rebalancing of external accounts as rapidly as desirable for a healthy global economic recovery. That said, there is no agreement on what “appropriate” levels of exchange rates should be. Within the United States, very eminent economists, such as McKinnon and Krugman, have taken diametrically opposed positions. One cannot but help wonder how an agreement can be forged when there is so little agreement on the fundamentals.

1:08 [Comment From Jessica: ] The IMF’s World Economic Outlook adds to the growing chorus of voices calling for China to devalue the renminbi – to increase domestic consumption and decrease reliance on exports. And yet Premier Wen has been adamant that this will be a gradual process. How do you foresee this issue playing out during the IMF conference? And what signs are you looking for that China will do anything more than dig in its heels?

1:13 Homi Kharas: (Jessica, I think you meant to say voices calling on China to revalue the RMB.) This is one of the most difficult issues being discussed during the meetings. Economists and policymakers have sharply different views on what the right course of action is, either for China itself, or for the global economy. There are voices within China calling for revaluation, as well as those opposed to it. That is a healthy debate. China has already moved to a floating exchange rate system, but during the Great Recession, it moved to stabilize the rate. As global conditions normalize, i would think they will return to a gradual float.

It is important to go beyond the exchange rate in thinking about China’s role in the global economy. China’s imports have led the recovery in global trade (up by 25 percent this year), and countries like Germany, Korea, and Japan (the world’s most successful exporters) have benefited hugely from this growth. What is most important is for China to continue to grow strongly and to continue to keep an open economy that encourages exports from the rest of the world.

1:14 [Comment From Nina G.: ] It seems every year there are big protests – even riots – in DC surrounding the annual meetings. What can Washingtonians expect next week, and what security measures are being taken?

1:16 Homi Kharas: Hopefully there will be no riots next week. The meetings have been cut much shorter than before, in part to minimize the security problems and disruptions caused to citizens. The actual meetings will be held over the week-end to minimize these disruptions. Hopefully everything will go off smoothly. Washingtonians are accustomed to living in a city where protests and marches take place. That’s a reflection of the healthy democracy in which we live. I enjoy the fact that so many different views can be openly expressed, as long as this is done in a peaceful way.

1:16 [Comment From Mark, Greenbelt, MD: ] Why are these meetings so often accompanied by protests? What are the protesters trying to accomplish?

1:19 Homi Kharas: Globalization is messy and many people are being hurt by it. Of course many others (far more in my view) are benefiting. But those being hurt have every right to try and get their voices heard and to raise issues that they feel are being neglected. We should manage globalization so that as many people as possible benefit, and I see protests as simply a way of having more voices heard.

1:20 Homi Kharas: I’ve lived in Washington a long time and I recall when protesters were asking the World Bank and IMF to take more account of environmental and social issues in their programs. Well, guess what. The organizations reformed and have done just that. So when the issue is genuine and solutions are possible, protests can help spur reform in a positive way.

1:20 [Comment From David Bosco: ] Do you have a sense of where replenishment of the International Development Association’s funds stands?

1:23 Homi Kharas: The African Development Fund just reached agreement on a new replenishment in September. Using today’s exchange rates, it got about the same as last time. The Global Environment Facility also got under one-half of its initial request for its replenishment in May. These are difficult times for raising money for aid organizations for obvious reasons. Rich countries have their own fiscal problems these days. I hope that donors will be generous toward IDA. We will have a better sense of how generous after the discussions scheduled for next week.

1:24 [Comment From Jennifer Sundlin: ] As China’s economic power increases, how has its role at these meetings changed, if it has?

1:26 Homi Kharas: China is at the center of many of the key issues being discussed this week. Global growth–China is the leader; exchange rate systems–China is the major issue; IMF governance reform–how big and how rapidly should China’s quota grow. Basically, the world is trying to learn how to accommodate the rise of what is now the second-largest economy in the world.

1:26 [Comment From Wes: ] How well did India survive the global economic crisis, and how will that country be involved with IMF/World Bank governance reform?

1:29 Homi Kharas: India not only survived the global economic crisis, it prospered. India is forecast to register one of the highest growth rates on record this year, according to the new IMF projections–9.7 percent in 2010. As a dynamic emerging economy, India’s representation in the IMF will grow, the question is by how much. India is seen by many as being able to discuss the formula on quotas from a more technical perspective than some other countries, simply because the politics associated with India’s growing global importance are less complicated. Hopefully, it can play an important role as a broker of the final compromise.

1:29 Seung Min Kim: And that’s it for today — thanks for joining us!