The IMF communicates its view of the world economy in two ways. The first is quite explicit, in the form of a World Economic Outlook with specific growth forecasts. The latest update to the Outlook, published last week, recognized that world growth is slowing down, but anticipated a V-shaped recovery (there is a reassuring V in their Figure 1, or you can look at the Q4 on Q4 numbers for 2009 in the pdf version - the US does not contract during the coming year, according to this view.)
According to the forecast – which factors in only actual policies in place; no assumed miracles allowed – this is not much of a global crisis, particularly for emerging markets (e.g., emerging market growth dips to 3.3% for 2009 and then pops back up to 5% for 2010 in the annual average data; China’s growth will accelerate from now through end of 2010, etc.) Given that, among other things, the IMF is the point organization for emerging market troubles, the message seems to be a soothing one.
But the IMF also communicates with both its lending to countries in difficulties, and with statements on and around this lending. Here the news is in striking contrast to the forecast.
The Fund has plenty of money (or access to the same) – it can currently lend up to $250bn, and has currently disbursed just under $50bn. Most observers have interpreted this as indicating the IMF does not need additional resources. But now the IMF begs to differ. John Lipsky, First Deputy Managing Director (the #2 in the hierachy and #1 carrying a US passport), said at Davos that the Fund would like to double its resources, to $500bn. Of course, he stressed that this is only as a contingency measure – but do not be misled by this terminology. The world economy is in serious trouble, this has first order implications for emerging markets, and there will in all likelihood be crises throughout the developing world and perhaps also among some richer countries (think Iceland, but bigger). The IMF wants you to know this.
The IMF also wants you to know that its major shareholders, including the US, Japan, and large European countries, are in broad agreement with this more negative view. The Fund would not be floating publicly a scheme for raising this amount of money if it did not already have the richest countries on board, at least in terms of broadly supporting the need for more funding. The writing on the eurozone wall probably helped – if the IMF is called upon in Western Europe, it needs to have a considerable amount of cash in hand.
The good news is that with the IMF taking matters so seriously, raising $250bn should not be difficult – in fact, Japan has already pledged $100bn. And the IMF could well move to issue its own bonds – in addition to providing a new source of funding, this would bring the Fund closer to financial markets in ways that will help make the organization more effective.
My reaction is in line with that of Montek Ahluwalia – former senior IMF and World Bank official and now a top economic policymaker in India. At Davos, he called the plan to raise $250bn, “very modest”. Other phrases, such as “too small” or “at least a start” also spring to mind. In the fall, I predicted that the IMF would need at least $1 trillion in resources to get us through this global crisis. If anything, I now think that estimate was too low.