Forecasters at international organizations often find themselves in a delicate position. On the one hand, they have unparalleled access to hard data and intelligence about what is happening in every corner of the world economy. On the other hand, their main shareholders – the US and larger European countries – do not want to hear predictions that are inconsistent with their own preferred baseline.
And, in the case of the US today, nothing could be more sensitive: it’s a relatively optimistic baseline, with a quick bounceback next year, that underpins the mild “stress scenario” being used for banks. So if the World Bank or the IMF said that the world economy is going down and not coming back any time soon, that would raise major issues.
The World Bank clearly wants to speak truth to authority on this occasion, but can’t quite get the job done.
In a document prepared for the G20 meeting, the World Bank hints at more dire outcomes: global GDP will decline this year for the first time since WWII, with growth “at least 5 percentage points below potential” (translation: roughly minus 1 percent). But they don’t give any supporting country-level detail and they are completely silent on the key question for the US banking stress test – what will happen in 2010. They must have worked through this level of detail, otherwise they wouldn’t feel comfortable saying that the world economy will contract, and their body language (including the scale of funding requests for developing countries) says that this is going to stay bad for a while. But they can’t quite bring themselves to be explicit.
The document is a series of dire warnings, couched in rather indirect language – although, to an official ear, the general downbeat tone is quite clear. Then you reach section VII, “Urgent Priorities” and the recommendation for the financial system is: “restoring confidence”. This is completely vague and unhelpful – which, of course, is the point.
The President of the World Bank is, by tradition, appointed by the US government – specifically, in practice, by the Treasury. And there have long been voices – including from some now at the Treasury – suggesting that this should change, perhaps in return for more resources for the Bank/IMF from those emerging markets that still have deep pockets, e.g., China.
Still, what the odds that a more independent World Bank and IMF (the governance of which could be reformed in parallel) would ever play a decisive or even controversial oversight role vis-a-vis the US economy?
The US is just too powerful to be contained or constrained by international institutions. The idea of an global “early warning system” is therefore illusory.
We need to take this into account when redesigning our financial system. No one will warn us and we will not warn ourselves.