Since the Wall Street bank Lehman Brothers failed more than two years ago, bringing the global economy to the brink of collapse, countries have spent hundreds of billions of dollars to prop up their markets, intensified regulation of financial companies and deepened government involvement in the economy.
For International Monetary Fund managing director Dominique Strauss-Kahn, the job is only half done, as he has been leading the fund through a fundamental rethinking of its economic theory. In recent remarks, he has provided a broad summary of the conclusions: State regulation of markets needs to be more extensive; global policies need to create a more even distribution of income; central banks need to do more to prevent lending and asset prices from expanding too fast.
“The pendulum will swing from the market to the state,” Strauss-Kahn said in an address at George Washington University last week. “Globalization has delivered a lot . . . but it also has a dark side, a large and growing chasm between the rich and the poor. Clearly we need a new form of globalization” to prevent the “invisible hand” of loosely regulated markets from becoming “an invisible fist.”
The effort to recast global economics will be a focus of IMF meetings this week. Finance ministers from the Group of Twenty major economies are expected to agree on the yardsticks the fund will use to judge countries and to flag instances when a nation might be pursuing economic policies that aren’t in the world’s best interest.
The undertaking has been encouraged by the United States as a way to push China, for example, to allow the value of its currency to rise and fall freely like that of the dollar or euro. But, in its broadest form, the effort would put the IMF in the role of a sort of global traffic cop — giving the go-ahead to fiscal policies and growth patterns that are deemed sound while warning countries when they’re acting in an unacceptable fashion.
The fund has no authority to enforce its conclusions, and Strauss-Kahn said in a recent interview that development of the guidelines has been fraught with posturing as nations argue for terms most advantageous to them. But he said he remains optimistic that it will produce new tools for guiding the world’s major economies.
“We have a chance at something that will really have an influence on policymakers,” Strauss-Kahn said. “Is the IMF able to have a global picture and figure out with various tools what kind of policies should be put in place in different countries — those that have to reduce a surplus, those that have to reduce a deficit? Yes, we are able to do that.”
The contours of the IMF debate over economic theory have become clear over the past year in discussions among the IMF staff and board, in seminars sponsored by the fund with top economists, and in the work the agency has presented to the G-20. The growing income gap between the rich and poor is no longer seen by many inside the IMF as a by-product of economic boom times but a cause of crisis, as poor and middle-income families turn to borrowed money to make up for stagnant incomes.
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