By Neil Irwin and Michael A. Fletcher
Washington Post Staff Writers
Friday, April 11, 2008
Financial markets are tumbling. The world economy is starting to sputter. Food prices have shot up so far, so fast, that there are riots in the streets of many poor nations.
It's a hard time to be one of the masters of the global economy.
Those leaders -- finance ministers from all over the world -- are gathering in Washington this weekend to sort out their reactions to the most profound global economic crises in at least a decade. The situation could reveal the limitations that international economic institutions face in dealing with the risks inherent to global capitalism.
"There's got to be something coming out of the weekend, a way to visibly assume public responsibility for trying to limit the damage that financial markets can do to our society," said Colin Bradford, a senior fellow at the Brookings Institution. "The pressure is on politicians this weekend to come up with an answer. . . . What is the power structure going to do about this?"
The Group of Seven finance ministers of major industrialized countries meet today, and the governing boards of the International Monetary Fund and World Bank will meet tomorrow and Sunday. Their agendas: in the case of the G-7 and IMF, countering the breakdown in financial markets; in the case of the World Bank, food inflation that threatens to drive more of the world's poorest people into starvation.
But these problems don't have obvious solutions, and it may be hard to achieve consensus on even modest steps that might improve the situation.
For example, as the leaders of major industrial economies meet today, they will look at ways to strengthen the regulation of banks and other financial institutions to try to lessen risks to the global system. They have indicated they will embrace recommendations of the Financial Stability Forum, an international group of bank regulators and other government officials. The forum urges such steps as encouraging banks to be more open with their information and pushing government agencies to coordinate better and respond more aggressively to risks.
Actions like those may not do much in the short run to prevent the problems in financial markets from slowing the world economy.
"They are going to share a lot of information, but I don't think there is going to be a coordinated policy response," said Domenico Lombardi, president of the Oxford Institute for Economic Policy. That's partly because European and Asian economies are in better shape than that in the United States, and thus leaders of those nations might be reluctant to undertake bold action.
U.S. officials have played down the possibility of action by governments to buy up mortgage securities or take other big steps. Addressing the idea of "an injection of public money in a very significant way," David McCormick, a Treasury Department undersecretary, said in a briefing Wednesday, "We're not at all certain that that would make sense or would even have the desired public policy outcome."
The IMF has taken a stronger stance in urging central banks and governments to consider unusual action. Many analysts would like the IMF to take the lead in trying to prevent future disruptions in financial markets.
"The IMF should orchestrate a worldwide response to this," Bradford said. "They can provide a table around which you bring the various national officials, and you bang heads. You say to people, look, we've got to come up with some codes and practices that will keep this from happening again."
But the IMF could face big limitations on its ability to play that role.
For one thing, the fund is in the middle of dealing with financial problems of its own. In the strong global economy of the past decade, few nations turned to the IMF to borrow money. The organization funds itself with interest payments on those loans, and as a result has had far less revenue.
So, much of its agenda this weekend will dwell on internal matters of balancing the IMF budget and selling off gold to raise cash.
Moreover, many developing nations, especially in Asia, are distrustful of an organization that is controlled almost entirely by the United States and Europe.
"The IMF can at best make suggestions as to what people should do," said Desmond Lachman, a resident fellow at the American Enterprise Institute. "They've got no leverage over any of the major shareholders. The most they can do is provide a technical case as to what kind of action should be taken."
On a different front, the World Bank will be dealing with the impact of rapidly rising food prices on poor nations, which already has spawned unrest in 33 countries, including Haiti, Egypt, Uzbekistan, Indonesia, Cameroon and Mozambique.
The rising prices -- up 83 percent in the three years preceding February, according to the World Bank -- are projected to continue for the next several years, threatening to undermine progress that has been made in battling extreme poverty and malnutrition.
"While many worry about filling their gas tanks, many others around the world are struggling to fill their stomachs," World Bank President Robert B. Zoellick told reporters yesterday. "And it's getting more and more difficult every day."
In meetings this weekend, Zoellick said, he hopes to rally the world's developed nations around what he calls "a new deal" for global food policy. To deal with the immediate food crisis, he has called on the world community to make up the $500 million shortfall in the United Nations World Food Program, while expanding other food aid for the poor around the world.
Longer term, he said, agricultural development should be made a greater priority, particularly in places such as Africa, which have vastly underutilized potential for food production.
The bank has already said it would nearly double its agricultural lending to sub-Saharan Africa to $800 million next year.
Zoellick said that the bank's food goals are about more than charity. They also present an opportunity for future economic growth -- a point he is pressing with the managers of sovereign wealth funds around the world. A 1 percent investment from those funds, he said, would amount to $30 billion in new investment in African development.
"Meetings such as this one are usually about talk. Words can focus attention. They can build momentum. But we can't be satisfied with studies, papers and talk," Zoellick said.