Suddenly, Rodrigo de Rato's tenure as chief steward of the global economy looks a lot less tranquil than before.
Rato, who became managing director of the International Monetary Fund in June 2004, has enjoyed a remarkably uneventful 15 months at the IMF's helm, thanks to robust global growth, low interest rates and a dearth of financial crises. He has used the opportunity to travel to several dozen countries, to the point that many on the IMF staff have questioned privately whether their boss is genuinely interested in the nitty-gritty details of his job.
But now Rato, a former Spanish finance minister, is under pressure to deal more aggressively with festering problems that menace the world economy's health, in particular the huge imbalance in global trade. The U.S. trade deficit is set to swell to about $700 billion this year, with corresponding surpluses mounting in China, other export powerhouses in Asia and elsewhere. Many economists fret that the upshot could be a protectionist backlash in Washington, or a crisis in which foreigners would dump the vast amounts of dollars they are accumulating from selling their goods to Americans.
The most blunt prodding came last week from the Bush administration, when Timothy D. Adams, the Treasury undersecretary for international affairs, demanded that the IMF crack down on countries that violate the fund's rules against currency manipulation. Accusing the IMF in a speech of being "asleep at the wheel," Adams was clearly suggesting that the fund ought to confront China, whose currency policy has become the target of intense criticism and threats of retaliation on Capitol Hill. Beijing's detractors charge that the exchange rate of the Chinese yuan has been kept far too cheap, giving an extra competitive advantage to China's low-cost manufacturers.
Other participants at the weekend meetings of the IMF and World Bank, while not necessarily agreeing with Adams, voiced disquiet that the fund was not playing a more central role in a concerted move to reduce the imbalances.
"Let me enter a plea for the fund to take a bold initiative in this area," said Michel Camdessus, a former IMF managing director, in a lecture Sunday attended by many top economic policymakers. Recalling the coordinated agreements during the mid-1980s among the major industrial powers that helped deal with the global economic stresses of that era, Camdessus said: "Now is the time for a similar effort, led this time by the IMF . . . because there is no other -- I insist, no other -- legitimate, global forum to tackle such a systemic problem."
Such exhortations "could be a wake-up call" for Rato, said Kristin J. Forbes, a former member of President Bush's Council of Economic Advisers. "There was a clear message that he should take bold action on some of these issues."
Rato is firing back, even though the rhetorical assault by Adams came from the United States, the most powerful shareholder among the IMF's 184 member countries. The IMF chief asserted that the fund was actively tackling all facets of the imbalances, as befits an institution established at the end of World War II to protect the international economy against financial turbulence.
The fund staff was ahead of others in recognizing that the Chinese should allow the yuan to rise, Rato contended, and it is continuing to advise Beijing to move further in that direction. Similarly, IMF public statements have helped forge a consensus that a global solution to trade imbalances will require the United States to slash its budget deficit, Asian countries to lift the value of their currencies, and European nations to adopt growth-promoting reforms.
But Rato maintains that calls for more audacious measures by the IMF are misplaced.
In a speech at a conference last Friday, he sought to illustrate the limits of the IMF's power by citing a famous story about President Harry S. Truman as he was preparing to hand power to Gen. Dwight D. Eisenhower. Truman reportedly joked that Eisenhower would sit in the Oval Office saying, "Do this! Do that!" and would become frustrated when he realized that the presidency was nothing like the army.
"In the same way, the influence of the fund comes almost entirely from its ability to persuade its members that they should follow its advice," Rato said. "If we want China to adopt more exchange rate flexibility then we need to be sensitive to the Chinese authorities' concerns . . . if you're in a room with a friend you don't need to talk through a megaphone."
He said in an interview that the IMF has already investigated and rejected suggestions that China's currency policies are so manipulative as to warrant the use of "special consultations" -- a sort of naming-and-shaming power that rarely has been invoked. And he pointedly suggested that before browbeating others, the United States ought to clean up its own act by taking more ambitious steps on the budget deficit, which would help curb consumption and thus imports.
"The U.S. part of the equation on global imbalances . . . is particularly urgent," he said in a speech to the IMF's governing council. The spending cuts the administration has proposed "would have been difficult to achieve even before the devastation wrought by Hurricane Katrina," so "actions on the revenue side" -- tax increases, in other words -- "will also be needed."
Rato dismissed proposals that the IMF should try cajoling the Americans, the Europeans, the Japanese, the Chinese and others into a pact such as the famous agreement struck in 1985 at New York's Plaza Hotel.
"Some people are obsessed with this idea that we should have a repetition of the accords of the '80s," he said. "The issues are now much broader" than the exchange-rate questions that dominated those deals, he said, "and we're talking about many more players."
His stance drew support from some economists and policymakers, especially those who agree that China's currency policy does not clearly violate IMF rules. But others worried that by refusing to use the IMF's clout against Beijing, Rato is increasing the chances that an angry U.S. Congress will enact punitive duties on Chinese goods and thus spark a trade war.
Right or not, Rato is facing his first big test in the IMF job -- "one that is impossible to do well," as he once put it.
"Here he's got his predecessor, Camdessus, saying he should be more active; and he's got his biggest shareholder, and the U.S. Congress, breathing down his neck," said C. Fred Bergsten, director of the Institute for International Economics. "I would say those are pretty big pressure points."