An IMF staffer checks on social distancing at the IMF/World Bank 2021 annual meetings

 

This year’s International Monetary Fund/World Bank annual meetings were a test of both institutional integrity and international cohesion. Former Clerk of the Privy Council and BMO Vice Chair Kevin Lynch and former White House National Economic Council aide and CN Vice President Paul Deegan provide a comprehensive takeaway.

Kevin Lynch and Paul Deegan

October 25, 2021

In these most uncertain times, the annual meetings of the International Monetary Fund (IMF) and World Bank in Washington last week were distracted not only by an investigation of the IMF’s own managing director, Kristalina Georgieva, but also the American debt ceiling hijinks that threatened to roil the very global financial markets that policy makers from around the world were meeting to strengthen. Dealing with global issues such as supply chain disruptions, rising inflation, energy disruptions in China and Europe, soaring debt, and the fourth wave of COVID at times risked being hijacked by American political machinations and renewed big power rivalry, including in the board rooms of the Bretton Woods institutions.

The good news from the IMF and World Bank is that the relatively robust global economic recovery is continuing, despite the headwinds from the Delta variant and supply chain disruptions.

Headline global growth is 5.9 percent this year, with 4.9 percent expected next year. Perhaps equally important, given the terrifying plunge in all economies last year and the large growth numbers we are now witnessing, is whether countries have recovered their pre-COVID levels of economic activity and employment. Here, the progress is more mixed, and depends significantly on vaccination rates and COVID mitigation measures.

Behind the headlines, however, the discussions around the Washington meetings highlighted five “deepening divides” that tilt the balance of global risks to the downside going forward. These divides include: The gap between economic prospects for high-vaccination rate countries versus low vaccination rate countries; between inflation hawks and inflation doves; between the demand for workers and the supply of workers; between the geopolitical interests of China and the United States; and, between economically efficient energy transition policies post-COP26 and inefficient, ineffective and uncoordinated ones.

Looking for international cooperation, the G20 Communiqué — a dense tome that clocked in at over 3000 words and set a new world record for the use of acronyms – suggests that it may be more present in rhetorical form than in reality. Yet, collective action to provide vaccines to low-income and emerging market economies is essential to stronger and more resilient global growth as well as to protection for all from endless new variants of COVID. Similarly, supply chain disruptions, particularly in microchips, are better dealt with in a coordinated fashion rather than by go-it-alone nationalism. In both cases, Western credibility is at stake in large swaths of the world and China is eagerly offering a competing model.

In her comments at the Washington meetings, the embattled director of the IMF spoke of the “Great Vaccination Divide – too many countries with too little access to vaccines, leaving too many people unprotected from COVID”. While more than 60 percent of the population in advanced economies is fully vaccinated, 96 percent of the population in low-income countries and 60 percent in emerging market economies remain unvaccinated. This is not only a global health problem but also an impediment to global growth, hobbling these developing economies from regaining their pre-COVID growth paths of output, employment and per capita incomes. Vaccination divides are a clear and present health and economic danger, both across and within countries.

On the inflation front, the mantra of central bankers that recent price blips are “transitory” is running into a data problem — prices are continuing to rise. Whether it is energy shortages driving up oil and gas prices, supply chain woes pushing up the prices of consumer goods and food, microchip supply gaps increasing prices for anything digital, and worker shortages putting upward pressure on wages and costs, consumers are confronting inflation rates at the supermarket, the gas pump and among e-retailers not seen in decades. And these energy, supply chain and microchip shortage issues are expected to persist into 2022. On top of this, economists, including former U.S. Treasury Secretary Larry Summers are concerned the proposed fiscal stimulus packages in the U.S. are simply too large and will stoke inflationary expectations, especially when added to the massive liquidity stimulus provided by the Fed — notwithstanding signs of looming tapering of the quantitative easing revived to support the pandemic economy. The IMF hand-wringing about the need for central bank inflation vigilance suggests that it, too, fears transitory inflation can become entrenched. If the inflation hawks are proved prescient, we can expect to see interest rates begin to rise earlier rather later, with costly consequences for highly leveraged governments, households and firms.

The IMF hand-wringing about the need for central bank inflation vigilance suggests that it, too, fears ‘transitory inflation’ can become entrenched.

How countries respond to the climate change targets set at the COP26 meeting in Glasgow, also has the potential to create deep and lasting divides in the global economy. Will countries be protectionist in their spending on green transitions, as the United States has been in its draft legislation? Will “carbon border adjustment mechanisms”, designed with the legitimate purpose of levelling the playing field with respect to climate change laggards, become the new trade barrier? Who will fund the green transitions in the developing world as these highly indebted countries clearly cannot afford it and the rest of the world cannot afford them not to adjust? Who will be the arbiter of whether countries are progressing toward their targets? And how will energy and natural resource intensive economies such as Canada deal with these transitions, which will be much more challenging for us than the rest of the G7 and the EU.

The Washington meetings also highlighted several of the paradoxes of the COVID recession and recovery. While jobs disappeared at an alarming rate as the recession took hold last year, the surprise is that the jobs have returned faster than the workers. Is this a permanent downshift shift in the labour force participation? Does this suggest a restructuring of parts of the gig economy? Will it take a sizeable increase in wages (including minimum wage rates) to lure these workers back into the workforce? Is it largely a temporary issue related to overly generous and poorly targeted COVID relief measures? While only time will tell how the jobs-versus-workers divide plays out, the economic consequences of a decline in the participation rate would be severe for economies like ours that are buffeted by slowing labour force growth and poor productivity growth.

Similarly, while global crises typically reinforce international cooperation — the 2008 global financial crisis and the role of the G20 is a prime example — this time is different. China and Russia have embarked on their own vaccine diplomacy and the West has been slow to get its act together. Concerns about Chinese influence discredited the WHO at a time when credible global public health leadership was most needed. Supply chain disruptions have been exacerbated by U.S.-China trade tensions and a lack of transparency on COVID risks. Russia is playing a duplicitous game with respect to energy shortages, particularly in Europe, but the effects are being felt worldwide. Even the tussle over the fate of the IMF managing director was framed in geopolitical terms of whether China exercised undue influence over a Bretton Woods institution.

So, given these divides, was there a consensus on the path forward?

In a modest way, yes. The IMF was quite vocal that central banks have to “walk a fine line between tackling inflation and financial risks and supporting the recovery” but must be “prepared to act quickly if the risks of rising inflation expectations become more material in this unchartered recovery”. The advice on fiscal policy for countries like Canada, which have returned to pre-COVID activity levels, was also clear: “With debt levels at record levels, all initiatives should be rooted in credible medium-term frameworks, backed by feasible revenue and expenditure measures.” Sounds a lot like a fiscal anchor combined with the withdrawal of pandemic stimulus and a shift to investment spending from income support. The imperative of a major ratcheting up of international cooperation on the vaccine front, for global health, growth and equity reasons, was a third area of convergent policy thinking. And finally, there was an emphasis on the need to make COP26 work, and that will require more than lofty rhetoric and ambitious future targets — it means a focus on the “how” and the “now”, combined with effective international cooperation.

This informal consensus on the core elements and key risks of the way ahead comes at a pivotal point in the recovery from the global pandemic and recession. It should also provide timely and useful messages for the re-elected Canadian government as it ponders its economic priorities and fiscal policy in crafting its Speech from the Throne.

Kevin Lynch is a former Clerk of the Privy Council and former vice chair of BMO Financial Group.

Paul Deegan is a public affairs executive and was Deputy Executive Director of the White House National Economic Council.