Last week Finance Ministers, Central Bank Governors and Development Ministers from around the world descended on Washington for the annual meetings of the International Monetary Fund (IMF) and the World Bank. What did they say, what did they do and what does it mean for international businesses?
Volatility was the word of the hour. In explaining the unnerving volatility of world economy, IMF Managing Director Georgieva noted that the economy had endured one shock after another, including COVID, climate change and Russia’s invasion of Ukraine. More pointedly, a Cambridge University professor asserted that policymakers had amplified volatility, presumably referring to persistent observations that Central Banks had expanded the money supply for too long and that governments had spent too profligately.
In concluding comments, IMF Managing Director predicted “further extraordinary challenges” and warned that policymakers “have an incredibly narrow path to walk–there is no room for missteps.” Referring to Russia’s invasion of Ukraine and the disruptions it was adding of a shaky global economy, Spain’s Economy Minster, Nadia Calvino served as Chair of the IMF steering committee and asserted that “Peace is the most important economic policy tool right now.” Accurate as that statement might be, it may also have served as an inadvertent acknowledgment that this convocation of the world’s top economic policy makers had not been able to project a clear, credible and coordinated strategy for putting the global economy back on track.
Most participating policy leaders agreed that the highest priority at the moment was for Central Banks to suppress inflation by raising interest rates dramatically. During the week, emerging price data had made clear that inflationary pressures continued to be strong in the United States, underscoring that interest rates would continue to rise. For business executives, this is perhaps the most obvious take away from the week of deliberations.
The prospect that the Federal Reserve will continue to raise US interest rates signals that most other Central Banks will be under pressure to do the same, or else face the prospects that their currencies will decline in value. Policymakers placed considerable attention on the risk that rising interest rates could push some countries into debt distress and possible currency instability. This is a second take-away for businesses with operations in vulnerable developing and emerging market countries.
While most of the assembled financial officials are not experts in geopolitical questions or policies on food and energy, these issues spilled over into their debates. For example, finance officials from governments represented in the G7 discussed coordination of their sanctions against Russia and U.S. Secretary Yellen’s proposal for a price cap on certain Russian oil exports. Managing Director Georgieva and World Bank President Malpas led discussions about how the institutions they lead could help countries cope with high and volatile prices for food and energy.
Prominent financial leaders from the past expressed concern that current leaders were not adequately addressing the crises of the moment. Former Bank of England Governor Carney noted somberly that in the current delicate market situation, “Mistakes will be punished.” Former U.S. Treasury Secretary Summers contrasted the boldness of foreign policy leaders in addressing Russia’s invasion of Ukraine with the “vague, airy, fairy” pronouncements of finance leaders on the economy. Summers said that, “This is the most complex, disparate and cross cutting set of challenges that I can remember in the 40 years I’ve been paying attention to such things,” while making clear he felt the response he had seen had not been commensurate with the challenge.
During the week, Indonesia convened the 4th meeting this year of Finance Ministers of the G20, representing the world’s largest economies. The G20 played a central role in coordinating an international response to the financial crisis and resulting “great recession” of 2007-2009. The G20 communique issued last week, however, appears to focus on secondary issues fails to convey any sense that the G20 is leading a charge to formulate and help execue an effective international response to the present crisis. The complexity of the challenges may provide the most important reason for this failure. Some observers suggested that rising tensions between China and the West, particularly the United States, was another important reason that made the G20 machinery slow to respond. The fact that China’s all-important Chinese Communist Party Congress would begin on October 16 no doubt made the Chinese government delegates careful not to make news that might be seen as disrupting choreography of President Xi’s election to an unprecedented 3rd term.
The high stakes, intense pressure and speed dating atmosphere of IMF and World Bank annual meetings sometimes creates unanticipated moments of calm and clarity when world economic leaders find the vision and courage to make great decisions for the benefit of the global economy. Viewed from the outside, the meetings last week did not appear to have such moments or such results.
On October 12, at the White House and only few blocks away from the IMF meetings, the Biden Administration released its National Security Strategy. The Strategy was built on the following premise:
“Russia poses an immediate threat to the free and open international system, recklessly flouting the basic laws of the international order today, as its brutal war against Ukraine has shown. The PRC, by contrast, is the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military and technological power to advance that objective.”
For business executives, one operational conclusion from the week may be that they should take seriously Managing Director Georgieva’s advice that we all “fasten our seatbelts.” Boards of Directors, CEOs and General Counsels have been focused on the implications for their businesses of the disruptive geopolitical environment. Now layered on top of that is the most challenging economic and financial situation of the last eighty years.
General Counsels might take to heart the observation that one of their number made last week about the importance of inculcating an ethos of experimentation, collaboration and problem solving in their legal departments. And recognizing that the great financial and economic disasters of the last century coincided with a breakdown of effective international cooperation and coordination among major powers, both on geopolitical and economic issues, business leaders may want to consider how they can better assess and guard against the complex geopolitical and economic risks their companies must navigate during the coming decade. Alan Larson is a leader of Covington’s “Global Problem Solving” initiative and served as the State Department’s Under Secretary of State for Economic Affairs in the Bill Clinton and George W. Bush Administrations.
Alan Larson is a leader of Covington’s “Global Problem Solving” initiative and served as the State Department’s Under Secretary of State for Economic Affairs in the Bill Clinton and George W. Bush Administrations.