The mission was grandiose: Save the global economy from the risk of a collapse in the dollar and, in the process, redefine the role of the International Monetary Fund. But nine months after the IMF launched an ambitious series of consultations aimed at reducing the massive U.S. current-account deficit and rebalancing the world economy, there is little to be shown for the initiative.
Since September the Fund has held two rounds of multilateral consultations with senior finance ministry and central bank officials from China, Europe, Japan, Saudi Arabia and the U.S., as well as numerous bilateral discussions. Participants say the talks have been constructive but fruitless.
"Unfortunately, so far there are no concrete results," says Joaquín Almunia, the European Union commissioner for economic and monetary affairs.
"The process is ongoing, but whether you can see tangible results, I doubt it," says a senior official from one of the participating countries. "The issue is so difficult. You can't address it in a short period of time."
The IMF hopes to hold one more round of consultations in coming weeks, and managing director Rodrigo de Rato will report to the International Monetary and Financial Committee at the Fund's meeting in Washington, scheduled for April. But Fund representatives are playing down expectations. Some of the key players, meanwhile, are drifting away. Raghuram Rajan, the chief economist who co-led the Fund team, resigned at the end of December and has not yet been replaced; Tim Adams, the U.S. Treasury undersecretary for international affairs and a champion of the consultations, last month announced his intention to resign.
Adams insists that the IMF process is useful. "Each successive multilateral conversation has been more productive than the previous one," he tells Institutional Investor. But other observers say Treasury Secretary Hank Paulson, a frequent visitor to China during his days at Goldman Sachs, is determined to deal directly with Beijing rather than rely on the IMF.
Fortunately for the global economy, the underlying imbalances have shown modest signs of improvement lately. The dollar's depreciation over the past four years and a slowdown in U.S. growth helped narrow the U.S. trade deficit in the fourth quarter and have stabilized the current-account deficit at a little less than 7 percent of GDP. As a result, concerns about a rapid unwinding of imbalances have eased.
But the problem is a long way from being resolved. The U.S. deficit needs to shrink to about 3 percent of GDP to be sustainable, estimates Jim O'Neill, chief economist at Goldman Sachs in London. Meanwhile, private sector capital flows are getting worse for the dollar, with foreign direct investment in the U.S. weakening and U.S. investors putting more money into overseas markets. As a result, the U.S. is more dependent on foreign central banks than ever. Says O'Neill: "It's very hard to believe the dollar has turned or will turn. Any temporary rise in the dollar is a rally to sell."
De Rato never suggested that the IMF could readily fix such deeply rooted imbalances. And the Fund has no real leverage when it comes to persuading governments to adopt suggested policies. But critics say de Rato, a former Spanish Finance minister, is failing to use the IMF's bully pulpit to speak out bluntly about the policy shortcomings of its members.
So far there's been no economic fallout from the failure of the consultations, but the impact on the Fund's reputation could be profound. Says Goldman's O'Neill: "Nobody's grasped the initiative from within. I regard the IMF as rapidly becoming less relevant."