By Anjan Roy
The bi-annual meetings of the World Bank and the International Monetary Fund in Washington when the policy wonks of these institutions for meet with finance ministers of the participating countries are important occasions for findings solutions to the world’s economic ills.
This year’s meet, currently being held in Washington, is more important than ordinarily because of the circumstances in which these are being made. These are, to say euphemistically, trying times.
The world is looking forward some altogether new ideas on tackling the multiple problems besetting the world when a ravaging war is being fought which is upsetting all established norms and framework. What are these problems and what impact these are leaving?
Inflation, high interest rates and financial instability are the most important challenges. As if, those were not enough, the devastating effect of the pandemic has virtually crippled many countries.
These, in their combined impact are affecting growth and developing and impacting the most vulnerable sections of world population. It is the poorer countries which have been so far worst affected.
The prospects for growth are low. Should remain less than 3% for the next five yeas, according to data released by the IMF already. That means, the people at the lower end of the income spread are at greatest risks.
How the growth prospects for the lower income countries could be bettered? Obviously, through larger investment in these countries and creating capacities. Since they are poor and lack capital, investments have to come from the global players and the developed countries.
Ironically enough, the opposite is happening. Developing countries are facing de-capitalisation rather than higher capitalisation and investment. Funds flowing out of them, other than coming inwards. So, in the lower incomes levels countries are at greater threat of going moribund and get into a stagnation. The need is for directing funds flows to these most vulnerable countries.
That could be the first charge for the policy makers at the Fund-Bank meet. That could be the major responsibility of the World Bank now.
Secondly, the IMF could become a focal player in the current context in calibrating and hammering out a new approach towards inflation control and maintaining overall financial stability. Since financial markets are integrated and funds flow incessantly across borders, their policies can determine a lot.
In this, the central banks have a critical role in the current juncture as they never had before.
Central banks have a paramount responsibility to restore price stability. Without price stability, the poor suffer most. However, they are facing dilemma. New tools are needed.
It is like this. Conventional economics would dictate that to tame run away prices, central banks should raise interest rates. These should act as a brake on demand and thus cool prices. But, as we are witnessing, such a blunt approach create multiple problems.
Apart from slowing down the pace of an economy, they bring financial instability in their trail.. We have just seen the tip of the iceberg. The liquidation of the Silicon Valley Bank, several other smaller US banks and across the Atlantic, the fall of one of the storied financial institutions, Credit Suisse, show what such policies could bring forth.
Thus the need the hour is to find new ways of achieving these conflicting aims without upsetting the finely balanced apple cart.
The Fund-Bank meet is hopefully throwing out some indications that new approaches are under the scanner. Rather than only a demand side approach to inflation control, a supply side attack on the prices are also being talked of.
Thus, while keeping the interest rates high, they can still provide liquidity and ensure that the economic activities do not suffer. So the growth process could remain strong and economies do not slump.
The fundamental approach towards inflation control seems like changing, listening to the discussions at the fund bank meeting now it appears that the emphasis is shifting from demand containment through higher interest rates to raising supplies through more funds to the MSMEs and smaller producers who should be able to jack up supplies and thus the supplies.
The third big issue that has come to the surface in Washington is the deleterious effect of the continuing war in Ukraine. The war is affecting the supply channels and developing a level of uncertainty in which it could be difficult to commit for development in the long term.
The geo-politics of our times is almost stunning the geo-economics of development. We need to break out of this mould now and launch a new age for growth and development.
In the midst of these, the IMF has released its annual report on the Outlook for Global Economy. IT has raised downward the immediate growth prospects for many countries, including India. While, the microscopic look could be at times misleading the more comprehensive assessment and prognostications are no doubt reasonable. Some good work done. (IPA Service)