Lawrence Summers is the elephant in the room at the annual meetings of the IMF and World Bank in Lima this week.
Summers, the former U.S. treasury secretary and World Bank chief economist, has come to personify the nagging feeling that something is fundamentally wrong with the global economy. He calls it “secular stagnation,” a shift to a persistently low level of economic growth. He says the threats facing the global economy currently are as "dangerous" as they have been since the Lehman Brothers bankruptcy.
The Summers view isn’t universal. Yet it's becoming the frame for the debate about the global economy. The International Monetary Fund’s latest World Economic Outlook acknowledges that “stagnation” is a threat. Christine Lagarde pushed back against the notion that the IMF has a “dark” view of the economy. She noted that the fund foresees global economic growth of 3.1 percent in 2015 and 3.6 percent in 2016; weaker than what was forecast in July, but growth all the same, she said. But Lagarde and the fund don’t have a bright view on the outlook, either. “Although there is a recovery, it is a bit modest and bit uneven,” the IMF’s managing director said. “It’s just not enough to respond to 200 million unemployed around the world.”
This is the backdrop for the meetings, which will conclude on the weekend. Success will be measured on the extent to which the world’s leading policy makers are able to reassure that they are serious about doing more than muddling along. The big questions are China (How bad is it?), the U.S. Federal Reserve (When will it raise interest rates? Is the world ready when it does?), and commodity prices (Can anything stop the pain of the resource exporters?). The Group of 20 finance ministers and central bank governors and the steering committee of the IMF both will hold press conferences on October 9th.
There will be other important points of discussion. The refugee crisis will make its way into conversation. World Bank President Jim Kim said October 8th that he has been speaking with European leaders such as Germany’s Angela Merkel and the United Kingdom’s David Cameron about creative ways to provide financial support for the countries straining under suddenly larger populations and for the refugees themselves. Kim said specifically that he could be close to a plan to lend money to refugees who would like to start businesses. “We really need to be more creative and more effective at dealing with the refugees in the Middle East,” Kim said.
In addition, the world’s commitment to the institutions and their leaders will surface. Kim will be lobbying for a capital increase. He avoided getting into details, but he said at a press conference that his institution would be ill-prepared for a surge in demand for its support. The World Bank is fine for a few years if lending stays at current levels, Kim said. So the question comes down to confidence that the global situation won’t worsen. If it does, Kim said he would have to deny aid because lending more would risk the World’s Bank’s credit rating.
Lagarde yet again called on the United States to ratify the 2010 overhaul of IMF governance, which would give China and other countries a larger voice. She reiterated that the fund could proceed without Washington’s approval, although it remains unclear how it would do so. It’s also unclear if Lagarde will be around to resolve the situation. She acknowledged that these meetings could be her last as managing director, as her term is up. Lagarde indicated should would like to serve another one. “I’m open to it not being my last annual meeting,” she said. “I’ve done my best,” she added. “It’s not my call.”
If Lagarde can rally the IMF’s members to do something about the global economy’s malaise, she might gain some valuable support. Lagarde has extra incentive to work overtime this week.