Raghuram Rajan, the head of the Reserve Bank of India, has a theory for why wealthy economies have recently been underperforming: It’s because they’re hypocritical. When poor economies falter, he says, their wealthy neighbors demand structural reforms in service of making the global economy more vibrant. But they have spared themselves the same tough love.
“They have tried everything new, continuing easy monetary policy, but they still don’t have sustainable growth that they would be happy with,” Rajan said in Pune recently. The bottom line, he declared, is that “we have been too quiet in the emerging markets, saying what the developed markets do is best for the global economy.”
Rajan isn’t alone in calling for developing economies to have a bigger say in the global economy. But as officials gather in Washington for the spring meetings of the International Monetary Fund and World Bank, it’s fair to wonder what countries like India, China and Indonesia would do if they had the influence in those institutions that they desire. Here are three areas where emerging economies, drawing on their own experiences, would probably handle things differently.
First, they would likely insist that the global economy rely less on monetary policy. After the 1997-1998 Asian financial crisis, the IMF and World Bank gave governments in the region a lengthy to-do list: reduce debt; push through painful structural reforms; maintain responsible monetary policies. Since its own meltdown in 2008, the West has broken all these commandments — none more so than its edict against loose monetary policies.
The U.S. Federal Reserve is Exhibit A. Its quantitative easing programs have allowed the West to put off addressing the root causes of its economic problems and caused smaller economies to be flooded with unstable investments. Rajan rightly points out that if developing countries in Asia were to mimic Washington’s monetary policies — or those of the Bank of Japan and European Central Bank — they would be labeled currency manipulators and shamed accordingly in IMF and World Bank discussions.
Second, developing countries would want global economic institutions to be more responsive to regional needs. More specifically, they would want institutions like the IMF and World Bank to accelerate reforms that reduce global inequality.
As Yukon Huang, a former World Bank director, recently wrote in the Financial Times, China’s push for an Asian Infrastructure Investment Bank as an expression of its desire for international institutions that are more efficient and more responsive to Asian perspectives. “The objective,” Huang wrote, “is not simply to duplicate the supposedly ‘highest standards’ of existing institutions such as the World Bank, the IMF and the Asian Development Bank, but to use this unique opportunity to establish the ‘right standards.’ “
Those include less bloat and bureaucracy; a greater focus on local governments’ evaluations of the utility and costs of projects; and a nimbler, more ad-hoc decision-making process.
Third, developing countries would want to grab a greater share of the spotlight in managing the institutions — and in calling out the specific deficiencies of the West. The developed world, they believe, should show more humility on the global stage. By some measures, China’s economy is already bigger than America’s. Indian growth, for its part, may outpace China’s this year for the first time since 1999. Meanwhile, the U.S. and Europe have been demanding that China and other Asian countries pay more to finance the IMF and World Bank, while reserving the right to run those institutions themselves.
With IMF chief Christine Lagarde now warning of stagnation and a “new mediocre,” it’s clear the West is struggling to manage the global economy. A dose of humility for richer economies seems only justified. If they open themselves up to a bit of criticism, it might even help them grow faster.
There’s no reason for emerging economies to delay asking for more say. “There is a concern that the rules of the game are not clearly set in the international world,” Rajan said. Starting in Washington this week, developing nations should demand a new rule book.