Employment will be front and center at this year’s meetings, since it is the key legacy issue from the global financial crisis that has yet to be resolved. In fact, jobs already dominated the discussion at the traditional Jackson Hole Economic Symposium at the end of August, a gathering of the world’s central bankers, finance ministers and academics that is held annually in the US in Jackson Hole, Wyoming. “One challenge that emerged there is that there is a lack clarity about the rate of full employment, which makes it difficult for central bankers to enact normal monetary policy,” says Chetan Ghate, associate professor at the Indian Statistical Institute in New Delhi.
The fragile recovery around the world will link the discussions at the IMF and the World Bank. “The global economy is operating way below potential, and there is a human cost to this, especially in terms of unemployment,” says Ghate. “Development aspirations in developing countries are not being met.” Adding to the uncertainty, countries like Brazil, India, Indonesia and South Africa are in the midst of an important political transition (having all just recently elected new governments) whose effects will be felt only in the coming months. Narendra Modi, India’s new prime minister, has so far elicited the greatest hopes. “We have had sluggish growth for the past two years, mostly driven by domestic factors,” says Ghate. “The expectation is that the new government will rebuild governance and that growth will return to 7% to 8% in three- to four-years’ time. I don’t think anyone can really know that, but it is fair to say that India’s performance will be positively affected by a stable government.”
Much of the debate at the IMF will cover the role of monetary versus fiscal policy to stimulate growth. “If you look at the world economy, it is still lethargic after all this unprecedented monetary expansion, so I say there may be a change in attitude,” says Hufbauer of the Peterson Institute. He believes that infrastructure could emerge as the biggest beneficiary of this shift in thinking. “Most governments don’t want to increase entitlement programs, because when you do, it’s hard to ever take it back,” Hufbauer says. “So if we are going to talk fiscal expansion, it will be in the context of infrastructure spending, which is below-grade in many countries and has very high social productivity.”
Though now widely anticipated, a full withdrawal, by the US Fed in particular, from the policies of low interest rates and quantitative easing could still be a point of contention in Washington. “International monetary cooperation remains a major issue for emerging markets economies,” says Ghate. “Meaning that monetary policy should be set so that it is mindful of the effects it has on them as well.” While the Fed has announced it will bring its bond-buying program to an end in October, it remains unclear when exactly it will also turn the switch on interest rates. According to Hufbauer, they are bound to remain low for the time being, with a move not likely until the second quarter of 2015.
In the meantime, international monetary policy cooperation is of concern not only to emerging countries. Having just launched unconventional interventions of its own but still struggling to keep the threat of deflation at bay in the eurozone, the European Central Bank is behind the curve relative to the Fed, the Bank of England and the Bank of Japan. ECB President Mario Draghi is moving toward quantitative easing precisely at a time when his American counterpart Janet Yellen is preparing to take the US in the opposite direction, which might undercut his efforts to reach the ECB inflation target.
Finally, IMF/WB governance issues will be on the table again in October, as the US Congress continues to block long-proposed reforms that, among other things, would see a larger voting share at these institutions going to developing countries. Participants may feel an added sense of urgency, as the BRICS countries join forces to launch their own New Development Bank, modeled after the World Bank, and Contingent Reserve Arrangement (CRA), which will resemble the IMF. Though the project is promising and, in the long run, could complement the Bretton Woods institutions, experts warn not to expect too much from either in the near future. “We are coming to the conclusion that we have a deficit in terms of global economic governance,” says Marcos Troyjo of Columbia University. “So the diagnosis will be there, but I don’t see the political will, the economic capacity or the room for cooperation and maneuvering that would either bring existing institutions up to date or that would allow for the creation of a new architecture.”