The New New Normal


The IMF is offering 20th-century solutions for a 21st-century economy.

As the world's power brokers -- well, ministers and central bankers from 188 countries -- gather in October for the annual meetings of the International Monetary Fund, they will again be confronted by evidence that the IMF is still in need of proper reform. This time, the evidence comes not only in the form of continued global economic malaise and financial instability, but the IMF's brutally honest self-evaluation of its role in the insufficient Greek bailout (and, by implication, its involvement in other European countries). On the heels of this disappointing performance, one thing is clear: The IMF is still stuck in the last century.

Nearly 70 years ago, the IMF was created for what remains a good and valid reason. Emerging from a world war that had been fueled by a global depression, beggar-thy-neighbor policies, and inadequate economic coordination, visionary leaders recognized that a well-functioning global economy requires a strong, multilateral institution empowered to intervene and rescue countries from disaster.

On paper, the IMF is well-equipped for the job. It commands a virtually universal international membership. It has a highly talented staff and a sizable budget. Its Articles of Agreement give it unique and direct access to policymakers from individual countries. And its executive board provides a confidential forum for frank multilateral discussions and collective decision-making. But it is hamstrung by its masters in Europe over political squabbles and is not nearly representative of the shift south and east in global economic power.

It is far from obvious that sufficient steps will be taken to make the IMF more effective. Despite the obvious, urgent need, officials are still unwilling or unable to pursue the comprehensive revamp that is so critical to the global economy's well-being.

Five years after the financial crisis that ravaged Western and emerging countries and pushed the world to the edge of a depression, the global economy is struggling again. Growth is anemic, alarmingly high pockets of unemployment persist, and social unrest is on the rise from the Middle East to Europe to Latin America. To make things worse, economic disappointments are no longer limited to weaker countries. Whether it is flat growth in Germany, China's slowing economy, or less-positive news from recently booming economies such as Brazil and Turkey, even the strong are feeling the malaise.

Global finance is also increasingly vulnerable. Despite many new regulatory reforms to make the system stronger and safer, discomforting instability has returned to markets. Rather than base investment and resource-allocation decisions on sound, fundamental analysis, too many investors rely overwhelmingly on the artificial support they receive from the experimental policies pursued by Western central banks. No wonder the U.S. Federal Reserve's mere mention a few months ago that it might reduce its monthly securities purchases led to dizzying asset price drops, disrupted markets, and panic. These wild gyrations severely complicate policymaking around the world, adding to the headwinds facing growth and job creation.

Yet this is the type of world for which the IMF's founding fathers -- particularly British economist John Maynard Keynes and his American counterpart, Harry White -- created the institution. At minimum, the IMF was built to act as an effective, decisive crisis manager; more ambitiously, it was to serve as a global police force to prevent the emergence or persistence of large imbalances that could imperil the economic and financial well-being of countries, including those behaving responsibly.

IN PRACTICE, HOWEVER, the IMF's contribution to a more stable and prosperous global economy continues to be undermined by long-standing structural and governance deficits. Perhaps nowhere is this clearer today than in the courageous report that the IMF has prepared on its involvement and failures in the first Greek bailout.

By the IMF's own admission, the institution allowed itself to be overly influenced -- some would say outright bullied -- by some of its partners (such as the European Commission) in supporting policies that were inadequately designed and whose implementation was insufficiently owned by Greece. Specifically, the IMF ignored its own assessment of financial viability that pointed to the need for an early restructuring of Greek debt. It lent into a program that was not well-enough financed, and its understanding of the country's growth and debt dynamics proved incomplete.

Unsurprisingly, Greece is still struggling mightily three years and hundreds of billions of dollars later, after a huge bailout operation and massive austerity program. Anywhere else, such a costly, visible failure would prompt governing boards to conduct serious discussions and pursue reforms. Not at the IMF.

Despite more than two decades of talk about updating its representation and voting, the IMF is still overly influenced by European politicians. Two reasons for this (among many) are that (1) the IMF's top job is still unofficially reserved for a European, just like it was back in 1944, and (2) Europe still holds about one-third of the seats on the executive board. No wonder European leaders don't hesitate to push back hard when the IMF offers constructive criticism. As a case in point, within hours of the Greece report going public, European officials rushed to the airwaves to condemn it as "plainly wrong" and neither "fair" nor "just."

Meanwhile, emerging economies seethe -- frustrated by Europe's dominance of the IMF and, more generally, by an institution that still seems stuck in the 1970s. Yet no one really wants to lead the reform movement, especially as this would involve locking horns with some of the developed world's big bulls (or, perhaps, bears these days). Brazil has, more than once, accompanied its private advocacy for more equitable representation with bold public statements. But to no avail.

Leadership on this urgent matter could -- and should -- come from within the IMF itself. Yet Christine Lagarde, the IMF's well-liked and charismatic managing director, has essentially punted on this issue. Rather than signal a steadfast willingness to pursue reforms and take on Europe's angry, misguided reactions to criticism, she has reverted to diplospeak, noting the IMF's "very unusual and very exceptional" relationship with European institutions.

We shouldn't criticize her too much -- it is not easy to bite the hand that feeds you. In a selection process that continues to place geography well ahead of merit and inclusiveness, Lagarde owes her appointment to European politicians. And long gone are the days when these politicians would pick an experienced technocrat such as the highly respected Jacques de Larosière or Michel Camdessus. Instead, since 2004, Europe has opted for political personalities for a job seen as a stepping stone to presidencies and prime ministerships at home.

This leaves only one player with the power to turn the tables: the United States. As the world's most powerful economy, the United States has the largest voting share of any country at the IMF (16.8 percent). And it has been periodically dismayed, if not irritated, by how Europe has handled its financial crisis.

But Washington cannot lead -- or even coordinate -- a deep, comprehensive reform of the IMF. In normal times, most American politicians are highly skeptical about the role, cost, and effectiveness of multilateral institutions. And given today's polarized and dysfunctional Congress (not to mention many of its members' poor grasp of what the IMF does), any attempt by President Barack Obama's administration to rejigger the IMF's makeup could easily be misconstrued as selling out America's European allies to less-reliable developing countries.

Yes, the world urgently needs a more effective IMF that can reduce the global imbalances that undermine growth and jobs in so many countries. But don't look to the upcoming gatherings in Washington to deliver the needed reforms. Instead, and despite yet another frank and well-documented self-evaluation, it is likely that the IMF will continue to be undermined by political masters who lack courage and vision. Let us just hope that the global economy doesn't require saving soon -- because the IMF is not yet ready.

Photo: PAUL J. RICHARDS/AFP/Getty Images

The New New Normal

Into Africa

Believe the hype. Africa's rise is real.

Not since the countries of Africa tossed out their colonial masters several decades ago has there been this much optimism and excitement about the continent's prospects. While China's economic expansion has slowed, and while Europe and the United States try to dig themselves out of recession, Africa has not only weathered an up-and-down global economy -- it's been booming. Consider Nigeria's stock market, which gained 35 percent last year, or Uganda's, up 39 percent. But even more important is that real gains are finally being made on the ground in Africa today -- ones that speak to the possibility of a breakout phase that would lift millions out of utter poverty and great misery.

Let's start with the numbers. According to International Monetary Fund data, sub-Saharan Africa has grown at an annual rate of 4.8 percent over the last five years, a period that includes the trauma of the global financial crisis. That means it has outperformed other developing regions -- like Latin America, for example, at 3.3 percent -- and it blows out of the water the advanced economies, which expanded just 0.5 percent per year.

This is happening on a continent that has been saddled for decades with the worst levels of malnutrition, ravaged by preventable and treatable diseases, beset by corruption and rent-seeking, and scarred by a legacy of foregone opportunities. It is also occurring on a continent thought to be deeply vulnerable to negative external shocks, internal political upheavals, and now, sadly, terrorist movements.

No wonder there's so much excitement. Even the most discriminating investors are paying greater attention to Africa, which is all the more remarkable given that for decades the place was deemed virtually uninvestable. Now, from bonds to private equity, new vehicles are emerging to channel foreign investments into more of the most promising African economies. How real is the boom? Foreign direct investment in sub-Saharan Africa has leapt from $6 billion in 2000 to $34 billion in 2012. In just the past couple of years, several African countries -- among them Angola, Namibia, Senegal, and Zambia -- have issued external debt for the first time, allowing them to invest for the future.

Cynics might say they've seen this all before -- that 10 years ago, another great wave of anticipation about Africa's development merely gave way to disappointment. And yes, some things fizzled out; in some instances, countries were even left worse off. Witness what happened to Ivory Coast, once regarded as the jewel of Africa's development crown: It is only now emerging from a brutal, costly civil war that erased years of development.

We should be cautious, then, in saying that things are sure to be different this time around. Yet if one looks closely, cause for hope is on solid analytical soil. Africa's traditional growth story was built on rising prices for international commodities. But this proved neither sustainable nor inclusive, encouraging corruption and an unproductive rentier mentality among the ruling elite. There's a reason we think of Africa when we think of the resource curse. 

This time, however, an expanding set of small- and medium-sized enterprises is bringing real economic diversification. According to World Bank statistics, these firms add some 20 percent to the continent's GDP and contribute roughly 50 percent of the new jobs in sub-Saharan Africa. These successful businesses are giving rise to internationally competitive companies, thereby providing access to global markets, new business models and technologies, and higher wages and salaries.

Data: World Bank; Photo: Jon Hrusa/EPA

This can have a multiplier effect on long-term productivity of both labor and capital. As we've seen in Brazil and Mexico -- and now in Ghana and Kenya -- it slows brain drain by providing greater opportunities at home; it encourages nationals to migrate back home; and it engages the diaspora in enhancing the flow of capital and opening up new cross-border interactions. The ultimate benefit of all this, of course, is the promise of sustaining and nurturing wider prosperity.

This business boom is not just an isolated development limited to a few outlier countries. If these dynamics accelerate and attain critical mass in several major African economies, as I believe they will, the regional and global effects could be consequential. But there's still a lot to be done.

Right now, it is still cheaper (and easier) to export something to another African country via Europe or Dubai than directly. Clearly, regional trade suffers as a result. And though capital flows to Africa have picked up, they continue to be well below what economists would expect given principles of comparative advantage, consumption and production patterns, and, of course, per capita income.

There are other pressing needs too. Africa can't hope to really compete on the global economic front lines until it has broader electrification and a better transportation system. Unlike in decades past, however, the major driver needs to be the private sector, not some politician at a regional summit offering grandiose and unreasonable plans, or a celebrity do-gooder organizing a concert.

For the developed world, Africa's rise is not about charity or even just improving the livelihoods of the millions who live on the margins of subsistence. A growing, more prosperous Africa would assist the much-sought-after global rebalancing, helping the world find a less volatile economic equilibrium. A rising Africa eventually would provide a long-term source of global aggregate demand and a destination to engage foreign capital that is now overheating a smaller set of developing economies.

All this sounds very appealing, and it is. It is also far from automatic. Africa's rise can still be derailed by internal obstacles, especially the lack of adequate institutions in the public sector. Badly managed ministries and funding processes can contaminate development, especially if, rather than responding to people's needs, they allow for a concentration of power that not only enables corruption but raises the incentive for the existing political order to block any changes to the system, no matter how beneficial for the common good. It's no surprise then that African countries, on average, score in the bottom third of Transparency International's Corruption Perceptions Index.

It is the responsibility of Africans to recognize and address these risks. Yet the rest of the world can play a role in ensuring that this time, Africa's rise will be real and sustainable. The continent needs infrastructure projects, it needs risk mitigation, and it needs public-private partnerships that help build small and midsize businesses. What it doesn't need is a mindset that eternally treats Africa as an aid recipient. But most importantly, the West needs to get its own house in order to prevent currency wars or another recession that could imperil global capital flows.

Count me among the growing number of people excited and hopeful about what's happening on the ground in Africa. Markets are booming, and this time it's not just gold mines and oil rigs; it's a new generation of workers and entrepreneurs. Still a cynic? Don't take my word for it -- just follow the money.

Data: IMF 

Sean Gallup/Getty Images