Cheerleading Tone Marks IMF Report Douglas O. Walker Professor of Economics Robertson School of Government Regent University Virginia-Pilot—April 24, 2005

The state of the world economy was a main topic of discussion at the meetings of the International Monetary Fund and the World Bank, which took place recently in Washington. Among the reams of documents before the central bankers, finance ministers and international bureaucrats was the recently released World Economic Outlook of the IMF, a semiannual assessment of developments in the world economy.
As always, the IMF can be counted upon to act as the world’s economic cheerleader, this year putting the best face possible on what can be regarded only as an uncertain and discouraging global outlook.

In the view of the IMF, the world economy is recovering from a brief slowdown and regaining strength consistent with a sustainable expansion at a rate considerably greater than the average pace recorded for the past two decades.
The IMF arrives at this rosy view by stressing the positive signs that suggest clear sailing ahead: Strong domestic demand continues to drive an above-trend expansion in the United States, and economic activity in Europe and Japan, although not thriving, is at least increasing.

Performance by emerging and developing countries was better than expected in 2004, and China and India continue to record remarkably robust growth. Progress in Latin America and elsewhere, supported by high commodity prices and improved macroeconomic management, is forecasted as faster than in the 1990s.
As always, the IMF hedges its assessment by listing weaknesses that could dampen, even negate, its optimistic appraisal of the world economic situation. Its outlook points to an unbalanced pattern of world growth, reflecting marked contrasts in performance between a rapidly growing United States, China and India and a much slower-growing Europe and Japan. The lack of vigor in the key export markets of the United States contributes to widening global current account imbalances and intensifying pressures on the key currency underlying the international monetary system, the dollar. Other obstacles to sustained world growth also are recognized: Oil prices remain high in response to large increases in demand and uncertainties about supply; large fiscal deficits need to be addressed in many countries – especially the United States and Europe; and rigidities everywhere inhibit adjustment to technological advance and intensified world competition.

At first glance, a world economic expansion does appear to be under way, one that the IMF forecasts is not just sustainable but may accelerate modestly next year. But in making any assessment of the world economy, one must weigh the relative strength of the contending forces – determining its potential for sustained growth against the possibilities for an abrupt downturn.

The implicit assumption of the IMF seems to be that the huge fiscal and trade imbalances in many countries, and the growing instabilities in oil, foreign exchange and equity markets, are not as intractable and dangerous as they first appear. Prudent policy actively implemented in a manner consistent with its recommendations – and a little bit of good luck- should, in the view of the IMF, allow the world economy to weather the intensifying storm many see on the horizon.

For others, a more reasonable assessment would emphasize that the world economy is nowhere near as healthy as the IMF assumes nor is it anywhere near as immune to a sharp downturn as its forecast implies. One might even conclude the current outlook is precarious, fraught with uncertainty and holds the potential for deep crisis.

It is the fact that to have confidence in the IMF assessment one must think that governments will immediately adopt measures to deal with world economic problems, and take prompt and decisive action should any one of them threaten recovery. Anything is possible, but given the magnitude of these problems and a long history of government inaction, smooth sailing would seem less likely than rough seas.
Without question, the IMF produces a first rate survey of the world economic scene. But the world needs less cheerleading and a more somber assessment of the difficulties before it and, most importantly, the steps governments need to take to avoid a sinking world economy.

About the Author:
Dr. Walker is a professor of economics in the Robertson School of Government at Regent University in Virginia Beach and formerly served as a senior economist at the United Nations in New York. Reach him at dougwal@regent.edu.