Increasingly fickle capital flows mean that countries have to implement domestic reforms to protect their stability, the IMF’s powerful advisory board said on Saturday.
After many emerging economies were hobbled by sharp capital outflows over the past year, the IMF’s steering committee, the International Monetary and Financial Committee (IMFC), said that more volatility was to come, especially as the US tightens its monetary policy.
Singaporean Minister for Finance and committee chairman Tharman Shanmugaratnam said countries have to undertake structural reforms over the medium term to protect themselves as the global recovery enters a new phase.
The IMFC, comprised of two dozen of the world’s leading finance ministers and central bankers, singled out increased volatility in capital movements as one of the key challenges for the global economy.
“What we have observed is more herd-like behavior in the markets, more herd-like behavior driving capital flows,” Tharman said at the end of the IMF/World Bank spring meetings in Washington.
“That’s not going to be a short-term phenomenon, that’s going to be a continuing challenge,” he said.
“It’s partly reflecting a change in the structure of global finance — more capital flows, and also a changed composition, with a greater share that’s been taken up by bond funds, a greater share that’s been taken up by mutual funds, ETFs [exchange-traded funds],” he said.
This translates to more frequent, more sudden reactions to changes in risk perception — exactly what hit emerging economies last year when their growth slowed and interest rates picked up worldwide as the US Federal Reserve began its move away from its crisis-era easy money policy.
That shift is one of a number of challenges to global growth that the IMF highlighted during the spring meetings, with “structural reform” the byword for adjustments needed in the richest to the poorest economies to adapt to the post-crisis world.
“We are turning the corner. The global economy is faring better,” IMF managing director Christine Lagarde said in a press conference with Tharman.
At the same time, she said, “it is uneven, it is too slow, it is too fragile.”
“It applies to pretty much all countries — structural reforms that will improve the competitiveness of those economies,” Lagarde said.
The IMF has specified reforms, like balance-sheet fixes for indebted corporations and governments, cleaning up and strengthening banking systems — including in Europe — and improving labor markets, especially to create jobs for the tens of millions of unemployed younger people around the world.
Tharman said that, with investment still weak relative to the stage of recovery, countries need to strengthen their legal and operating frameworks to give private investors more confidence.
The message came after the G20 economic powers, meeting at the same time in Washington, failed to demonstrate concrete action to shore up growth and meet their own goal of significantly boosting the current tepid, five-year forecast for world output.
Australian Treasurer Joe Hockey, whose country leads the G20 this year, admitted that the plans submitted by the group this week were “clearly inadequate.”
“Some countries put forward proposals that reheated initiatives from previous occasions, or were already announced,” he said.