Stiglitz doubts IMF will make headway on global imbalances

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The Independent Online

Finance ministers from around the world gather in Singapore next week for the annual meetings of the International Monetary Fund but Joseph Stiglitz - the scourge of globalisation - is pessimistic they will make any progress in tackling the global imbalances that hang over the world economy.

"I'm very sceptical," he says. "I just think they are foolish ... perhaps I should say unfamiliar, with the laws of economics."

Like many commentators, he believes the record deficits in the United States and the equally giant holdings of US financial assets by countries such as China are unsustainable.

The IMF achieved a major breakthrough at its April meetings when it received approval to launch a round of multilateral consultations, with the first focusing on the global imbalances.

It persuaded China and the US to talk about one of the thorniest geopolitical issues between the two superpowers, with Europe and Saudi Arabia. Oil-rich Opec nations have also built up vast surpluses. The meetings are under way and the IMF says they should produce something by the end of the year.

But Professor Stiglitz is exasperated that American politicians believe the simple solution is for China to allow its currency to rise against the dollar to stem the record flow of cheap imports. "They don't understand this is a multilateral problem within a system in disequilibrium," he said. "If China revalued it would make things worse because the trade deficit is related to the gap between domestic savings and domestic investment.

"The exchange rate won't alter the underlying imbalance and unless investment collapses the gap will remain - and I don't think anyone wants a US depression as a policy prescription."

The solution proposed by Professor Stiglitz, a former adviser to President Bill Clinton and chief economist at the World Bank, is a new form of global money.

This currency, which he dubs the "global greenback", would be issued to countries to allow them to replace the $3 trillion that the world collectively keeps "buried" in the form of reserves. Those countries with a surplus would be "taxed" by seeing their greenbacks given to developing countries to finance their development programmes.

Of course, one issue is who would administer this. The Group of Seven (G7) nations including the UK that meets in Singapore next weekend does not even count China as a member.

And the whole of Asia has in effect passed a vote of no confidence in the IMF in the wake of the region's 1997 financial crisis that was blamed on policies of privatisation and liberalisation imposed by the fund. "The class of '97 is saying, 'we don't want the IMF to step on our neck again'," Professor Stiglitz says. He envisages Europe and Asia forming a "club" to launch the new reserve system. Whether or not this gains any ground in Singapore - and that looks unlikely - China will be at the top of the agenda at the IMF meetings As well as the multilateral surveillance issues, ministers will debate a plan to resolve complaints that the share of votes held by members relates to a model of the world economy that is decades out of date.

It has proposed a two-step process, with four countries - China, South Korea, Mexico and Turkey - receiving an immediate ad-hoc increase in their voting power.

It would then move on to a deeper reform based on a new formula to be agreed over the next two years. But any reform based purely on GDP could cut Europe's share of the vote. It would also pile on the pressure for the Continent to give up some of the eight seats it holds on the 24-strong executive board.

Gordon Brown, who chairs the IMF's powerful monetary and financial committee, believes there is no need for the UK to give up its seat but has hinted the 12-nation eurozone could share one.

Yesterday Jeroen Kremers, IMF executive director for the Netherlands, said the European Union was not a country. "There is no justification for Europe to go to one chair and there is absolutely no expectation that will happen," he said.

The Chancellor will be going to Singapore despite the political turbulence over Tony Blair's plans to step down as Prime Minister.

Ballot forms on the IMF's reform package have gone out to member states but do not need to be returned until 18 September, opening up next week for vigorous debate. Eurozone countries are opposing any formula based on GDP that would cut their quota and boost that of the US. The overall package is opposed by more than 50 developing countries such as Brazil, India and Argentina.

Meanwhile, the IMF's biannual economic forecasts are expected to show global growth of 5 per cent this year, led by China and India.

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