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> Stalled post-crisis reforms must be restarted
> By Mohamed El-Erian
> Published: October 7 2010 23:09 | Last updated: October 7 2010 23:09
> When the financial crisis erupted policymakers around the world
> gathered in Washington for the International Monetary Fund’s annual
> meeting, and responded impressively. They won the war against global
> depression by showing an unusual and much-needed common purpose. Now
> those returning to meet at the IMF in Washington this weekend, and
> especially policymakers from industrial countries, need to do much
> more to secure the peace.
>
> In the early part of this crisis swift co-ordinated action saw a
> painful economic collapse replaced by employment gains and greater
> financial stability. The recovery in industrial countries was aided
> by an impressive rebound in emerging economies. Having entered the
> crisis with strong financial conditions these developing nations
> demonstrated a resilience unthinkable a few years ago.
>
> EDITOR’S CHOICE
> In depth: Currency wars - Oct-07
>
> Analysis: Currency wars: Going head to head - Oct-07
>
> Interventionist talk ahead of IMF meeting - Oct-07
>
> Yen at fresh high amid intervention talk - Oct-07
>
> Investors price in US inflation fears - Oct-07
>
> Opinion: China must fix global currency crisis - Oct-07
>
> Unfortunately, declarations of victory proved premature, especially
> for the US. In the middle of 2010 job creation slowed, talk of a
> “recovery summer” faded, and growth projections were revised
> downwards. Even worse, global co-ordination through the IMF and the
> Group of 20 industrialised nations gave way to narrow domestic
> agendas. More recently, an escalating round of currency tensions is
> rightly being viewed by markets as “a race to debase”, which will
> ultimately do great damage to the world economy. This marked failure
> to continue co-ordinated action reflects two critical weaknesses
> that now must be taken seriously: an insufficient appreciation of
> the mix of post-crisis forces; and a growing void at the centre of
> the international system.
>
> On the first, three domestic policy slips were made by industrial
> countries in the immediate aftermath of the crisis. We did not
> respond forcefully enough to the deep structural distortions
> accumulated during the age of leverage and debt-entitlement. The
> disruptive nature of balance-sheet contamination (and related
> overhangs in debt and housing inventory) were not fully appreciated.
> And there was little understanding that the finance system would
> return to normal much more quickly than the real economy,
> aggravating an already huge rift between main street and Wall Street.
>
> To make progress, industrial country governments must break out of
> their cyclical mindsets and act decisively on the structural front.
> Fiscal stimulus andquantitative easing, while relevant, are not
> enough. A comprehensive package of measures is needed, including pro-
> growth tax reform; infrastructure investment; housing finance
> reform; more support for education and research; expanded social
> safety nets; job retraining; and medium-term fiscal rules.
>
> Emerging economies, and especially those major markets such as
> China, must help too. They should be more resolute in shifting the
> emphasis of their policies from just the producer to the consumer.
> They must also strengthen pension systems and other social sectors
> (particularly health and education), harnessing the purchasing power
> of their growing middle classes.
>
> However, even that will not be sufficient if the growing void at the
> core of the global system is not fixed. Multilateral institutions,
> and especially the IMF, must step up to fill it. These institutions
> have unique human talent, and they are structurally more adaptable
> and agile than national bureaucracies. Yet they too must be reformed
> if they are to deliver.
>
> For the IMF this means acting on long-standing governance and
> representation problems – and doing so by going well beyond what is
> being currently contemplated. Europe must show leadership and allow
> a much-delayed redistribution of IMF board seats and voting power.
> Its insistence on maintaining outmoded entitlements serves only to
> undermine our challenged global governance. Without greater
> legitimacy the IMF can do little to inform and influence the
> behaviour of individual countries. Its analysis will fall on deaf
> ears, and its ability to advance peer reviews and policy co-
> ordination will be damaged.
>
> Without these steps growth will continue to disappoint, unemployment
> will become ever more structural in nature, and today’s currency
> tensions will turn into tomorrow’s currency wars. History books will
> report with admiration on the crisis management phase. Unless
> policymakers hear a loud wake up call this weekend, these books will
> be a lot less generous about the management of the post-crisis world.
>
> The writer is chief executive and co-chief investment officer of Pimco
>
>