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00:00This is a story about being fit for purpose.
00:03As the IMF met in Washington last week,
00:05its mission of providing global financial stability has never been more important.
00:10But one of the fund's key participants expressed doubts about whether it's up to it,
00:14whether it is still fit for its very important purpose.
00:19I think we need to step back and look at the IMF and World Bank, their core missions.
00:25We cannot have these kind of elite beliefs get in the way.
00:32An awesome force of a thousand planes and riders thrusts deep into France.
00:37That core mission for the IMF and the World Bank was crafted back in 1944
00:42in the White Mountains of Bretton Woods, New Hampshire,
00:45less than a month after Allied troops helped turn the tide in World War II
00:49by storming the beaches of Normandy.
00:52Eighty years later, the world is a very different place.
00:55And the wars that multilateral organizations like the IMF are contending with
00:59are now in places like Iran and Ukraine.
01:03Even if the war ends tomorrow, it would take quite some time for the recovery to kick in.
01:10War is, in any circumstances, the worst outcome.
01:14There are reasons to really worry about the upside inflation risks from the war in Iran.
01:18The IMF and the World Bank, I mean, these were institutions that were created
01:24even before the end of the Second World War with the basic idea
01:28that if countries can work together and cooperate on the economic and the financial front,
01:33and we can have stability in the world, then we would have less wars.
01:38Clearly, that is being tested at this current moment.
01:41Until she joined the Harvard Economics Faculty last year,
01:46Gita Gopinath helped countries work together as the first Deputy Managing Director of the IMF.
01:52In this current environment that we have right now with the conflict in Iran,
01:57the countries that have programs with the IMF, many of them are importers of energy,
02:03and they're getting hit by these increase in prices.
02:07Many countries are in trouble right now because of the price spikes from the war.
02:12Kevin Gallagher is the Director of the Global Development Policy Center at Boston University.
02:18We don't know where this war is going, how long it will last.
02:21COVID, as I recall, really hit global growth fairly substantially.
02:25Is there any prospect this could reach that sort of level?
02:28Well, the economy, the global economy has been really fragile,
02:31especially in emerging market and developing countries, since COVID.
02:34And this shock is yet another one.
02:37We've had that.
02:38We had interest rate hikes just a couple of years ago.
02:40Many countries have had sort of climate shocks and droughts,
02:43and then, of course, COVID itself.
02:44And so we're nowhere near the growth potential that many countries were on a path before COVID happened.
02:51And now this shock is really sending a lot of countries back.
02:56Since the start of the new millennium,
02:58we have lived through a global financial crisis,
03:01the recession that followed, a pandemic, and several wars.
03:05But through it all, the IMF has stayed pretty much the same.
03:09The IMF hasn't changed much.
03:11It's in a bit of a crisis right now.
03:13It still offers a family of emergency financing to countries that are in trouble.
03:18This is the time when the IMF is absolutely critical, given all the instability.
03:24First thing I would note is what the IMF is really good at is surveillance.
03:29And that is super valuable in this environment of very high uncertainty.
03:33Just coming out in terms of forecast of what the impact is going to be of the various shocks on
03:38the global economy.
03:39But this comes against a broader backdrop of perhaps increasing dispersion in the approaches of a lot of the member
03:46countries for the IMF
03:47in their approach to economics, certainly different from what happened after World War II when the IMF was created.
03:52What challenges does that present to the IMF?
03:55The geopolitics, of course, matters for the functioning of all of these multilateral institutions.
04:02I think the IMF is somewhat better placed because it plays the role of a firefighter.
04:09And when you're a firefighter, you don't really have the luxury to fuss around.
04:12It's not about whether you can have another more trade agreement or you can give money to a country to
04:18build a road that will be available in 10 years.
04:21But it's about are you going to bail out a country that is otherwise going to plunge into a crisis,
04:27which is not only going to affect the country, but it's also going to spill over into the region.
04:32A firefighter like the IMF may not be directly driven by politics or differences in economic approaches.
04:39But those politics and differences can sometimes create more fires to fight as they affect countries' fiscal positions.
04:47We've certainly moved away from the time of ever-closer integration and an efficiency-driven global trade model
04:56to one where national security concerns are becoming important.
05:01And I'm not denying that that's not an important one.
05:03That certainly is much more salient of this current world we live in.
05:06De-risking supply chains are an important factor.
05:09You know, making sure that you have strategic inputs in your own country.
05:13Factories for those in your own countries, those are coming up too.
05:16What the IMF cares about is countries' fiscal situations.
05:20And if you're going to end up in a world where everybody is going to spend a whole lot more
05:24on defense spending,
05:25a whole lot more on building semiconductor chip factories, more rare earth discoveries and all of that,
05:31then we could end up with this big buildup in debt in the world,
05:35which already is, frankly, on an unsustainable path.
05:40It's not just the economic approaches that have changed since Bretton Woods.
05:44It's also the relative sizes of some of the economies involved,
05:48most notably China, which dramatically rose to become the second strongest economy in the world,
05:54something not reflected in the allocation of quotas that effectively determine who has influence over the fund.
06:00The quota has gone up, but not commensurate to the formula that the United States made,
06:07which says that it should go up relative to the size of your economy.
06:11So given that China is now the second largest economy in the world,
06:14they should have the second most voting.
06:16But the U.S. in the last iteration of increasing quotas,
06:21they said, let's increase quotas, but not without voting power changes,
06:26because Japan is number two.
06:29And they, both Japan and the United States, don't want China to leapfrog over.
06:34It's caused a little bit of a legitimacy issue.
06:38Whether it's the U.S. or China, or the other major players in the IMF,
06:43like Japan, Germany, and France,
06:45the wealthy countries are the ones that control a fund
06:48whose entire purpose is to help poorer countries when they run out of money.
06:53But sometimes that has led to conditions on loans that some find unduly onerous.
06:58The fund was supposed to be there to help countries get a shot in the arm,
07:01to get back on their feet.
07:02But over time, it's had almost the same policy, which is austerity.
07:06Now, it's important to have it in countries that are profligate, like I said.
07:10But so many of the crises that have been happening over the past decade
07:14have been external shocks to countries that have good fundamentals.
07:17Is there an inherent, even structural, challenge for the IMF
07:20in the difference between who needs the emergency funding
07:23and who decides on the emergency funding?
07:25Because the quotas are determined by how prominent the economy is,
07:29how successful it is, how many reserves they have.
07:30And the people who need it are the opposite of that.
07:32So you have sort of the haves deciding for the have-nots.
07:35Yeah, you put the nail right on the head there.
07:37The countries that receive the programs have no say in what the design looks like.
07:42They can request, and they often get what they need,
07:45but they have no say in the terms.
07:48But Gopinath says from her experience
07:50that often structural conditions are required by the situation.
07:54The IMF has evolved as an institution in terms of the policies it recommends
08:00and what countries need to do in a crisis,
08:03just as the thinking in terms of the intellectual thought, too,
08:06in terms of what helps a country in a crisis.
08:09So there was a time, and I would say the East Asian crisis was certainly one of those,
08:13where there was an excessive focus on just spending cuts.
08:18And it was about cutting spending across the board
08:21without much attention to the details about where the spending cuts would happen.
08:25I think that was a strategy that was appropriately rethought,
08:29and now the IMF is more targeted in how it spends.
08:33In fact, when it goes in and tells countries to reduce overall spending,
08:37it very often says that you need to increase spending
08:39to the most vulnerable in society
08:41because you are in a crisis,
08:43and this is a particularly challenging time for them.
08:46So far more targeted in terms of what's needed
08:48in terms of spending reductions.
08:50I mean, unfortunately, spending reductions are always a part of the solution
08:55because that's the only way for the country to come back
08:58to a more stable macro environment
09:01without racking up a large amount of debt.
09:04These policies are never easy.
09:05They're difficult.
09:06I think the IMF has evolved over time
09:08in terms of making it better tailored to country circumstances.
09:12The world has changed fundamentally since 1944
09:16when the IMF was created,
09:18and it appears that one of the largest changes
09:20is about to come,
09:22with artificial intelligence poised to change
09:24just about every economy.
09:26One of the things that we talk about all the time now
09:29is artificial intelligence
09:30and how it's going to transform our world.
09:32Typically, we don't know exactly how,
09:34but we think it's going to.
09:35When you look at specifically what the IMF does
09:38and how it may affect different nations differently,
09:42how can the IMF sort of anticipate that if it needs to?
09:45AI is usually transformative,
09:47and everybody has to pay attention to it,
09:50including the IMF.
09:51So even though the IMF has a relatively shorter horizon
09:55in terms of the kinds of problems it deals with,
09:57AI is something that they cannot not pay attention to.
10:00So they are, in the near term,
10:03just looking at where most of the AI development is happening
10:07and AI adoption is happening.
10:08It is happening in the more advanced world,
10:10and I would say China among the emerging markets.
10:13But everywhere else,
10:17the momentum is not as strong.
10:19So at least in the near term,
10:21we could see a divergence
10:22where you would have more productivity growth
10:24coming out of the US
10:25relative to, say, developing countries.
10:28But hopefully, over time,
10:31when developing countries figure out
10:32how to deploy AI
10:34to close their skill gap,
10:37to make sure,
10:37you know, your scarcity of doctors
10:38and teachers and technicians,
10:40that you could close the skill gap through AI.
10:43Whether it's AI or an emerging China
10:45or a breakdown in macroeconomic consensus,
10:48Gallagher says it's hard
10:50for an IMF fit for its purpose in 1944
10:52to remain so today.
10:55And that has led some
10:56to call for fundamental reform.
10:59It needs to get bigger,
11:00it needs to get better,
11:01it needs to get more inclusive.
11:02It's not big enough.
11:03The monetary firepower
11:05that has only about $400 billion
11:06for the poorest countries,
11:08and if they all went to the fund
11:11like they did
11:11during the global financial crisis,
11:13we'd be really drained.
11:15So one, it just needs to get bigger.
11:16Two, it needs to get better.
11:18It needs to tailor its programs
11:19to country circumstances.
11:21If it's an external shock,
11:22it should just give short-term liquidity
11:24without austerity conditions.
11:26And it needs to be more inclusive.
11:27The countries that are the biggest recipients
11:31need more say in the program design.
11:33Those are the three things.
11:34Make it bigger, make it better,
11:35make it more inclusive.
11:36Let's go.
11:36All right.
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