IMF Meeting Focus: Food Inflation, Lax US Regulations, IMF Prescriptions

The International Herald Tribune gives a particularly interesting report on a semi-annual meeting hosted in Washington by the IMF and World Bank. It illustrates that the influence of the US and of US sponsored institutions is waning.

One item mentioned in other reports on these meetings is the concern with the impact of food inflation and rising oil prices on developing countries. Of course, we in the US don’t count food and energy in the “core” consumer price index. The logic is that they are volatile and if inflation in them were sustained, it will show up eventually in core CPI. But follow that one through. If you wait until, say, food price increases work their way into core CPI, it would presumably be via wage increases. By that time, inflationary expectations would be well established and hard to break.

But the article focuses on the fact that the participants see the snowballing subprime problems as proof that lax regulation of financial institutions leads to instability and resent that the US sees fit to prescribe reforms to developing countries, but can’t keep its own house in order.

From the International Herald Tribune:

With hundreds of officials and experts convening here over the weekend, the theme this year has not been fear of protesters but of the global impact of the collapse in the American housing sector, which many delegates blame on lax regulations and sleepy regulators in Europe and the United States.

“Allow me to point out the irony of this situation,” Finance Minister Guido Mantega of Brazil said, noting that “countries that were references of good governance, of standards and codes for the financial systems” were now “the very countries” whose financial problems threatened global prosperity.

In an interview, Trevor Manuel, the finance minister of South Africa, said: “If one looks at the impact of the subprime crisis in the U.S., the losers are poor citizens who tend to be black and Hispanic. But it is also the large banks with an international profile in Europe and the United States that have taken a beating.”

“It is clear that there was regulatory and supervisory failure,” he added.

The finance ministers and central bank governors from around the world spent the weekend discussing what they said was “the current episode of financial market turbulence,” declaring in a statement that they would continue to “analyze the nature of the disturbances and consider lessons to be learned and actions needed.”

But for many, the lessons were already clear. Western regulators had ignored warning signs, Western banks had used exotic off-the-books “conduits” to buy and sell dubious mortgage products, Western rating agencies had gone along for the ride – and now the whole world was suffering from Western excesses….

This weekend there was a new finger-pointing and perhaps schadenfreude discernible in the statement of the G-24 group of poor countries led by finance ministers of Argentina, Syria and the Democratic Republic of Congo, who noted that “developing countries are a new driving force as well as a stabilizing factor in the world economy.”

Like other ministers from what used to be called the third world, they blamed the advanced countries’ regulations and lack of transparency for the mess.

In response to all this lecturing, Treasury Secretary Henry Paulson Jr. and his top aides fanned out at meeting after meeting to assure the finance ministers that although the impact of the market turmoil had yet to be fully understood or felt, there was no need to panic because the fundamentals of the U.S. economy were sound.

“We recognize that there are some issues in the system that need to be addressed,” said Clay Lowery, an assistant Treasury secretary for international affairs, cautioning against quick remedies that might be counterproductive. “We want to make sure that there isn’t a rush to judgment.”

Robert Steel, a Treasury under secretary for domestic finance, told audiences how the department had worked with banks to create a new superfund or “structured investment vehicle” aimed at loosening the credit markets….

But many listeners were doubtful. Manuel, the South African finance minister, noted that the new fund had already gotten a skeptical response in talks here by speeches over the weekend by Alan Greenspan, the former Federal Reserve chairman, and Michel Camdessus, the former head of the IMF

Paulson and Steel said that Washington had already set up advisory panels on auditing and regulations in the financial services industry. But their emphasis was on the industry itself setting up new codes of “best practices,” and not on government regulations.

“We’re making progress, and working our way through the turmoil of capital markets,” Paulson said after meeting with the finance ministers of Europe, Canada and Japan. “We’ve got a ways to go. But we can all come together and say how we can learn from some of the mistakes and make some corrections.”

But the idea of voluntary “best practices” was not only getting a cold reception among the developing countries. Many European delegates were skeptical of the Bush administration’s approach on the issue, which parallels its call for voluntary “best practices” on regulating hedge funds and “sovereign wealth funds,” which are government funds run by China, Russia and oil-exporting countries that have begun to invest heavily in the West.

“We can’t say this crisis was totally unexpected, but we didn’t anticipate how this turmoil would happen, or when or how,” Joaquín Almunia, the European commissioner for economic and monetary policy, said in an interview. “We may need to adopt some new regulations, but right now our emphasis is on diagnosing the problem.”

Much of the anger among developing countries was focused on the IMF, which along with the World Bank was the host of the Washington meetings.

Asian and Latin American countries that were rescued after crises in the 1990s, many of them now healthy because of their exports, have paid off their loans to the Fund but are still smarting about the lectures they got and the budget cuts and tax increases they were forced to adopt.

The G-24 developing countries offered a stinging rebuke to the Fund, effectively turning the tables on its leaders and lecturing them for in effect dropping the ball while banks in the West invested recklessly in subprime mortgages using lending facilities that were off their balance sheets.

Calling on the Fund to be more “evenhanded” in the future, the finance ministers said it should put as much focus in the future on evaluating the “vulnerabilities” of advanced economies as it does on their own economies.

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