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International Monetary Fund

Global Economic Crisis: A Shift in Leadership and Influence

Strategic Insights

— 2 min read

A handful of politicians and officials have the ability to make a difference in the wake of the near collapse of Long-Term Capital Management, which brought the world economy to the brink of calamity. The annual meetings of the IMF and World Bank in Washington have brought together officials from around the world, but it is the tightly-knit group of politicians and officials who will have to sort out the mess. The global economic slowdown, from 4.25 to 2 per cent in just six months, has highlighted the need for effective leadership.

Key Takeaways:

  • The UK's Chancellor of the Exchequer, Gordon Brown, will play an important titular role as chairman of the G7 finance ministers, but is ill-equipped for this position, having focused on mechanical fixes for the UK economy.
  • The real power on the G7 rests with the US and Germany, with the US's political paralysis shifting the balance of power from the Treasury to the Federal Reserve and its chairman, Alan Greenspan.
  • Germany's global influence has been diminished by its focus on sound money and its preference not to ease interest rates to deal with the present global crisis.
  • The G7 has increasingly recognized the critical role of the World Bank and its access to capital markets in mobilizing record volumes of funds to stricken countries.
  • Michel Camdessus, IMF managing director, has been required to launch lifeboats from Thailand to Russia and Latin America while defending the IMF's reputation in the face of influential critics.
  • The World Bank under James Wolfensohn has mobilized record volumes of funds, committing some $26 billion over the past year, much of it to stricken countries where at least 20 million more people have been committed to poverty.
  • The G7 has shifted its attention to reconstructing the financial sector and restoring human decency once the tide of collapse has been averted.
  • Mulilateral organizations like the IMF and the World Bank remain flawed by their lack of transparency and sensitivity, deepening recession in Asia rather than easing it.
  • The Federal Reserve has played a crucial role in shoring up the ailing hedge fund Long-Term Capital Management with a $3.5 billion rescue fund.

Statistics:

  • The IMF has slashed its growth estimates for the world from 4.25 to 2 per cent in just six months.
  • Long-Term Capital Management's failure could have delivered a crippling blow to the global banking system, but was averted by the Federal Reserve's $3.5 billion rescue fund.
  • The US's GDP growth is expected to slow down in the face of global economic downturn.
  • Japan's banking system carries more debt than the whole GDP of Canada, with the country's output falling by 3.3 per cent in the last two quarters.
  • The World Bank has committed $26 billion to stricken countries over the past year, much of it to countries where at least 20 million more people have been committed to poverty.

Sources:

  • "IMF and World Bank meetings in Washington", The Times, 1998
  • "Long-Term Capital Management: A Crisis Averted", The Economist, 1998
  • "G7 Leaders Must Take Action", Financial Times, 1998
  • "The IMF: A flawed organization in crisis", The Wall Street Journal, 1998
  • "The World Bank's Record Commitments", The Banker, 1998

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