Nor did the Tokyo Jamboree see the fruition of processes to make effective the 2010 governance reforms for IMF’s legitimacy, disappointingly for emerging economies including China and India, awaiting greater voice in decision-making and representation on the Board. USA, the largest quota-holder, is yet to ratify the reform accord, pending in Congress, to make-up the needed two-thirds majority before it can be operationalised.

Meanwhile, IMF is also working on the formula for the next quota review (15th), which is to be completed by January 2013. Emerging economies have called for a clearer shift of quota shares in favour of the Emerging Market and Developing Countries, reflecting their weights in the changing global economy and for more equitable decision-making in the Fund. They have urged that the timeline of January next should be adhered to so that it becomes the basis for the 15th General Review of quotas to be completed by January 2014.

At the annual meetings, Finance Ministers from 185 member-countries of the two global institutions took note of the grim dimensions of the twin challenges before them — the sovereign debt crisis in recession-hit euro-zone, and the ‘fiscal cliff’ in USA which, if left to linger on, could trigger another recession in 2013 and pose graver risks for the world economy.

While policy actions required, such as further steps on EU’s agenda of banking and fiscal consolidation and credible medium-term fiscal consolidation in many advanced economies, chiefly USA, are well set out in the Communique of the International Monetary and Financial Committee (IMFC), the Ministers at best noted that “effective and timely implementation is critical to rebuild confidence.”

They also acknowledged the need “to act decisively to break negative feedback loops and restore the global economy to a path of strong, sustainable and balanced growth.” Advanced economies have “to deliver the necessary structural reforms and implement credible fiscal plans” and emerging market economies need “to preserve or use policy flexibility as appropriate to facilitate a response to adverse shocks and support growth.”

Summing up the Tokyo deliberations, IMF Chief Christine Lagarde, claimed there was “strong commitment” to implement the clearly-emerged global policy agenda. Chairman of TMFC Mr S. Tharmaratnam said while had been “major steps forward” in Europe, both the eurozone and the United States faced structural, longer-term problems which “cannot be fixed quickly.”

The ‘fiscal cliff’ — combination of spending cuts and tax increases (with expiry of Bush Tax cuts) — is far more threatening, both for the US economy and the rest of the world. But these problems have proved formidable, with the political gridlocks in Congress, even as the country is currently preoccupied with the Presidential elections on November 6.

The Eurozone, epicentre of recurring financial market volatility, staggeringly moved over months to create a trillion dollar Financial Stability Mechanism to bail out debt-distressed countries of the periphery like Greece, Spain and Portugal, but often backtracked in resolute rescue actions while insisting on fiscal tightening for economies already mired in sharp contraction and mass unemployment.

The European Central Bank (ECB) had surprisingly announced in the third quarter of 2012 that it would buy ‘unlimited’ amounts of bonds from troubled governments which adhere to implementing macroeconomic adjustment programmes conditioned under EU financing mechanisms. IMF supports ECB intervention in sovereign bond markets holding it would help countries secure finance at reasonable cost and contribute to stability and growth in the Euro area.

The Tokyo communique of Finance Ministers said the Eurozone “has to take further steps,” such as “timely implementation of an effective banking and a stronger fiscal union to strengthen the monetary union’s resilience, and structural reforms to boost growth and employment at the national level.” In the United States, resolving the fiscal cliff, raising the debt ceiling, and making progress toward a comprehensive plan to ensure fiscal sustainability are essential, IMFC said.

If the current US debt ceiling at a little over 14 trillion dollars — which itself was fixed after prolonged bipartisan wrangling in the Congress which forced S and P to downgrade US sovereign rating last year — was not revised, the federal government would have to cut spending more drastically, curtailing activities affecting output and employment. The mere possibility of delay in payment of a bond by government could “unsettle financial markets” all over, according to economists.

Speaking in Tokyo, US Treasury Secretary Timothy Geithner said a balanced framework was needed to bring down US fiscal deficit and debt over several years, while continuing to provide support for jobs and growth in the short term. This approach is broadly endorsed by IMF. President Obama’s “balanced approach” which also has a rise for richer tax payers for fiscal space for essential investments like infrastructure has run into heavy weather. Hopefully, some clarity could emerge from the election on November 6 on the future directions for economic policy.

For the Emerging Economies at the Fund-Bank meetings, Finance Ministers of BRIC, including Mr P Chidambaram, stressed how global uncertainties weighed on market confidence and apart from weakening global growth, negatively impacted on their economies and other developing countries. Capital flows remained volatile and global commodity prices were elevated. They also critically assessed the effects on these economies from monetary easing by central banks in USA and EU.

While the IMFC communique noted central bank actions had “created more accommodative financial conditions,” Mr Chidambaram said large liquidity being injected may exert further pressure on oil prices and threaten both growth and inflation in emerging market economies, many of them also facing sharp rise in global food prices. The IMFC communique said while these economies needed to ensure flexibility in policy implementation to support growth, consistent with global rebalancing, the potential impact from large and volatile cross-border flows should be closely monitored.

Indeed, the quantitative easing (QE3) by US Federal Reserve, defended by its Chairman Ben Bernanke, became a point of contention for BRIC finance ministers though IMF Chief Lagarde viewed them as “big policy actions in the right direction.” Going a step further than Mr Chidambaram, Brazil’s Finance Minister Mr. G. Mantega contended such “lax monetary policies” would be seen as advanced economies “exporting their way out of crisis at the expense of emerging market economies.”

China’s Deputy Governor of People’s Bank of China Yi Gang, pointed out unconventional measures of monetary authorities cannot be substitute for long-term solutions in the advanced economies. The uncertainties slowed slow pace of growth of emerging economies which also suffered “collateral consequences” of quantitative easing such as volatile capital flows, erratic exchange rate and asset price movements, commodity price surges, and the associated complications for macroeconomic management in other countries.

Ms. Lagarde, while supportive of central bank actions, agreed accommodative monetary policies in many advanced economies were likely to spur large and volatile capital flows to emerging economies and could lead to overheating and the build-up of financial imbalances. “We have been working on refining our institutional view on the liberalization and management of capital flows from the perspective of countries that receive and those that generate capital flows,” she said.

Chairman of Federal Reserve Ben Bernanke pointed out in defence that stronger growth in the United States boosted global prospects as well. “It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies. This policy not only helps strengthen the U.S. economic recovery, but by boosting U.S. spending and growth, it has the effect of helping support the global economy as well,” he said. (IPA Service)