The sudden near-collapse of the global financial system in September 2008 with the quick and unexpected demise of Lehman Brothers, brought the flow of credit to a halt and induced panic among policymakers.

Six months later when they met in London in April 2009 as G20 they decided to act in unison. They agreed to stimulate their economies by using their budgets to create domestic demand. The United States and China led the way in these efforts.

This was the time-tested Keynesian approach which was adopted at the depth of the Great Depression and saved the already battered world economy from going into an abyss from which it would take decades to climb out. The approach worked. The Great Recession of 2008-09 was prevented from becoming the Great Depression of the first decade of the 21st century.

With some comfort having returned to the corridors of power in the capitals of the major economies, policymakers returned to their old ways. However, on Friday October 8, a day before the meeting of the policy making committee that gives direction to the IMF, unexpectedly weak employment data from the United States confirmed the fear that the recovery in that country had slowed down to the point that the talk of a double-dip recession no longer seemed excessively pessimistic. News that the economy lost 95,000 jobs in September pushed the dollar briefly below 82 Japanese yen for the first time in 15 years.

Tokyo had already begun to adopt measures aimed at weakening the value of its currency. There were fears of a global currency war. Tim Geithner, US Treasury Secretary called for collective action on the eve of the IMF annual meeting, lamenting progress on lifting domestic demand, “in countries running external surpluses and by the extent of foreign exchange intervention as countries with undervalued currencies lean against depreciation”. He accused China of setting off a cycle of “competitive non-appreciation” in which countries block their currencies from rising in value to support their exporters - as Japan, Brazil and South Korea have recently tried.

This line of policymaking, US Treasury Secretary believed, posed an existential threat to the global economy. These were strong words uttered by an official who was under great pressure because of the political environment in his own country to produce some results. In the run up to the mid-term collections in the United States, China had become the poster child of the opposition to the economic policies of the Obama administration.

The value of its currency was not the only issue that was of concern to the developed countries with reference to China's economic policies. Revaluation of the currency would help to reorient growth away from exports and coastal manufacturing areas and move it toward domestic demand and poor regions in the country's interior. Some of these areas had become politically restive in recent years.

The rich nations also wanted Beijing to put greater emphasis on developing its social safety nets that would ultimately result in reducing domestic savings and increasing consumption. The assumption was that a China consuming a larger proportion of its national product would export less and thus help to balance the global economy. While Geithner was pointing his finger at Beijing, the Europeans included the United States among the culprits attempting to manipulate their currencies in order to build their exports.

Jean-Claude Juncker, chairman of the group of euro-zone finance ministers, complained about the weakness of the dollar as well the undervaluation of the Chinese renmenbi. “The euro is too strong today”, he said. “I don't think the dollar is in line with the underlying fundamentals”.

The Chinese on their part had their own set of complaints. They said that a good part of the global imbalance that threatened the global economy and slowed down the recovery was the inability of the United States to curb its fiscal deficit and reduce the amount of debt carried by the public sector. They also emphasised that the easy money policies followed by the central banks of large economies had contributed to global imbalances.

The decision by the Federal Reserve in the United States, the country's central bank, to use “quantitative easing” once again to stimulate demand would help to further lower the value of the American dollar.

Having articulated these different points of view it is not surprising that the IMF meeting produced at best a tepid response which did little to calm the markets. There was no pressure exerted to get China to increase the value of its currency. Instead the policymakers pledged to “work toward a more balanced pattern of global growth, recognising the responsibilities of surplus and deficit countries”.

These were code words for China, with huge trade and foreign exchange surpluses, and the United States with equally large deficits. The IMF policymaking committee also vowed to “address the challenges of large and volatile capital movements which can be disruptive”. This was reference to the large flow of capital to countries such as Brazil and India where higher returns were available because of the monetary tightening undertaken by the central banks. These actions had raised interest rates.

The other important issue before the IMF during the agency's annual meeting was to change its rules of governance which would have given greater voice to the large emerging economies which were also the fastest growing economies in the world. One result of this would be the reduction in the number of seats held by Europe in the 24-member of IMF board of directors. The Europeans were not prepared to make major adjustments and suggested only minor changes that were not acceptable to the United States and the large emerging economies.

Weak words don't produce strong policy actions. “The language is ineffective. The language is not going to change things. Policy has to be adapted”, said Dominique Strauss-Kahn, IMF managing director expressing his discontent at the outcome of the meeting. Many experts feared that the lack of any substantive agreements and brinkmanship on proposed reforms to the IMF is likely to exacerbate currency volatility in the month running up to the Seoul Group of 20 summit.

Many of the causes for the disorder in the global economic system remain unaddressed. Expectations are that action on some of the problems that have proven difficult to resolve may advance in the G20 meeting to be held in Seoul in November. There will be fewer people sitting around the table than was the case at the IMF annual meetings at Washington but Pakistan will be absent from the Seoul deliberations as it is not included in G20.