Currency wars show fading economic clout of West
Currency wars have heated up with charges that Chinese renminbi (yuan)
is under-valued. The Chinese countered that banking policies and lowered
interest rates in the West caused the trade imbalance. The exchange rate
battle is seemingly indicative of the fading economic clout of many
Western economies.
Economies with under-valued currencies tend to amass high export
incomes and enhanced trade balances. Creditor countries like China and
Germany have reaped much better than debtor countries like USA and
Britain.
The divergent anxieties in general over Chinese currency policy and
the lowered banking rates response of USA have spawned a dilemma for
those attempting to secure international economic cooperation since the
financial crisis of 2008.
Obviously the United States has lost some of the standing required to
shape global policy. Not only is Wall Street viewed by many as having
initiated the world financial crisis, but also, a number of countries
fear that policies by the Federal Reserve (US Central Bank) are pushing
down the dollar’s value - the same kind of currency weakening for which
the US administration has criticized China.
Rhetoric versus persuasion
For one thing, China has adroitly deflected criticism of its currency
policies by pledging to move at a gradual pace and by pointing to other
sources of global imbalances. Western diplomats are trying to strike the
right balance between forceful rhetoric and patient persuasion in
pressuring China to revalue the renminbi. Cajoling has not worked.
Trading at Wall Street stock exchange. Pic. courtesy: Google |
Complicating the effort is a dispute between the United States and
Europe over how to change board representation within the IMF to give
greater voice to the fast-growing economies that are propelling global
growth. The Americans want those emerging economies, especially China,
to have more representation and thus take on more responsibility. But
Europe is reluctant to give up some of its positions on the board.
The inconclusive IMF stand on the issue means that the renminbi’s
exchange rate will again be a focus when USA and other leaders of the
Group of 20 economic powers gather in November in Seoul, South Korea.
Many expect the United States to keep up pressure on China between now
and that meeting.
Asian-Latin economies fare better
The crisis has shifted influence away from the bigger powers toward
Asia and Latin America, whose economies have weathered the recession
much better-in comparison to those of the United States, most of Europe
and Japan.
Most economists believe that Asian and Latin economic models are now
dominant. “We have come to the end of a model. The time that seven
advanced economies can make decisions for the world without consulting
the emerging countries is a goner,” said one European official involved
in the talks at the IMF recently. “Like it or not, we simply have to
accept it,” he added.
The apparent volatility of the situation made China reduce the
depreciation of its currency somewhat this year without acceding to the
pressure for China to act hurriedly or show a seemingly conciliatory
gesture and stand with it at the forefront of the debate.
In general, the Europeans have taken a far more appeasing line toward
China.
The French Finance Minister Christine Lagarde, said on Saturday,
“It’s not helpful to use bellicose statements when it comes to currency
or to trade.” Need to avoid confrontation is markedly felt.
IMF in the middle
Thomas Kleine-Brockhoff, senior director of policy programs at the
German Marshall Fund of the United States, which promotes trans-Atlantic
cooperation, warned that “things are moving from a consensual to a more
confrontational period in global economic governance.”
The 187-member IMF has never been forced into making decisive
collective action rather than the customary gradual, incremental fashion
associated with changes in national economic policies.
True, everyone wanted greater attention on the currency problem and
for the IMF to play a greater role in monitoring its members’
exchange-rate practices. But the ‘spillover effects’ of each country’s
economic policies on the rest of the world are too complex.
A letter issued recently from the IIF’s Managing Director Charles H
Dallara warned that the world economy faced a situation as critical as
that confronted in the early months of 2009. At that time industrial
production, world trade and stock markets were contracting at a faster
rate than the corresponding period following the October 1929 share
market crash. “As countries struggle to cope individually with the lack
of upward momentum in global growth-and in many cases unacceptably high
unemployment-urgent action is needed to arrest the disturbing trend
towards unilateral moves on macro-economic, trade and currency issues,”
he wrote.
Calling for policymakers to engage in unilateral negotiation to
deliver a set of consistent and mutually-reinforcing measures to address
the problems, Dallara warned that a ‘communiqu‚ of platitudes’ from the
G20 next month only risked further undermining market confidence. Obama
Adviser and Treasury Secretary Tim Geithner has labelled currency issuer
the ‘central existential challenge of cooperation’.
“Getting the world to buy into a stronger set of norms and behaviours
on these issues seemed an impossible task. There is no specific
mechanism in the IMF or G-20 that would lead to consensus. Avoiding a
looks up to the challenge,” he said. There is a dire need to change that
by encouraging countries to act more multilaterally. G-20 leaders have
their work cutout in November. |