The meeting of finance ministers and central bank governors of the Group of Twenty (G-20) countries in Moscow last week chose to remain silent on what is arguably the most pressing international economic issue today: competitive currency devaluation. The communique at the end of the summit noted: “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.” This is a nicely worded statement of pious hope.
Clearly, the leaders at the summit decided to turn a blind eye towards recent developments in Japan, where the newly elected government is forcing the central bank to buy assets with a clear and, so far successful, intention of devaluing the yen to boost exports. But the reasons for avoiding the issue by G-20 are not hard to fathom. Pointing a finger at Japan would have meant asking China and then the US a hard question. Evidently, these leaders were not willing to ignite conflict of any kind at this moment.
It is true that policymaking in any country is based on its internal economic dynamics, but in a highly interconnected financial system, there are spillovers and big countries need to recognize this. Illustratively, the Chinese policy of pegging its exchange rate to the US dollar and not allowing the renminbi to appreciate for years on an end is an internal policy decision, presumably to serve internal objectives such as boosting manufacturing output and creating employment. However, China has been routinely accused, especially by the West, of exporting unemployment. It was also blamed for accumulating massive foreign exchange reserves, which added to the global savings glut and was one of the reasons for the emergence of international economic imbalances.
But the problem is that there is absolutely no mechanism to identify and check policy excesses that has consequences for others. In fact, the US, despite all the noise for years, could not label China as a currency manipulator.
The issue is that despite domestic policy compulsions, nations are expected to play by rules, but if such flouting of rules goes unchecked, it will only create incentives for others to follow and will damage the very basis of international trade and cooperation. It is simply unfair to transfer the cost of output expansion in one country to others. Competitive devaluation, if unchecked, will mar growth in the entire world.
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