The recently concluded annual meeting of the International Monetary Fund (IMF) had as its backdrop the looming fear of currency wars, as countries try to export their way out of the slowdown. The fear that the recovery in advanced economies is running out of steam has led to broad hints by the US Federal Reserve about unleashing another wave of monetary easing. Emerging markets are struggling to cope with the dollar inflows. The Chinese, mercantilists par excellence, have spurned all efforts to get them to abandon their currency’s peg to the dollar.
Against this background of widely divergent interests, nobody expected IMF to do much. Its role till recently was to deal with crises in emerging markets, on which it diligently toed the line of the Washington Consensus. Now that that consensus is dead and it is the developed countries that are embroiled in a crisis, it is thrashing about trying to find a new persona. Any attempt to portray itself as an international regulator is severely hampered by its voting structure, which gives too much weight to the developed world. The US has recently attempted to redress the balance somewhat by trying to reduce the voting power of the European nations, but no decision on governance and quota reform has emerged from the meeting.
The usual platitudes have been aired on working “toward a more balanced pattern of global growth, recognizing the responsibilities of surplus and deficit countries; and address the challenges of large and volatile capital movements”. The communiqué talks of increased surveillance of “vulnerabilities in large advanced economies”; IMF’s country reports will now take into account the international consequences of each nation’s policies. But the problem remains on how to translate the recommendations into action.
The experience of the 1930s should warn us about the serious consequences of adopting beggar-thy-neighbour trade and currency policies. With the world economy being far more interlinked now, the need for collective action is even more imperative. One proposal, made by the Institute of International Finance—a global association of financial institutions—is to constitute a core group of the world’s major economies before the Group of Twenty summit in Seoul next month to address three pressing issues: global macroeconomic imbalances, regulatory reform and medium-term fiscal consolidation. To that list, we would add IMF’s suggestion of discussing the impact of monetary, currency and other policies that have international spillover effects. Unfortunately, though, there are no signs the world’s leaders are prepared to listen.
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