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Friday, Oct. 15, 2010
Managing the world economy
When the Great Depression descended in the 1930s, protectionist trade policies ensured that the downturn was longer and more severe than it might otherwise have been. In the aftermath of the Great Recession that began in 2008, world leaders vowed not to repeat those mistakes. While the protectionist temptation has been strong, it has largely been fended off, although with some slippage.
The same courage and resilience has not been evident when it comes to currency policy. There are enough indications that governments are trying to sustain export competitiveness by weakening their currencies — enough for experts to believe that we are already in the midst of a "currency war." Not surprisingly, the currency policy was front and center as world economic officials met last weekend in Washington D.C. They did not reach agreement on how to deal with the problem. Nor is there any indication that they will get a grip on it anytime soon.
The ongoing transition to the new global economic order was evident on the night of Oct. 8, when Group of Seven officials, formerly the men who ran the world economy, convened for just dinner and discussion and did not issue a communique. During the evening, Japanese officials explained the rationale behind their attempts in September to halt the yen's sharp appreciation, the first such intervention in more than six years, and one that appears to have worked only temporarily. Those officials interpreted the group's silence as acquiescence to the policy, although other participants said that time had run out for criticism and warned that similar moves in the future would not be appreciated.
Giving Japan a green light makes it harder to challenge China's efforts to depress the value of its currency, which is the chief source of concern among economic officials. Many countries, led by the United States, believe that China's attempts to keep low the value of the renminbi effectively export unemployment to other nations. China insists that its currency is not undervalued, and that Beijing is trying to avoid fluctuations in its value that might destabilize China's economy and those of its chief partners. As Premier Wen Jiabao warned in one meeting, renminbi instability is bad for China and the world.
The meetings of the International Monetary Fund and the World Bank, which followed the G7 discussions, were dominated by the currency issue. Unfortunately, the participants could only agree that the IMF is the best organization to deal with the problem and that overheated rhetoric is not making a solution any easier. As French Finance Minister Christine Lagarde explained, "In a war, there is always a loser and in this situation there must not be a loser."
The IMF meeting ended with a call to "deepen its work" on currency movements. It gave IMF Managing Director Dominique Strauss-Kahn a mandate to try to work out some arrangement to deal with the problem and create stability among key nations. He told the press that the renminbi seemed undervalued, but that the world was not engaged in a currency war.
Last weekend's meetings underscore the need for a new system of global economic management. The current system has two chief problems and they are related. The first is the fact that existing institutions do not reflect today's distribution of wealth and power. Emerging economies deserve more say in the working of international economic mechanisms. The IMF is increasing the voting weight of those nations, but the process is slow and the expected changes do not go far enough.
The second problem is the inability to force countries to comply even if some group can provide leadership and direction. No nation is prepared to be "named and shamed" by the IMF or to sacrifice its economic sovereignty in the name of a global good. Moreover, there is no means to enforce policy coordination.
The G20 is the answer to the first problem, but it struggles with the same constraints when it tries to enforce decisions. In fact, solving one problem only exacerbates the other. Like the IMF, the G20 has a consensus approach to decision-making. The challenge of reaching agreement is considerably reduced when the group moves from 187 members to 20, but consensus among 20 is tougher than finding it among seven.
At the IMF meetings, Mr. Strauss-Kahn noted that global growth could be as much as 2.5 percent higher over the next five years if key countries coordinated policy to ensure more balance in global accounts. Good luck. These problems persist precisely because solutions go to the very heart of national concerns about sovereignty. There is a real fear that failure by the G20 nations to address the currency issue will fatally wound that organization's hopes and prospects to emerge as the new manager of the global economy. Some believe that next month's summit, to be hosted by South Korea, is a make-or-break meeting for the group. The stakes then could not be higher.