By Domenico Lombardi
The IMF has just elected the first woman to its managing directorship, and already Christine Lagarde’s new desk in Washington is piling up with folders eagerly awaiting her arrival.
By Michael Pomerleano
The international monetary system needs reform. The present system, dominated by reserve holdings of US dollars, places an unsustainable burden of creating reserves on the US.
While the US is privileged, in the short run, to issue a reserve currency, it hinders the productive capacity of the country’s economy in the long run. Recently Joseph Stiglitz, the Columbia University professor and Nobel laureate, proposed a solution, suggesting that the role of special drawing rights should be expanded through new issues and by increasing their use in International Monetary Fund lending. In essence, the Stiglitz proposal aims to move to a world where reserve needs are met by these IMF credits known as SDR allocations rather than by building precautionary reserves.
2011: Speculations from Delhi
By Shankar Acharya
What might 2011 hold for us? Given the intrinsic uncertainty about the future, the really honest answer would be: I don’t know. But that would be far too boring a response and, perhaps more to the point, would not fill a column. So, at the risk of looking foolish in a year’s time, here are some predictions for 2011.
Currency wars and Indian policy
Suddenly the esoteric world of international finance is resonating to the clash of currencies. On September 27, Brazil’s finance minister stated that an “international currency war” had erupted. In its issue of October 16, The Economist put “Currency wars” on its cover, with evocative imagery of an aerial dogfight between paper planes of currency notes from different countries.
As that issue pointed out, there are three separate but related battles going on. First, there is the old and serious problem of a more or less inflexible pegging of the Chinese yuan (aka renminbi) to the US dollar, contributing to the massive Chinese current account surpluses and huge international reserve holdings and correspondingly large and unsustainable deficits elsewhere.
Uncertain times for global economic governance
These are uncertain times for global economic governance. For over six decades after the second world war the west framed the rules of engagement for the global economy.
In the initial years, the United States was the preeminent power, which oversaw the creation of the Bretton Woods system (International Monetary Fund and World Bank) and the initial rounds of trade liberalization under the newly-born General Agreement on Tariffs and Trade (which became the World Trade Organization at the end of the Uruguay Round in 1993).
As Europe recovered from the ravages of war and Japan launched on its high growth phase, these new leviathans (especially Europe) increasingly asserted themselves and won greater voice and roles in world economic governance. But it was still an essentially western enterprise, with a demilitarized Japan content to go along in return for an American nuclear umbrella.
The Soviet Union and its satellites were not an integral part of this economic system and the developing countries didn’t carry significant economic clout, not even the populous Asian giants of China and India.
By Ronald I. McKinnon
Speculation is rife about when, not just if, China should exit from its policy of stabilising the renminbi/dollar rate. The Financial Times editorial policy more generally, and Martin Wolf in particular have joined the usual ranks of American protectionists in bashing China for failing to appreciate.
“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.
Continue reading “China and Germany unite to impose global deflation”. Please post comments below.
As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. The last entry focuses on China, read the entries from the other countries below.
By Michael Pettis
Given the speed of its economic transformation, its sky-high bank-stock valuations, the unprecedented size of its accumulated reserves, and its much-advertised desire to change the global monetary system; it is tempting to assume that China will radically transform the world’s capital markets and financial systems with the same ruthless speed with which it has transformed export markets.
But this won’t happen. Beijing is skeptical of arguments supporting rapid financial and monetary deregulation, and policymakers continue to measure the usefulness of the financial system mainly to the extent that it serves the needs of rapid growth in manufacturing and infrastructure. This means continued heavy-handed control of the capital allocation process and the level of interest rates, the relinquishing of which are the two key measures of real financial sector liberalisation.
China’s main impact on the global financial system will continue, for the foreseeable future, to be limited to its massive accumulation of reserves. And because the US is still the only economy large and flexible enough to accommodate the high trade surpluses that the Chinese economy relies on, it will continue to accumulate dollars.
The only truly global power was in rapid relative decline. Not long before, it had won a pyrrhic victory in a costly colonial war. New great powers were on the rise. An arms race was under way, as was competition for markets and resources in undeveloped areas of the world. Yet people still believed in the durability of the free trade and free capital flows that had nurtured prosperity and, many believed, had also underpinned peace.
That was how the world looked to many at the end of the “noughties” of the 20th century. Yet catastrophe lay ahead: a world war; a communist revolution; a Great Depression; fascism; and then another world war. The world order – built on competing great powers, imperialism and liberal markets – proved incapable of providing the public goods of peace and prosperity. It took calamity, the cold war and the replacement of the UK by the US as hegemonic power to re-establish stability. That then facilitated decolonisation, unprecedented economic expansion, the collapse of communism and yet another epoch of market-led global integration.
“History does not repeat itself, but it rhymes,” as Mark Twain is supposed to have said. The noughties of the 21st century now have the same fin de regime feeling as those of a century ago. Then the US, Germany, Russia and Japan were on the rise; now it is China and India. Then it was the Boer war; now it is the wars in Iraq and Afghanistan. Then it was an arms race between Germany and the UK; now it is the military build-up in China. Then the protectionism of the US undermined liberal trade; now conflicts between the US and China undermine our ability to tackle climate change. Then the US was isolationist; now China and other rising powers demand untrammelled sovereignty.
The remainder of this article can be read here. Please post comments below.
Here are some of the responses to Martin’s column on China’s exchange rate policy:
Jim O’Neill, chief economist at Goldman Sachs:
Like many others, I often, all so easily, fall into the camp that the Chinese exchange MUST still be undervalued, and cite the reserves fact and its growth as evidence, but I am not so sure when I really analyse it. We have a model for estimating fair values for many currencies, our so called GSDEER, and it did used to suggest that the CNY was undervalued. However as a result of the approximate 20pct appreciation of the past 4 years, and higher prices than many other countries, our model suggests it is no longer so clear. Now FX models are FX models, and having spent so much of my career on them, I know only too well that it is subject to even more risks for somewhere like China. But when I see our own- objective -model saying things like this, observe surveys showing that Mexico is now back to being the no 1 place to produce heavy industrial goods, and China’s imports rising much more sharply than exports, I stop to question my underlying tendency. On top of this, and Martin, as many others, never seems to address this, China’s current account surplus this year is going to be close to about half what it was a year ago amidst lots of evidence that domestic demand, especially consumption, is roaring away. Yesterday, we got news that in November, Chinese auto sales rose by 92pt year on year. They are so strong, that they are now importing some directly from overseas. You see similar evidence when you look at LCD TV sales and almost anything else. As some Chinese policymakers point out, this is almost definitely more important than the exchange rate issue that so many are still rather perhaps excessively focused on.
Dani Rodrik, professor of international political economy at Harvard University:
To Martin’s two questions at the end of his piece, one must add a third: What would be the consequence if China’s economic growth were to decline significantly as a result of the currency appreciation that the rest of the world is urging the country to undertake? Answer: a tragedy for the world’s most potent poverty reduction engine, and potentially a disaster in terms of social and political stability in the world’s most populous country.
What people seem to overlook is that China’s growth is directly linked to the performance of its tradables. What drives rapid growth is the flow of labor to high productivity manufactures in urban areas from the rest of the economy. A conventional rebalancing of the economy will work to the advantage of non-tradables and the detriment of tradables. Before joining the WTO, China promoted its tradables through trade and industrial policies. It has since shifted to exchange rate policy, since WTO rules prevent it from pursuing those old inducements. It is no coincidence that China’s current account deficit began its inexorable rise in 2001, the year that China became a WTO member.
According to my back-of-the-envelope calculations, China’s growth would be reduced by more than 2 percentage points if its currency were to appreciate by 25 percent in real terms (which is roughly how undervalued it is). This would put the economy below the 8 percent growth threshold that its leadership thinks is critical to maintain domestic social peace.
So while I think Martin is right that we are headed towards a train wreck, China is not the evil and misguided party that commentary of this sort makes it seem. It does face a serious dilemma. And nobody is offering any helpful ideas on how to get the country out of it.
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