Commentary Type

Exchange Rates, Fair Play, and the "Grand Bargain"

Op-ed in the Financial Times


At this week's spring meetings of the International Monetary Fund and World Bank, much will be-rightly-said about the need for more Asian currency appreciation and a further fall in the dollar as essential elements to reduce large global payments imbalances. But what remains underappreciated is the role that perceived "fairness" in exchange rate policies can play in the broader goal of sustaining globalization and resisting protectionism.

The key long-term economic challenge is to integrate further the larger emerging economies into the international financial and trading system. The win-win "grand bargain" that both industrialized countries and the larger emerging economies should be pursuing is this: The larger emerging economies want reliable access to key markets in industrialized countries for their exports and excess savings. They also want increased "chairs and shares" in international financial institutions to reflect their growing economic weight. The industrial countries want the emerging economies to play by the international "rules of the game" on trade, intellectual property, and exchange rates and to give more access to their fast-growing markets.

The rub is, this win-win bargain requires significant progress simultaneously on all the elements. If either side is seen as foot-dragging and if the designated international "umpires"-the IMF and the World Trade Organization-do not enforce the rules, then the game can descend into a lose-lose sequence of protectionist measures.

China has been for three consecutive years conducting large-scale, prolonged, one-way intervention to resist a meaningful rise in the renminbi just when its global current account surplus has been surging (to 7 percent of gross domestic product last year). This fuels US concern that China's large net export surplus has been garnered "unfairly" through "manipulation" of its currency. Because the IMF has failed to investigate seriously these charges, it seems as if there is no effective international umpire on exchange rate policies. This has led to national "freelancing" of a kind that would frustrate other parts of the grand bargain, for example, the Schumer-Graham proposal in the US Congress for a 27.5 percent tariff on China's exports to America and the proposed US blocking of a quota increase in the IMF for any country found to be maintaining a "fundamentally misaligned currency" in the new Grassley-Baucus bill.

The concerns of larger emerging economies are no less pressing. How can the United States ask others for greater market access when US investment plans by CNOOC and Dubai Ports were rejected-and while the US Congress is considering guidelines that would politicize foreign direct investment approvals in the United States? Why should Beijing accelerate renminbi appreciation when the United States is handicapping external adjustment by failing to present a credible medium-term plan for fiscal consolidation? Why should emerging economies agree to observe rules on exchange rate policies and forgo regional substitutes for the IMF if the industrial countries prevent them achieving a "fair" voting share in the IMF?

Window dressing and inaction of the type seen in the run-up to these IMF-World Bank meetings are not going to advance the grand bargain. President Hu Jintao of China announced neither a significant downpayment toward correcting the renminbi's substantial undervaluation nor a pledge to start observing IMF rules on exchange market intervention; instead, he placed orders for Boeing aircraft and other US goods and heralded a minor liberalization in China's capital outflow regime. President George W. Bush made no substantive commitments on reducing the US budget deficit. The US Congress did nothing to allay concerns about protectionist threats to the US market. European countries showed no inclination to reduce their chairs and shares in the IMF. And Rodrigo de Rato, IMF managing director, unveiled proposals for a minor procedural change in IMF surveillance and yet another new fund lending window when he should have promised a new start-both in carrying out the IMF's unique mandate as a global umpire against inappropriate exchange rate policies and in engaging in "ruthless truth-telling" about errant macroeconomic policies in systemically important economies. Unless exchange rate and trade policies, as well as IMF governance, are perceived as "fair" in both industrial and emerging economies, momentum on globalization could shift into reverse. Allowing that to happen would be a "grand blunder."

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