FOUR DAYS of IMF-World Bank meetings that began on October 6th and ended on Saturday were dominated by tensions between balance of trade surplus and deficit countries, mainly China and the US, over exchange rates.
The meetings ended inconclusively, with appeals for the IMF to do more to resolve the issue, and the near-certainty that world leaders will again grapple with the dispute at next month’s G20 meeting in Korea.
The final communique of the International Monetary and Financial Committee (IMFC) described the turmoil over currency markets in bland terms, saying the world must “work towards a more balanced pattern of global growth, recognising the responsibilities of surplus and deficit countries; and address the challenges of large and volatile capital movements, which can be disruptive”.
Dominique Strauss-Kahn, the IMF’s managing director, made an avowal of the fund’s impotence at the IMFC’s press conference: “The language is ineffective,” he admitted. “The language is not going to change things . . . There is no way to believe that global growth can be rebalanced without changing some currency value . . . What we need is real action.”
Mr Strauss-Kahn said a “spillover report . . . to address the question of systemic stability” has become “part of our toolbox”. The IMF will make an in-depth study “on how to manage in the short term the problems created by the capital flows,” he added.
Emerging countries blame low interest rates in advanced countries for an influx of investment that is driving their currencies upwards, at the risk of overheating their economies.
China has in the past prevented the IMF from releasing reports critical of Beijing. China’s reserves, at $2.5 trillion, are the highest in the world.
The trade and currency imbalance has become an issue in US mid-term elections, with dozens of candidates broadcasting television advertisements accusing opponents of being too soft on China.
In remarks to the IMFC, US treasury Timothy Geithner said “The IMF must strengthen its surveillance of exchange rate policies and reserve accumulation practices,” adding that “the IMF must increase the candour of its surveillance”.
Without naming specific countries, Mr Geithner criticised the policy of China and others, saying: “For too long, many countries oriented their economies toward producing for export rather than consuming at home . . . Countries that chronically run large surpluses need to . . . boost their domestic demand. And it is critical to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate management.”
China has allowed the renminbi to appreciate 2 per cent since June; the US believes it should rise by at least 20 per cent.
