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Global Financial Governance: The Fund could tame unfair competitive devaluation

Edited on Wed Jan-14-09 08:43 PM by Ghost Dog By Jessica Einhorn Published: January 14 2009 19:52 | Last updated: January 14 2009 19:52 The severity of the present crisis is an opportunity to remedy deep-seated problems. A fundamental (not proximate) cause of our economic plight is the imbalance in current accounts – in particular between the US and China – during the past decade. We can choose our narrative tone – for example, that US spending saved the world from a decline in growth as the east Asians and some others built up their reserves through export-led expansion. Alternatively, the reckless US financial system and irresponsible American consumers accommodated the Chinese mercantilism as the dollar became overvalued and the Chinese built up reserves and maintained an undervalued exchange rate. Of course, both are true. But there is a bigger truth. The global system as governed by the International Monetary Fund is asymmetric in its approach to deficit versus surplus countries. The IMF has an important operational function – to provide financing to deficit countries that experience a crisis in their balance of payments because of unavailability of external finance in a convertible currency. While the Fund also has provisions prohibiting the manipulation of exchange rates to achieve competitive advantage (what we call a competitive devaluation), there is no operating approach to redress this distortion to fair trade. ... We should consider a solution that would rely on both the IMF and the World Trade Organisation for judgment and implementation. If a country runs a surplus on its current account for some period (more than a year) and is simultaneously intervening to purchase foreign exchange at a particular percentage of gross national product, then that country should come up for automatic consideration at the IMF. In order to strengthen political will for action, the presumption should be that a country that sustains the scope and pattern of trade surplus and reserves described in the guidelines is achieving a distortion of trade that should be remedied. Unless an exception is voted by a majority in the Fund, a recommendation to the WTO would follow in favour of remedial action (such as a surcharge on the exports of the named country). This would be consistent with the existing agreements between the two institutions, which gives precedence to the IMF in determinations on foreign exchange matters and provides for the Fund to inform the WTO regarding measures that are inconsistent with Fund articles. All IMF members would be governed by the policy, which would not be subject to a blocking veto in its implementation. ... Tackling this problem would provide an excellent context to address the long-standing issue of reapportioning quota shares (the system that determines votes at the IMF). These negotiations have been going on for years with little redress. If the big industrial countries had something at stake in curbing the excesses of currency imbalance, the prospects might be more positive. Indeed, if the US would agree to surrender its hold on the presidency of the World Bank, then there would be a package of reform worthy of the effort. The Europeans give up shares, the Asians and others give up mercantilism, and the US gives up a vestige of unipolarism. The IMF and the World Bank gain legitimacy and the Fund resolves a dilemma that haunts its fundamental mission. A grand slam for international financial governance. The writer is dean of the School of Advanced International Studies, Johns Hopkins University /... http://www.ft.com/cms/s/0/5cce475a-e262-11dd-b1dd-00007...

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fedsron2us (1000+ posts)

Wed Jan-14-09 09:09 PM Response to Reply #78

80. Strangely not that far from the ideas Keynes was promoting after World War 2

http://www.guardian.co.uk/commentisfree/2008/nov/18/lor... Of course, these are the great mans real ideas rather than the fantasy policies that are attributed to him by every free market dickhead on the planet

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Ghost Dog (1000+ posts)

Wed Jan-14-09 09:45 PM Response to Reply #80

81. Indeed. This particular piece does appear directed against China, though,

Edited on Wed Jan-14-09 09:53 PM by Ghost Dog to which this appears to be a response: US to blame for financial crisis, says China Source: Agence France-Presse -->DU thread: http://www.democraticunderground.com/discuss/duboard.ph... US mistakes are the root cause of the global financial crisis, a senior Chinese central bank official said overnight, rejecting criticism of China's high savings rate and booming trade surplus. "Errors made in US economic policy-making, financial supervision and markets are the ultimate causes of the crisis," said Zhang Jianhua, research head at the People's Bank of China, in an opinion piece carried by the People's Daily. Some observers in the West are blaming China and other nations' high savings rate and trade surplus for fuelling excess consumption and asset bubbles in the United States, he said. "Such views are ridiculous and irresponsible in the extreme," Mr Zhang wrote in the harshly worded piece in the Communist Party's mouthpiece. Read more: http://www.news.com.au/business/story/0,23636,24915240-... Edit: Note the way positions, and therefore interests, are somewhat reversed, today. The US is now the deficit nation. Here's the summary of Keynes's proposal (from George Monbiot's Guardian article, your link above): ... He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency - the bancor - which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country's trade deficit or trade surplus. Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be? Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But - and this was the key to his system - he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations' deficits. When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed". Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position. But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the American delegation at Bretton Woods, Harry Dexter White, responded to Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no." Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would impose no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank. ...

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Demeter (1000+ posts)

Wed Jan-14-09 10:38 PM Response to Reply #78

87. At This Point, China Has Little to Do With the US Economy

This is our own, personal, national little Death Spiral, brought to you by those fine folks at BushCo. China's got problems of her own, which we caused, partly. Although Europe did their part, too.