The trou­ble with in­ter­na­tional pol­icy co­or­di­na­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Af­ter a 30-year hia­tus, in­ter­na­tional co­or­di­na­tion of macroe­co­nomic pol­icy seems to be back on pol­i­cy­mak­ers’ agen­das. The rea­son is un­der­stand­able: growth re­mains ane­mic in most coun­tries, and many fear the US Fed­eral Re­serve’s im­pend­ing in­ter­est-rate hike. Un­for­tu­nately, the rea­sons why co­or­di­na­tion fell into abeyance are still with us.

The hey­day of in­ter­na­tional pol­icy co­or­di­na­tion, from 1978 to 1987, be­gan with a G-7 sum­mit in Bonn in 1978 and in­cluded the 1985 Plaza Ac­cord. But doubts about the ben­e­fits of such co­op­er­a­tion per­sisted. The Ger­mans, for ex­am­ple, re­gret­ted hav­ing agreed to joint fis­cal ex­pan­sion at the Bonn sum­mit, be­cause re­fla­tion turned out to be the wrong ob­jec­tive in the in­fla­tion-plagued late 1970s. Sim­i­larly, the Ja­panese came to re­gret the ap­pre­ci­ated yen af­ter the Plaza Ac­cord suc­ceeded in bring­ing down an over­val­ued dol­lar.

More­over, emerg­ing-mar­ket coun­tries’ rep­re­sen­ta­tion in global gov­er­nance did not keep pace with the in­creas­ingly sig­nif­i­cant role of their economies and cur­ren­cies. Th­ese coun­tries’ very suc­cess thus be­came an ob­sta­cle to pol­icy co­or­di­na­tion.

The ef­fort to re­vive in­ter­na­tional co­or­di­na­tion be­gan in re­sponse to the 2008 global fi­nan­cial cri­sis. The larger emerg­ing-mar­ket coun­tries ac­quired more rep­re­sen­ta­tion when the G-20 suc­ceeded the G-7 as the pre­em­i­nent global eco­nomic group­ing. G-20 lead­ers agreed on co­or­di­nated ex­pan­sion­ary poli­cies at their Lon­don sum­mit in April 2009. Then they agreed in Seoul in 2010 to give emerg­ing-mar­ket coun­tries quota shares in the In­ter­na­tional Mon­e­tary Fund that would be more com­men­su­rate with their eco­nomic weight. (The US Congress, to its shame, has yet to pass the nec­es­sary leg­is­la­tion.)

Since then, many calls for co­or­di­na­tion have lamented the out­break of “cur­rency wars,” oth­er­wise known as com­pet­i­tive de­pre­ci­a­tion – an old phe­nom­e­non that re­calls the tit-for-tat de­val­u­a­tions of the 1930s. Now, as then, the fear is that if all coun­tries try to de­pre­ci­ate their cur­rency to gain ex­port com­pet­i­tive­ness and boost their economies, all will fail.

This con­cern has been re­flected, for ex­am­ple, in com­plaints about in­ter­ven­tion by China and other emerg­ing mar­kets to pre­vent cur­rency ap­pre­ci­a­tion. Like­wise, suc­ces­sive rounds of quan­ti­ta­tive eas­ing by the US Fed­eral Re­serve in 2009-2014, the Bank of Ja­pan since 2013, and the Euro­pean Cen­tral Bank since ear­lier this year, re­sulted in de­pre­ci­a­tions of the dol­lar, yen, and euro, re­spec­tively.

The most re­cent set of calls for co­or­di­na­tion arise from fears – ar­tic­u­lated, for ex­am­ple, by Raghu­ram Ra­jan, Gov­er­nor of the Re­serve Bank of In­dia – that the Fed will not ad­e­quately take into ac­count the ad­verse i mpact on emerg­ing-mar­ket economies when it raises in­ter­est rates.

The US has led some in­ter­na­tional at­tempts to ad­dress com­pet­i­tive de­pre­ci­a­tion, in­clud­ing an agree­ment among G7 min­is­ters in Fe­bru­ary 2013 to re­frain from for­eignex­change in­ter­ven­tion and a Novem­ber 2015 side agree­ment to the Trans-Pa­cific Part­ner­ship to ad­dress cur­rency ma­nip­u­la­tion. But crit­ics are ag­i­tat­ing for a stronger agree­ment backed up by the threat of trade sanc­tions.

At­tempt­ing to use game the­ory to in­ter­pret the var­i­ous calls for co­or­di­na­tion is re­veal­ing, though not in the way that game the­o­rists as­sume. The play­ers of­ten do not think they are play­ing the same game. For ex­am­ple, when the US urges Ger­man fis­cal stim­u­lus – as at it did in Bonn in 1978, in Lon­don in 2009, and at the G-20’s Brisbane sum­mit in 2014 – it has in mind the “lo­co­mo­tive game,” in which fis­cal stim­u­lus has pos­i­tive “spillover ef­fects” on its trad­ing part­ners. The global econ­omy will do bet­ter if the ma­jor coun­tries – each afraid to un­der­take fis­cal ex­pan­sion on its own, for fear of wors­en­ing its trade bal­ance – agree to act to­gether to pull it out of re­ces­sion and up to speed.

Ger­mans, by con­trast, think they are play­ing a “dis­ci­pline game.” They view bud­get deficits as cre­at­ing neg­a­tive spillover ef­fects for neigh­bors, owing, for ex­am­ple, to the moral haz­ard of bailouts. Their idea of a co­op­er­a­tive equi­lib­rium is the Euro­pean Union’s 2013 “fis­cal compact,” un­der which euro mem­bers agreed yet again to rules for lim­it­ing their bud­get deficits.

The most re­cent ex­am­ple of this “di­a­logue of the deaf” occurred in Europe, from Jan­uary to July 2015. Month af­ter month, the Greek gov­ern­ment and its eu­ro­zone part­ners sat at the board, one side think­ing the game was check­ers and the other think­ing it was chess.

In­ter­pre­ta­tions vary no less when it comes to mon­e­tary pol­icy. Some be­lieve that mon­e­tary ex­pan­sion in one coun­try shifts the trade bal­ance against its part­ners, owing to the ex­change-rate ef­fect; oth­ers be­lieve that any ad­verse ef­fect on trade bal­ances is off­set by higher spend­ing. Some ar­gue that the prob­lem is com­pet­i­tive de­pre­ci­a­tion or too-low in­ter­est rates; oth­ers main­tain that the real prob­lem is over­val­ued cur­ren­cies or too-high in­ter­est rates.

Some be­lieve that the way to over­come com­pet­i­tive de­pre­ci­a­tion for good is to fix ex­change rates, as the ar­chi­tects of the Bret­ton Woods ar­range­ments did in 1944; oth­ers, in­clud­ing some US politi­cians to­day, ad­vo­cate the op­po­site ap­proach: an agree­ment against seek­ing to in­flu­ence ex­change rates at all.

Yes, reg­u­lar meet­ings of of­fi­cials can be use­ful. Con­sul­ta­tion can min­imise sur­prises. Ex­changes of views might help nar­row dif­fer­ences in per­cep­tions. But some calls for in­ter­na­tional co­or­di­na­tion are less use­ful, par­tic­u­larly when the aim is to blame for­eign­ers in or­der to dis­tract at­ten­tion from do­mes­tic con­straints and dis­agree­ments.

Con­sider the Brazil­ian of­fi­cials who coined the phrase “cur­rency wars” in 2010. Their coun­try’s bud­get deficit was too large, caus­ing its econ­omy to over­heat. Pri­vate de­mand was go­ing to be crowded out one way or an­other, if not via cur­rency ap­pre­ci­a­tion, then via higher in­ter­est rates. Yet of­fi­cials blamed the US and oth­ers for the strong real. Like­wise, US politi­cians’ on­go­ing ef­forts to ban cur­rency ma­nip­u­la­tion in trade agree­ments may be an ef­fort to scape­goat Asians for US work­ers’ stag­nant real in­comes.

Of­fi­cials would of­ten be bet­ter ad­vised to im­prove their own poli­cies, be­fore they tell oth­ers what to do. Oth­er­wise, calls for in­ter­na­tional co­op­er­a­tion may do more harm than good.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.