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G20 Meeting Gives BRICs More IMF Power, Vows No Currency War
While the US media was having kittens over the Wikileaks data dump and the final sprint in the mid-term elections, the real news the last few days came out of Gyeongju, South Korea, where the G20 Finance Ministers meeting took place. At the conclave, the emerging markets (mainly Brazil, Russia, India and China) were given 6% more voting power at the IMF. This happened in recognition of their increased importance to the global economy. At the same time, the leaders agreed not to engage in competitive currency devaluations but stopped short of setting targets on trade balances. It's two steps forward but one small step back.
The shift in voting power was a necessary concession to the emerging markets of the world in order to keep them onboard with the IMF and its role in the global economy. Russia and Brazil wanted more, India was a bit more conciliatory, and Turkey noted that while there was an agreement, there was no timeline for making the shift. Nevertheless, China moved from sixth biggest vote to the third biggest at the IMF, after the US and Japan. Further adjustments should follow as China has passed Japan to become the world's second biggest economy. In addition, Europe is yielding two seats to the emerging economies on the 24-member IMF board.
The final communiqué contained the usual diplomatic piffle, but there were a few sign posts on currencies ahead of next month's G20 summit. The most significant was in section 2 of the document:
[we will] move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries.
This is a direct assault on China's currency policy, and no doubt it was agreed by the Chinese to create momentum away from a mercantilist policy that the wiser heads in the Communist Party understand is damaging Chinese domestic growth. Decoupling the yuan from the dollar and letting it rise goes against years of policy, but it is the only way that the poorer interior of China is going to develop and the only way the richer residents of China's coasts are going to be able to achieve the kind of lifestyles to which they aspire.
At the same time, it is a slap on the wrists of the Americans who are pumping dollars into their economy for perfectly good domestic reasons. Unfortunately, many of those dollars are wandering off to Asia where they merely serve to drive up asset prices, creating another bubble.
The final bit of news out of South Korea was the vow to "strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels." Notice the absence of the word "targets," which Secretary Tim Geithner wanted. The G20 is not about to start managing global trade even in the broadest sense of the word. And that's why the US Secretary of the Treasury stopped in China for talks on the way home; it is an issue not for the G20 but for the G2.
© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
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