The United States believes that global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery. Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses and by the extent of foreign exchange intervention as countries with undervalued currencies lean against appreciation. These are the critical challenges of this period, and we must work collectively and through our multilateral forums, such as these meetings, to address them cohesively.Meanwhile, things were getting quite testy outside the meeting proper. While Geithner and IMF Managing Director Dominique Strauss-Kahn envisioned putting enhanced surveillance mechanisms in place to monitor the activities of major economies with major CA imbalances, there wasn't much said about implementation. After all, what leverage would an erstwhile lender like the IMF have over non-borrowers? It remains a moot point if this question isn't answered.
Also, as per the title of this post, developing countries were aggrieved by the political economy of labelling what activities constitute "intervention." For obvious reasons, the US is keen on excluding extraordinarily loose fiscal and monetary policies as evidence of such when its effects are arguably wider-ranging and longer-lasting. International currency war, anyone? On to the sniping:
Outside the formal meeting, the skirmishes over currencies continued. Tim Geithner, US treasury secretary, stepped up his call for the IMF to sharpen its focus on global imbalances. Governments intervening to hold down their currencies had accumulated large foreign exchange reserves which were threatening to destabilise the world economy, he said.Which brings me to the last point here regarding LDC participation at IFIs. Despite earlier suggestions that developed countries--especially overrepresented European ones--would be willing to shift the allocation of voice and votes at the emergency lender to emerging economies, it remains a work in progress. DSK says so himself:
“The IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices,” he told the IMF’s ministerial steering committee. “[E]xcess reserve accumulation on a global scale is leading to serious distortions in the international monetary and financial system, and is inhibiting the international adjustment process.”
Dominique Strauss-Kahn, IMF managing director, is proposing a new surveillance mechanism whereby the fund would conduct special analyses of its large member countries, including China, the US and the eurozone, and assess how the policies of each affected the others.
In the weeks before the meetings, several emerging market countries including Brazil, India and Thailand have complained about the effect of rapid capital inflows distorting their economies by pushing up interest rates. But policymakers from China and other emerging markets said that these destabilising flows were a result of ultra-low policy in the US and other advanced economies, which was driving money into emerging economies in search of higher yields.
Zhou Xiaochuan, China’s central bank governor, told the IMF meeting that the focus on currencies was one-sided. “The continuation of extremely low interest rates and unconventional monetary policies by major reserve currency issuers have created stark challenges for emerging market countries in the conduct of monetary policy,” he said. “The Fund’s current surveillance framework, which focuses on exchange rate policies, effectively leaves developed countries outside the Fund’s oversight.”
[T]he international community failed to make progress on reforms to the Fund to give emerging economies a greater say over the global economic governance...Dominique Strauss Kahn, IMF managing director, acknowledged that the communiqué issued by the Fund’s governing body was short on substance. “The language is ineffective,” he said, adding “policy has to be adapted”.And here is the part of the communique that the IMF managing director found overwhelming concerning "quota and governance reforms":
Regarding reform of the Fund to increase the voting power of emerging nations at the expense of mostly European countries, which are over-represented, he said there had been movement towards agreement. “I’d say agreement will be found in the coming weeks,” he said, but admitted some large hurdles still needed to be crossed on the increase in voting share of emerging economies’ representation on the IMF board and the selection of future managing directors.
“There is only one obstacle, which is the agreement of the members,” said a frustrated Mr Strauss Kahn who had hoped to wrap up the reform package at the weekend.
We reemphasize that quota and governance reforms are critical to institutional legitimacy and effectiveness. The Fund is and should remain a quota-based institution. We urge members who have not consented to the 2008 quota and voice reform to do so promptly. We have made progress toward finding common ground on the core reform areas, and we are working actively to resolve outstanding issues. These issues relate to the size of the quota increase and the quota shift, in line with our October 2009 Istanbul communiqué; enhanced voice and representation of emerging markets and developing countries at the IMF’s Executive Board; modalities for protecting the voting share of the poorest members; enhanced ministerial engagement and strategic oversight; and an open, transparent, and merit-based process for selecting the heads of the IMF and other IFIs. We call for progress in Board and management accountability, Board effectiveness, and staff diversity. Given the urgency of these issues, we call on the Managing Director to report to the IMFC on progress on quota and governance reforms by the end of October.The more things change, the more they stay the same, eh? Pardon me, for some reason, I'm feeling Canadian today. America does like to have its own cake and eat it too even if she is no longer in the same position to get its will done like before.