Tag Archives: imf

Governed by the gutless?

Alan Beattie’s new booklet “Who’s in Charge Here” (Amazon) is an amusing, accurate, accessible account of the current mess in global financial and trade “governance.” Well worth the $3 price. But he draws a “lesson” from his little history of the crises of 2008-2011 that I find un-satisfying. Who’s in Charge Here is a valuable […]

The limits of WTO litigation

Good sense from a former Chair of the WTO Appellate Body.

“It is in the best interest of both countries to continue negotiating on the currency issue rather than resorting to litigation at the WTO. On this issue especially, litigation should be the last resort.” Extract from James Bacchus in the WSJ


Alhougth I’m sure a lot of trade law geeks like me would like to see Article XV litigated, nevertheless … just to see what it means.

Rotten ideas about the renminbi

The prospect of a U.S.-China clash over currency controls next month when the U.S. Treasury Secretary is supposed to pronounce on China’s ‘currency manipulation’ has prompted hyperbolic fears (Martin Wolf, in the FT says he “wonders whether the open global economy is going to survive…”!) and at least two feeble plans.

One is from the IMF, which wants a new mandate—although it admits that’s not really necessary—to undertake explicit multilateral surveillance of Systemic Stability (i.e. imbalances in external accounts). But the Fund does a bad job of justifying its claim for a new role. The Conclusions (on page 12) of the current proposal from the Fund management offer no better reason that that it wants to feel important as the manager of a new ‘peer review’ process. Ho hum!

A much worse idea comes from Arvind Subramaniam in today’s Financial Times. He wants the WTO not only to engage in surveillance but also to enforce the ‘right’ value for currencies.

“The World Trade Organisation is a natural forum for developing new multilateral rules. First, undervalued exchange rates are de facto protectionist trade policies because they are a combination of export subsidies and import tariffs…:”

Even if we accept that there is an equivalence between currency management and trade measures, we have to ask so what? You’d imagine, wouldn’t you, that a trade economist would recall that, in WTO, neither of these trade instruments is necessarily “protectionist” and that neither is illegal (or even deprecated)! This is not much of an argument for WTO intervention.

Second, the WTO has a better record on enforcement of rules. Its dispute settlement system, although not perfect, has been reasonably effective in allowing members to initiate and settle disputes…What is needed is a new rule in the WTO proscribing undervalued exchange rates.

Uh-huh. But does Prof. Subramaniam recall what is needed to add a ‘rule’ to the WTO? If not ‘consensus’ (or ‘explicit consensus’ in the Doha negotiating mandate), then a very strong qualified majority (⅔ of Members according to Article X of the Marakesh Agreement). Furthermore, a new rule adopted by a majority vote applies only to Members that accept it; unless a further another strong majority (¾ of Members) decides to expel any Member that does not accept the new rule.

Now think for a second or two what sort of mess a proposal to penalize persistent trade surpluses would create in WTO. Remember, we’re talking about an Organization that—for the present at least—can’t decide which way is up (in the Doha round), let alone what constitutes an “undervalued exchange rate”

Imagine, too, that horrible wrangle ending up in a majority vote on the new rule, which will inevitably be aimed at China and possibly Germany. But will also potentially hit a lot of others; Thailand and Vietnam, for example. What we have here is a recipe for a hecatomb of the WTO.

The IMF would continue to be the sole forum for broad exchange rate surveillance. But in those rare instances of substantial and persistent undervaluation, we envisage a more effective delineation of responsibility, with the IMF continuing to play a technical role in assessing when a country’s exchange rate was undervalued, and the WTO assuming the enforcement role.” Extract from FT.com / Comment / Opinion – The weak renminbi is not just America’s problem

Fat chance! Even if the IMF could actually discover the ‘correct’ international price of a currency, the WTO would break if tasked with enforcing it.

Market and PPP measures of GDP

Source: IMF data mapperSource: IMF data mapper

In comments on the previous post, Ian Castles AO, the former Australian Statistician, notes that the World Bank and IMF create confusion in their reports by mixed use of market-exchange-rate (MER) and purchasing-power-parity (PPP) bases for estimating output and growth. Simply, using market exchange rates to compare the value of output among countries over-estimates the size of developed economies and under-estimates the size of developing economies. This confusion affects their analyses of, among other things, trade data.

The charts (click the thumbnails), taken from the two sets of data prepared by the IMF, show the dramatic difference between MER and PPP bases for comparing output and growth. Using the PPP basis for comparison, developing countries’ economies are much larger in relation to developed economies and projected to ‘close the gap’ sometime after 2015 (take the IMF projections with a grain of salt: they’re just ‘straight line’ extensions of current patterns of growth). The only difference between the two charts is the identification of China. Note that using a PPP basis for comparison, China appears less dominant in the developing country group.

Bad plus bad equals worse

The key piece of bad news, today, from Chapter 3 of the IMF World Economic Outlook

Recessions that are associated with both financial crises and global downturns have been unusually severe and long-lasting. Since 1960, there have been only 6 recessions out of the 122 in the sample that fit this description… On average, these recessions lasted almost two years. Moreover, during these recessions GDP fell by more than 4½ percent. Reflecting in part the severity of these recessions, recoveries from synchronized recessions are weak.

“What is to be done?”

Lenin recommended it. Now Simon Johnson moves from blaming the elites to organizing against them.

“We have to break up any bank that’s ‘too big to fail’ so that we can have a functional free market. We need serious reform that fixes the root causes in our political and economic system: excessive influence of banks, dangerous compensation systems, and massive consolidation that does nothing to serve the public interest.” Extract from A New Way Forward

Renminbi reserve currency?

A development worth watching:

“Economists say the SDR plan is unfeasible for now but see Beijing’s currency swap deals [with Argentina, Malaysia, Indonesia, South Korea, Belarus] as pieces in a jigsaw designed to promote wider international use of the renminbi, starting with making it more acceptable for trade and aiming at establishing it as a reserve currency in Asia, something that would also enhance China’s political clout” Extract from Financial Times