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