The International Monetary Fund chief Strauss-Kahn tries bridging the north-south divide on exchange rates
He looks like a mix of the older Robert De Niro and a younger Peter Ustinov. At the end of three days of meetings, the annual gathering of finance ministers and central bank governors, and a long last day he walks briskly and settles down to business. We have been waiting for half an hour, but he assumes we know he has been busy, and so there are no apologies. We are in the presence of Dominique Strauss-Kahn, the International Monetary Fund’s charismatic managing director.
I first met Strauss-Kahn in August 2007 when he came to meet Prime Minister Manmohan Singh to canvass support for his candidature for this job. He didn’t have to spend much time listing his credentials with Singh welcoming him warmly with the words: “French leadership at the Fund has been good for India.” Strauss-Kahn sat at the edge of his chair, hands kept together and resting on his lap, like an applicant at an interview.
Three years later as I look at him welcome the gathering, he sits like Caesar at the senate, on a comfortable white leather sofa, legs stretched out, arms gesticulating. A head of state in waiting. King Dominique at his own roundtable.
This is the second meeting of the Global Economic Action Roundtable (GEAR). A small gathering of select finance ministers, central bank governors, economists, financial wizards, heads of financial institutions and a couple of newspaper editors. The agenda: issues and priorities coming out of the annual meetings and the consequent agenda for the G-20 summit.
There are four finance ministers, including Christine Lagarde of France, Tharman Shanmugaratnam of Singapore, Youssef Boutros-Ghali of Egypt, and Tommaso Padoa-Schioppa of Italy. There are a few central bank governors, including Jean-Claude Trichet of the European Central Bank, Mark Carney of the Bank of Canada and the IMF’s former chief priest and now governor of the Bank of Israel, Stanley Fischer.
The big guns from the world of economics and finance include Nobel Laureate Joseph Stiglitz, an unrelenting critic of the Fund, billionaire George Soros and new guru of the post-crisis world Nouriel Roubini. The head of the Asian Development Bank, Haruhiko Kuroda, is here and so is the head of the International Labour Organisation Juan Somavia. There are a few familiar faces from the Washington DC think-tank world, as well as Martin Wolf of the Financial Times. China is represented by David Daokui Li, a professor at Tsinghua University and director of the Centre for China in the World Economy, and India is represented by yours truly.
Strauss-Kahn begins with a political gesture, inviting Lagarde to make the opening comments. I am not familiar with French politics to know the gesture’s full significance, but many around the room smile and Lagarde herself is taken aback at being asked to speak first.
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She lists out the issues that finance ministers from around the world discussed at the annual meetings – currency and exchange rates, bank supervision and financial regulation, development cooperation and investment in infrastructure, commodity prices and global governance. Fischer speaks next, at length, on the exchange rate controversy, speaking not as the familiar spokesman of Wall Street and the US treasury, but as the governor of an emerging markets central bank. Exchange rate ‘wars’ are probably here to stay as emerging markets cope, says Fischer, adding that economic theory has few answers to what governments should do.
The bottomline is that emerging markets are under pressure to appreciate their currencies, a kind of ‘tax on exports’, to solve a problem that most did not create. Fischer is not hopeful that an early solution would be found to the problem of ‘currency wars’ and certainly does not see the annual meetings having bridged the divide.
Soros comes in next, also focusing on the exchange-rate controversy. The world is divided into two camps, Soros says. There is China and there are the rest. China controls its own exchange rate and, with its over $2.5 trillion reserves, controls the exchange rate of many others, including the euro. The allusion being to China’s strategic ‘talking up’ of the euro in the run up to the annual meetings. Soros squarely blames China for using its fixed exchange-rate system to create global imbalances and suggests that the RMB appreciate by 10% a year against the US$.
The interventions by Fischer and Soros on exchange rates, coming against the background of US and Brazil’s attempt to place the issue on the front-burner in the run up to the annual meetings and the western media focus on ‘currency wars’, ensure that the next two hours are devoted largely to the issue.
Many, including Roubini and Wolf, draw attention to the fact that no one seems to know how to get ‘surplus’ economies like China to reflate and generate global demand, and prevent ‘deficit’ economies like the US and the EU from deflating. US behaviour is, in fact, ‘inflating’ emerging markets and they are contributing to further deflation in the US.
Given these concerns, many feel the G-20 should focus on cross-border financial flows and seek greater stability. ADB’s Kuroda seeks a ‘global currency pact’ between three categories of countries/ currencies: the G-3 (US dollar, euro and Japanese yen), ‘rapidly-rising economies of Asia’ (China in particular), and ‘commodity exporters’, including Opec, Brazil, Canada and Australia.
The currencies of Asia’s emerging economies will appreciate against the other two, argues Kuroda, but there is need for greater global coordination, a job for the IMF and the G-20. Kuroda believes China’s yuan is overvalued, but is not willing to speculate by how much. He is not sure if capital controls are such a good idea, and hopes emerging markets would not have to resort to them.
With currency wars and exchange rates taking centre stage, the GEAR discussion, like the annual meetings, is hijacked by the issue. In my own intervention, I wonder whether the tail is wagging the dog. Yes, managing exchange rates is important, but the focus of developing economies is more on growth, inflation, financial sector regulation and global governance. Neither the annual meetings nor the GEAR discussion have paid much attention to these issues.
Strauss-Kahn agrees, showing once again his desire to strike a balance between the priorities of the developed and the concerns of the developing world. He hopes the G-20’s Seoul summit next month would help bridge the divide between the two.
But how the Fund and G-20 would relate to each other after Seoul, with his political rival and French President Nikolas Sarkozy taking charge of G-20 leadership, and Mr Strauss-Kahn likely to come under increased pressure from home to contest the French presidency, will become the focus of media attention in months to come.