Global finance chiefs split over which policies are most to blame for propelling potentially risky capital flows into emerging markets, with both sides pushing the International Monetary Fund to adjudicate.
The disagreement marked the second day of the IMF’s semi-annual meetings which drew policy makers from the lender’s 187-nation membership to Washington. US Treasury Secretary Timothy F Geithner blamed a lack of currency appreciation in developing nations such as China for driving so-called hot money into more open markets, while Brazil Finance Minister Guido Mantega pointed his finger at loose monetary policies in rich nations including the US.
The argument came as nations again sparred over an IMF proposal to endorse a limited use of capital controls to shield economies from such flows before they spur overvalued currencies, inflation and asset bubbles. Group of 20 policy makers ducked the issue yesterday, saying they would keep studying the topic.
“Capital recipient countries are experiencing both commodity inflation and currency overvaluation related to capital flows,” Mantega said in a statement today to the IMF’s policy-steering committee.
The World Bank calculated in January that net private capital flows to developing countries expanded 44 per cent in 2010 to about $753 billion. While these investments often fuel growth, economies including Brazil and South Korea have recently begun to fret that they risk undermining their economies.
‘Primary trigger’
By keeping interest rates low, countries such as the US are providing the “primary trigger of many of today’s economic woes,” said Mantega. He defended the use of capital controls as legitimate “measures of self defence”.
“Domestic political constraints have been too easily invoked by reserve currency issuing countries as a reason for adopting ultra-expansionary monetary policies, but this does not change the fact that these policies generate spillovers that have made life difficult for other countries,” he said.
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The US was also chastised for its budget deficit even as Geithner reiterated President Barack Obama’s plan of this week to cut the cumulative shortfall by $4 trillion within 12 years.
“Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues with repercussions on confidence and the still fragile financial sector,” Dutch Finance Minister Jan Kees de Jager said.
With its currency climbing, Brazil has imposed a tax of 6 per cent on international bond sales and loans with an average minimum maturity of up to 360 days. It received net inflows of $10.5 billion in foreign currencies from trade and financial investments this month through March 25, compared with $7.4 billion for all of February, according to the central bank.