When the International Monetary Fund was formed seven decades back, one of its primary objectives was to "facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members..." The orderly exchange rate system it implemented, for the first three decades after its formation, revived the war-ravaged economies of Europe and Japan, helped by rapid growth of cross-border trade in goods and services. Later, globalisation helped fast growth in many developing countries, particularly in Asia where it helped pull a billion people above the poverty line. China, for example, grew at/near double digit levels for three decades.
In recent years, particularly after the financial crisis eight years back, both global economic and trade growth have dropped sharply; and income inequalities within individual economies have grown even as the per capita income gaps between countries have narrowed. Before last week's annual Fund/Bank meetings in Washington, the IMF's managing director described the world economy as "weak and fragile" and gave a call for "inclusive growth", arguing that "growth has been too low, for too long, and benefiting too few." The result is a growing backlash against globalisation, particularly in the two Anglo-Saxon countries as manifested in the surprising strength of Donald Trump with his anti-trade, anti-immigration election agenda, and the Brexit vote in June. (Even Germany, that bastion of free trade and from which it has benefited enormously, recently agreed to a sharp increase in duties on Chinese steel.)
The current political/economic climate in the US and the UK - the two bastions of deregulated financial services - supports my belief that one reason for the malaise in global growth and trade is the disproportionate share of profits going to finance capital, thanks to the "holy trinity" of liberal capital flows, market-determined exchange rates, and fiscal austerity the IMF pursued so assiduously for the last three decades. To be sure, under the leadership of the current managing director, there does seem some fundamental review of the "neoliberal" agenda it has been following. A few years back, it admitted to having made a major error in its estimation of fiscal compression on the debt to gross domestic product (GDP) ratio; more recently its economists have found that liberal capital flows and fiscal austerity lead to lower growth and increased income inequalities, (see The Other Side on August 18). In fact, economist Helene Ray has argued: "Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime." (One wonders whether our finance minister has had the time to look at these issues and papers, but surely his chief economic adviser has.) As for market-determined exchange rates, William White, of the Organisation for Economic Co-operation and Development, has said that: "Driven by short-term momentum trading, in which traders buy and sell currencies to cash in on what they anticipate, will be a continuation of increases or decreases in their value, exchange rates can deviate for years from levels consistent with underlying fundamentals." No wonder trade growth is falling.
One has not come across much analysis of the impact of market-determined exchange rates on economic growth, and on trade in goods and services. On first principles, it seems to me to be self-evident that volatile, unpredictable exchange rates increase the risks of exporters and importers, and of investors in the tradeables sector. Also, overvalued exchange rates lead to trade deficits and output/employment loss. If global economic and trade growth is to be restored, does the IMF need a fundamental review of its stance on the wisdom of market-determined exchange rates?
BRICS
Some years back, economists identified Brazil, Russia, India, China and South Africa (BRICS) as the five large, fast-growing emerging economies; their leaders had a summit meeting in Goa last week. Press statements apart, what would they have actually discussed? Brazil's recent removal and impeachment of its last president and economic downturn; Russia's economic woes because of low oil prices; or South Africa's charging its finance minister with fraud - less than six months after his appointment, and three earlier changes in incumbency in a week? Is it time to disband the increasingly irrelevant and, in any case, artificial grouping of countries with little in common in their political systems, economies, or growth record? In any case, in terms of economic and geopolitical power, China has far outstripped the other four; its only rival today is the US.
The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com
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