The managing director of the International Monetary Fund, Dominique Strauss-Kahn, may not have tilted at wind mills but he certainly was speaking with a forked tongue when he gave an admonition wrapped inside some sage counsel — there are no domestic solutions for international problems — which incidentally had a nice ring to it, besides being of a piece with another sobering adage (‘think global, act local’).
Competitive devaluation of currencies, not floating in the international currency markets, by their respective governments may well turn out to be as mutually destructive as nuclear bombs (with neither victor nor vanquished) but Strauss-Kahn more than anybody else should know that it was the IMF that has all along been advocating devaluation of currencies with obsessive zeal, almost as a panacea for the ills of nations faced with foreign exchange crises. In its worldview, with which there can be no serious quarrel, devaluation applies brakes on imports and gives a leg up to exports.
Devaluation has thus become a strategic if seemingly masochistic tool for ushering in export-led growth, with Japan and China standing out as shining examples. Who would have anticipated that the IMF prescription would one day come to haunt its promoter-in-chief, the US, so much that it would be constrained to eat its words?
The IMF medicine, though meant for countries facing foreign exchange crises, has resonated with everyone, particularly those wanting to export their way to prosperity. To the IMF and the US, the magic potion is meant to be taken only on the recommendation of the IMF physician and both are furious that China has been taking it with telling effect for itself and disastrous results for the US in particular and the Western world in general.
It has not occurred to them that some medicines are also taken as preventives or as boosters, without a doctor's prescription. They cannot fault China and others for taking to devaluation with alacrity, without an IMF prescription.
Be that as it may, the IMF has not only been setting store by devaluation but also has been in the forefront of promoting and whipping up dollar mania. The Gold Exchange Standard (GES), it announced at the behest of the US back in 1944, hot on the heels of its birth, was a masterstroke in anointing the greenback as the world’s currency — an honour it has clung on to steadfastly, despite the US having reneged on the gold peg at the first hint of trouble in 1973 (in the shape of the first oil shock), and despite the US economy having proved to be a house of cards these last few years.
The point is that at the root of the currency war which the IMF has decried is an insatiable dollar quest and, by extension, an export thirst. The IMF having whipped up both, its chief does not have the moral authority — much less the credibility — to hold forth sanctimoniously against those wanting to pile up dollars a la the OPEC nations, through exports and not through inflow of capital.
For some countries, especially those endowed with abundance of critical mineral resources not available elsewhere, export is both an opportunity and a compulsion, especially when other gainful economic activities pass them by. The Middle East oil exporting nations fall into this category. Japan too needs to export to pay for its imports, because nature has been unkind in not bestowing it with natural resources.
But China has had no such compulsions. It seems to have plumped for export for export’s sake and in the process neglected the domestic constituency, except that in the course of manufacturing for export it has also addressed the unemployment problem successfully.
In its single-minded pursuit of the greenback, China has tied itself in knots, if not shot itself in the foot. It has built an enviable war chest of dollars, a substantial part of which is languishing in the US earning a paltry interest, while its own people suffer from lack of purchasing power, thanks to the starvation wages paid to workers to make exports competitive.
In short, by wearing export blinkers, the Chinese government all these years has subsidised outsiders and a small internal constituency — exporters. China has to grin and bear it when its export surplus has to be ploughed back in financing imports by the US. It would like to see the US on its knees economically, but at the same time cannot afford to see its currency go under, because a large part of its fortunes is locked up with the fortunes of the US economy.
India wisely, in hindsight, has not followed the policy of export for the sake of export, even though it needs foreign exchange to pay for its imports, mainly oil. China’s predicament is that it needs a strong dollar lest its assiduously built reserves vaporise when the US is itching to get onto the export bandwagon by ironically following the devaluation route it has been decrying along with the IMF.
That the US has been standing on the tripod of military might, cutting edge technology and its currency might is trite. It laughed up its sleeve when the export surpluses of China and many others — except the Islamic oil exporters — found their way back to its economy in what appeared to be a virtuous cycle.
Little did it realise that its much-vaunted currency would one day come to haunt it by making it the most indebted nation, emanating from a perennial current account deficit. The flood of imports has not only created a mountain of debt but also a vast army of the unemployed, with indigenous production having been rendered expensive by a devalued yuan.
The US then must be secretly ruing its decision to have imposed its currency as the world’s referral currency. For, what was soothing to its ego and easy on its finances then, alas, has now turned out to be a pain in the neck. The larger message arising then out of the current jockeying for devalued currencies is the crying need to make a smooth transition to an international settlement regime that reflects the current realities and factors in the dangers of being ruled by a single currency whose economy in addition is in a shambles.
Such a new regime would bring about sanity on both fronts — exports and its concomitant currency. This is the unspoken sub-text of the current world financial crisis and its offshoot, the use of currency as a financial weapon — something that no one seriously wants to address, with vested interests hobbling incipient initiatives.
The author is a chartered accountant
