The G-20 Finance Ministers and Central Bank Governors, who met in Seoul over the weekend of October 23–24, made only minor progress on currency and balanced growth issues—certainly not enough progress to decrease materially the threat of continued currency wars.
Yes, they said all the right things about moving toward “more market determined exchange rate systems,” refraining from “competitive devaluation of currencies,” pursuing the “full range of policies conducive to reducing excessive external imbalances,” and assessing persistently large imbalances “against indicative guidelines…” But these statements are not going to do the job in the absence of agreement on quantitative limits for external imbalances, along with a graduated set of penalties for countries that persistently exceed these limits.
In a paper delivered at a conference organized by the Asian Development Bank and the Peterson Institute for International Economics in Seoul in late October, I proposed that G-20 members agree to a limit on current-account imbalances of 4 percent of GDP and that countries that exceed this limit be subject to a graduated set of penalties, with the penalties depending on the extent and duration of their imbalances. At the lower end of the range the penalties would begin with an IMF special consultation to discuss their exchange rate policies; in the middle part of the range it would include public “naming and shaming” of their exchange rate policies; and at the higher end it would encompass WTO-approved trade policy retaliation and a temporary ineligibility for special drawing rights allocations and for increases in their quotas in the Fund.
Given the substantial benefits that countries believe they receive from engaging in competitive devaluation (or competitive nonappreciation), there have to be some offsetting costs if they are to be deterred from following beggar-thy-neighbor policies. The current international monetary system does not provide those offsetting costs. Until it does so, we can expect countries—especially large surplus economies like China—to game the system by not following the rules. Unfortunately, this weekend’s G-20 meeting has not filled that large hole in the system because it has stopped short both of defining what are “excessive” external imbalances and of spelling out what are the consequences of persistently running such excessive imbalances.