I visited Korea earlier this summer and gave a talk on effects of U.S. Tapering on Emerging Markets. (This was also the subject of comments at an Istanbul conference sponsored by the NBER and the Central Bank of Turkey in June.)
An interview on the effects of policy at the Fed and other advanced-country central banks on East Asian EMs now appears in KRX magazine (in Korean), August. Here is the English version:
Special Interview with Jeffrey A. Frankel <KRX MAGAZINE> August
Q: On 10 June 2014, Federal Reserve Bank of Boston President Eric Rosengren said in a speech that the Fed’s “new” monetary policy tools, including forward guidance and large-scale asset purchases, were “essential” in ensuring the economic recovery in the United States. What do you think about the ‘ongoing’ U.S’s ‘Tapering’ policy? And what is your idea about appropriate “new” monetary policy?
The ECB should further ease monetary policy. Inflation at 0.8% across the eurozone is below the target of “close to 2%.” Unemployment in most countries is still high and their economies weak. Under current conditions it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% euro-wide, then the periphery countries have to suffer painful deflation.
A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress. This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership.
The IMF reform would have been an important step in updating the allocations of quotas among member countries. From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power. (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.) But one would then be wrong. The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other Emerging Market countries, coming largely at the expense of European countries. The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.
The value of the yen has fallen sharply since November, owing to the monetary component of Japan’s efforts to jump-start its economy (“Abenomics”). Thus the issue of currency wars is expected to feature on the agenda at the G-8′s upcoming summit in Enniskillen, UK, June 17-18.
The phrase “currency wars” is catchy. But does it have genuine analytical content? It is another way of saying “competitive devaluation.” To use the language of IMF Article IV(1) iii, it is what happens when countries are “manipulating exchange rates…to gain an unfair competitive advantage over other members…” To use the language of the 1930s, this manipulation would be a kind of beggar-thy-neighbor policy, with each country seeking to shift net exports toward its own goods at the expense of its neighbors.
The parties to the UN Framework Convention on Climate Change are meeting once again in Durban, South Africa, from November 28 to December 9. The period covered by the Kyoto Protocol ends in 2012 and the clock is running out on negotiations for a successor agreement. Progress at Copenhagen two years ago and Cancun one year ago was slow. Negotiations have been blocked by a seemingly insurmountable obstacle. The United States is at loggerheads with the developing world, especially China–now the world’s largest emitter of greenhouse gases (GHG)–and India.
Under French President Nicolas Sarkozy’s leadership, the G-20 has made addressing food-price volatility a top priority this year, with member states’ agriculture ministers meeting recently in Paris to come up with solutions. The choice of priorities has turned out to be timely: world food prices reached a record high earlier in 2011, recalling a similar price spike in 2008.
Consumers are hurting worldwide, especially the poor, for whom food takes a major bite out of household budgets. Popular discontent over food prices has fueled political instability in some countries, most notably in Egypt and Tunisia. Even agricultural producers would prefer some price stability over the wild ups and downs of the last five years.
It is time for the Managing Director of the International Monetary Fund to come from an emerging market country. But that has been said often before. Whining about the injustice of the 65-year duopoly under which the IMF MD comes from Europe and the World Bank President comes from the US won’t change anything. Only if emerging market countries were to unify quickly behind a single strong candidate would they have a shot at the post. They are evidently too fragmented even to make an effort to come together in this way. Thus the job will probably go to a European yet again.
Korea may have an opportunity to exercise historic leadership, when it chairs the G-20 meeting in Seoul, November 11-12. This will be the first time that a non-G-7 country has hosted the G-20 since the larger, more inclusive, group supplanted the smaller rich-country group in April of last year as the premier steering committee for the world economy. With large emerging market and developing countries playing such expanded economic roles, the G-7 had lost legitimacy. It was high time to make the membership more representative. But there is also a danger that the G-20 will now prove too unwieldy, in which case decision-making might then revert to the smaller group.
My last blog post listed some policies and institutions with which various small countries around the world have had success — innovations that might be worthy of emulation by others. Of course there are plenty of other examples of policies and institutions that have been tried and that are to be avoided. The area of agricultural policy is rife with them. Many start with a confused invoking of the need for “food security.”
The recent run-up in wheat prices is a good example. Robert Paarlberg wrote an excellent column in the Financial Times recently, titled “How grain markets sow the spikes they fear.” Grain producing countries point to the high volatility of prices on world markets and the need for food security when imposing taxes on exports of their own grain supplies, or outright bans, as Russia did in July. The motive, of course, is to keep grain affordable for domestic consumers. But the effect of such export controls is precisely to cause the price rise that is feared, because it removes some net supply from the world market. (The same could be said when grain importing countries react to high prices by enacting price controls, because that adds some net demand to the world market.)
The current economic question is what to do about budget deficits. The Greek crisis has made sovereign debt a genuine concern even among advanced countries. (I should say “especially among advanced countries,” because developing countries now have stronger fiscal positions, in a historic reversal of roles.) At this weekend’s G-20 Summit, Germany and the UK are defending strong fiscal austerity, with language that doesn’t even allow for the idea that short-term spending might be expansionary under severe recessionary conditions such as 2008-09. In the US, Peter Orszag is reported this week to have resigned as OMB Director, not just to get married, but supposedly in part out of frustration about the fiscal outlook and President Obama’s refusal, as part of any comprehensive deficit correction program, to reverse his campaign pledge against raising taxes on those earning less than $250,000.