Tag Archives: G20

Games Countries Play

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Calls for International coordination of macroeconomic policy are back, after a 30-year hiatus. To some it looks anomalous that the Fed is about to raise interest rates at a time when most major central banks see a need to extend further monetary stimulus.

The heyday of coordination in practice was the decade 1978-1987, beginning with a G-7 Summit in Bonn in 1978 and including the Plaza Accord of 1985, of which this year is the 30th Anniversary.  Economists were able to provide a good rationale for coordination based in game theory: because each country’s  policies have spillover effects on its trading partners’ economies, countries can in theory do better when agreeing on a cooperative package of policy adjustments than in the non-cooperative equilibrium where each tries to do the best it can while taking the policies of the others as given.

Then coordination fell out of fashion.  The Germans, for example, regretted having agreed to joint fiscal expansion at the Bonn Summit; reflation turned out to be the wrong objective in the inflation-plagued late 1970s.  Although the Plaza Accord and associated intervention in the foreign exchange market were successful in bringing down an overvalued dollar, the Japanese had come to regret the appreciated yen by 1987.   Some of the other G-7 summit communiques had little effect, for better or worse.  Furthermore, as the economies and currencies of Emerging Market (EM) countries became increasingly important, their lack of representation in global governance became problematic.

Since the Global Financial Crisis of 2008, attempts at coordination have made a come-back.   The larger EM countries got more representation when the G-20 became the pre-eminent leaders group.  The G-20 leaders agreed on coordinated economic expansion at the London Summit of April 2009.  They agreed at the Seoul in 2010 to give EMs quota shares in the IMF that would be more commensurate with their economic weight (though the US congress has yet to pass the necessary legislation, to its shame).

Many calls for coordination lament the outbreak of “currency wars,” a phrase that Brazil’s Finance Minister in 2010 adopted for the old phenomenon of competitive depreciation.  The concern recalls the competitive devaluations of the 1930s. The idea is that a single country can depreciate its currency, gain international competitive for its exporters and thus improve its trade balance; but if all countries try to do this at the same time they will fail.  One manifestation of the currency wars concern has been foreign exchange intervention by China and other EM countries to prevent their currencies from rising.  Another manifestation arose from successive rounds of quantitative easing by the Federal Reserve in 2010-11, the Bank of Japan in 2012-13, and the European Central Bank in 2014-15; the results were in turn depreciations of the dollar, yen and euro, respectively.

The US has led some international attempts to address competitive depreciation, including an agreement among G-7 ministers in February 2013 to refrain from foreign exchange intervention and a November 2015 side-agreement to the Trans-Pacific Partnership to address currency manipulation.  But critics are agitating for a stronger agreement backed up by the threat of trade sanctions.

The most recent fear — articulated, for example, by Raghuram Rajan, Governor of the Reserve Bank of India in 2014 — is that the US central bank will not adequately take into account adverse impacts on EM economies when it raises interest rates.

To interpret the various calls for coordination in terms of game theory is challenging, in that some players think they are playing one game and other players seem to think they are playing another game.  Consider, first, fiscal policy.  When the US urges German fiscal stimulus, as at the G-7 Bonn Summit of 1978, the G-20 London Summit of 2009; and the G-20 Brisbane Summit of 2014, it has in mind the “locomotive game.”  The assumption is that fiscal stimulus has positive “spillover effects” on trading partners.  Each country is afraid to undertake fiscal expansion on its own, for fear of worsening its trade balance, but the world can do better if the major countries agree to act together as locomotives pulling the global train out of recession.

But Germans think they are playing a “discipline game.”   They view budget deficits as creating negative externalities or “spillover effects” for neighbors, due for example to the moral hazard of bailouts, not positive externalities.  Their idea of a cooperative equilibrium is the Fiscal Compact of 2013 under which euro members agreed yet again to rules for limiting their budget deficits.

When two players sit down at the board, they are unlikely to have a satisfactory game if one of them thinks they are playing checkers and the other thinks they are playing chess.  Think of the “dialog of the deaf” that took place between the Greek governmentelected in January 2015 and its euro partners

Interpretations vary just as much when it comes to monetary policy.  Some think monetary expansion in one country shifts the trade balance against its trading partners, due to the exchange rate effect; but others think it is transmitted positively, via higher spending.   Some think that the problem is competitive depreciation and too-low interest rates; others that the problem is competitive appreciation or too-high interest rates.  Some think that the way to solve competitive depreciation for good is to fix exchange rates, as the architects of Bretton Woods did in 1944.  Others, such as some US politicians today, think that the way to do it is the opposite:  an agreement against seeking to influence exchange rates at all, even enforced by trade penalties.

Yes, regular meetings of officials can be useful.  Consultation can minimize surprises. Crisis management often requires coordination.  Exchange of views might help narrow differences in perceptions.  But some calls for international coordination are less useful, particularly when they blame foreigners in order to distract attention from domestic constraints and disagreements.

Two examples of calls for coordination obscuring domestic problems.  First: Brazil’s budget deficit was too large in 2010.  The economy overheated.  Private demand was going to be crowded out one way or another: if not via currency appreciation then via higher interest rates.  When Brazilian officials blamed the US and others for a strong real, it may have been a way to divert attention so as to avoid confronting the domestic issue.  Second:  US politicians’ ongoing efforts to ban currency manipulation in trade agreements may be rhetorical attempts to scapegoat Asians for stagnation in the real incomes of American workers.

Officials would often be better advised to improve their own policies, before they tell others what to do.

[A shorter version of this column appeared at Project Syndicate.  Comments can be posted there, or at EconBrowser.]

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IMF Reform and Isolationism in Congress

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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 change in IMF quotas is a partial and overdue adjustment in response to the rising economic weight of the newcomers and the outdated dominance of Europe.   Voting share in the IMF is supposed to be in proportion to economic weight, not equal per capita or per country.  This acknowledgement of reality, the principle of matching the representation to the taxation, is sometimes known as the Golden Rule: “He who has the gold, rules.”  The principle is probably one of the reasons why the IMF has usually been a more effective organization than others such as the UN General Assembly.

It’s not that President Obama hasn’t tried to exercise global leadership, as just about any US president would.  He pushed for this agreement to reform the IMF at the G20 summit in Seoul in November 2010 (the first meeting of the group of leaders to have been hosted by a non-G7 country).  He prevailed despite understandable European reluctance to cede ground.

Some American congressmen may not be aware of the extent to which the IMF reform agreement represented the successful efforts of the US executive to determine the course of the international negotiations.  But then the rejection by the US Congress of an international agreement that the president had painstakingly persuaded the rest of the world to accept is not a new pattern.    It goes back a century, to the inability of President Woodrow Wilson to persuade a myopically isolationist US Congress to approve the League of Nations (1919).   Examples over the last century also include the International Trade Organization (1948), SALT II (1979), and the Kyoto Protocol (1997), among others.  A past history of trying to re-open international negotiations that the executive has already concluded is also the reason why Congress has to give President Obama trade promotion authority (that is, the usual commitment to fast-track congressional votes on trade agreements), or else our trading partners will not negotiate seriously.  This would impede ongoing talks in the Pacific, with Europe, and globally (in the venues, respectively, of the Trans-Pacific Partnership, Trans-Atlantic Trade and Investment Partnership, and the World Trade Organization).

Commentators have been warning since the 1980s that the US may lose global hegemony for economic reasons, as an effect of budget deficits, a declining share of global GDP, and the switch from net international creditor to net debtor.  One version is the historical hypothesis of imperial overstretch (Kennedy, Rise and Fall of the Great Powers, 1987). 

But the main problem seems to be a lack of will rather than a lack of wallet.   Or perhaps it would be more accurate to describe the problem with US domestic politics as wild swings of the pendulum between excessive isolationism and excessive foreign intervention in reaction to short-term events, untempered by any longer term historical perspective.   After the United States lost 18 rangers in Somalia in October 1993 (Blackhawk Down), Congress became highly resistant to just about any foreign intervention, no matter how big the “bang for the buck.”   Then, after September 11, 2001, it was prepared to follow President George W. Bush into just about any military intervention, no matter how dubious the benefit or how high the cost.   The total cost of the wars in Iraq and Afghanistan has recently been estimated at $4 trillion by my colleague Linda Bilmes, co-author with Joe Stiglitz of The Three Trillion Dollar War, 2008.  (It’s not just that the wars lasted for ten years; the biggest costs of such wars come subsequently, particularly for medical care that veterans need for the rest of their lives.)  These days, the pendulum has apparently swung back to the isolationist direction once again.

One had hoped that short-sighted congressmen had been made aware that among the costs of the foolish US government shutdown three months ago was damage to the country’s global credibility and leadership.   Most visibly, to deal with the shutdown, the White House in October had to cancel its participation at the leaders’ summit of APEC (Asia-Pacific Economic Cooperation) in Bali and thereby stymie progress on the US-led Trans-Pacific Partnership.  It was widely reported that the Asian countries drew from Obama’s absence the conclusion that they should play ball with China instead (Drysdale, “Asia Gets on with It While America’s out of Play,” Oct. 7, 2013.)

The increasing power of China and other major emerging market countries is a reality.  It is precisely what makes it important that the United States support a greater role for these countries in international institutions such as the IMF, the G20, and APEC.

The rise of China could go well or badly for international relations.  It depends in part on whether the status quo powers make room for the newcomer (Nye, 2013).This historical pattern famously goes back to Thucydides’ description of the rising power of ancient Athens and the resulting war with Sparta (History of the Peloponnesian War).  Examples of the consequences of failing to accommodate the new arrival include the role of Germany’s rise in the origins of World War I 100 years ago (e.g., Gilpin, War and Change in International Politics, 1981).  

The new Chinese President, Xi Jin Ping, has used the phrase “New Type of Great Power Relationship.” It sounds anodyne but may carry greater significance.   The phrase apparently demonstrates awareness of the historical “Thucydides trap.”  It signals China’s openness to working with other countries to avoid the tragedies of 460 BC and 1914 AD. It is only sensible to take him up on his offer and so smooth international relations into the future.

The potential for US leadership has survived remarkably well the loss of national status as an international creditor.   This has partly been a matter of luck.  In Asia, historical and territorial frictions among Japan, Korea, and China, have kept US participation far more welcome in the Pacific than it would otherwise be. Meanwhile, in Europe, fiscal follies have been even more egregious than America’s.  Asians are aware that the IMF has stretched the rules to lend into the euro crisis on a greater scale than it did during the Asia crisis of 1997-98.  They understandably feel entitled to a greater say in the running of the Fund.   But the emerging market countries have been so disunited, for example, that no two of them could come together in 2011 to support a common candidate for IMF Managing Director, notwithstanding that the three previous incumbents were European men who flamed out before completing their terms in office.  (The result was a European woman, Christine Lagarde.  She has done a good job rather than kowtowing to Europe; but that is beside the point.)

The latent demand around the globe for enlightened US leadership, which first appeared at the end of World War I, is still there.  It can survive budgetary constraints (and apparently can survive misguided military interventions).  But it cannot survive an abdication of interest on the part of the US Congress.

[This column appears at East Asia Forum. It is an extended version of an op-ed, titled “Absent America,” that appeared first at Project Syndicate.  The author would like to thank Joe Nye and Ted Truman for comments.]

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Combating Volatility in Agricultural Prices

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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.

 

The G-20’s efforts will culminate in the Cannes Summit in November. But, when it comes to specific policies, caution will be very much in order, for there is a long history of measures aimed at reducing commodity-price volatility that have ended up doing more harm than good.

 

For example, some inflation-targeting central banks have reacted to increases in prices of imported commodities by tightening monetary policy and thereby increasing the value of the currency. But adverse movements in the terms of trade must be accommodated; they cannot be fought with monetary policy.

 

Producing countries have also tried to contain price volatility by forming international cartels. But these have seldom worked.  

 

In theory, government stockpiles might be able to smooth price fluctuations, releasing commodities in times of shortage and adding to stocks when prices are low.   A free-marketer will point out that they can undermine the incentive for the private sector to hold stockpiles.  A valid response is that this incentive is undermined regardless, because political economy never allows “hoarders” to “price gouge” in times of food crisis.    It all depends on how stockpiles are administered.  The record in practice is not encouraging.

 

In rich countries, where the primary producing sector usually has political power, stockpiles of food products are used as a means of keeping prices high rather than low. The European Union’s Common Agricultural Policy is a classic example – and has been disastrous for EU budgets, economic efficiency, and consumer pocketbooks.

 

In many developing countries, on the other hand, farmers lack political power.  Some African countries adopted commodity boards for coffee and cocoa at the time of independence. Although the original rationale was to buy the crop in years of excess supply and sell in years of excess demand, thereby stabilizing prices, in practice the price paid to cocoa and coffee farmers, who were politically weak, was always below the world price.  In response, production fell.

 

Politicians often seek to shield consumers through price controls on staple foods and energy.  But the artificially suppressed price usually requires rationing to domestic households. (Shortages and long lines can fuel political rage as well as higher prices can.). Otherwise, the policy can require increased imports in order to satisfy the excess demand, and so can raise the world price even more.

 

If the country is a producer of the commodity in question, it may use export controls  to insulate domestic consumers from increases in the world price. In 2008, India capped rice exports, and Argentina did the same for wheat exports, as did Russia in 2010.

 

Export restrictions in producing countries and price controls in importing countries both serve to exacerbate the magnitude of the world price upswing, owing to the artificially reduced quantity that is still internationally traded. If producing and consuming countries in grain markets could cooperatively agree to refrain from such government intervention, working through the World Trade Organization, world price volatility could be lower.

 

In the meantime, some obvious steps should be taken.  It is too bad that the G20 attempt to do away with bio-fuel subsidies has failed, so far. Ethanol subsidies, such as those paid to American corn farmers, do not accomplish policymakers’ avowed environmental goals, but do divert grain and thus help drive up world food prices. By now this should be clear to everybody. But one cannot really expect the G-20 agriculture ministers to be able to fix the problem. After all, their constituents, the farmers, are the ones pocketing the money. The US, it must be said, is the biggest obstacle here.

 

It is probably best to accept that commodity prices will be volatile, and to create ways to limit the adverse economic effects – for example, financial instruments that allow hedging of the terms of trade.
 

What the G-20 farm ministers — meeting for the first time June 23 — have agreed is to forge an Agricultural Market Information System to improve transparency in agricultural markets, including information about production, stocks, and prices. More complete and timely information might indeed help.

 
The broader sort of policy that President Sarkozy evidently has in mind, however, is to confront speculators, who are perceived as destabilizing agricultural commodity markets. True, in recent years, commodities have become more like assets and less like goods. Prices are not determined solely by the flow of current supply and demand and their current economic fundamentals (such as disruptions from weather or politics). They are increasingly determined also by calculations regarding expected future fundamentals (such as economic growth in Asia) and alternative returns (such as interest rates) – in other words, by speculators.  

  

But speculation is not necessarily destabilizing. Sarkozy is right that leverage is not necessarily good just because the free market allows it.  And that speculators occasionally act in a destabilizing way. But speculators more often act as detectors of changes in economic fundamentals and provide the signals that smooth fluctuations. In other words, they often are a stabilizing force.

 

The French have not yet been able to obtain agreement from the other G-20 members on measures aimed at regulating commodity speculators, such as limits on the size of their investment positions. I hope it stays that way. Shooting the messenger is no way to respond to the message.

 

[This op-ed appeared via Project Syndicate.  Comments can be posted at that site.]

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