On the February 15-16, 2013, finance ministers and central bank governors from G20 countries gathered to have a tete á tete on the financial markets. The resulting communiqué acknowledges “ that important risks remain and global growth is still too weak, with unemployment remaining unacceptably high in many countries… weak global performance derives from policy uncertainty, private deleveraging, fiscal drag, and impaired credit intermediation, as well as incomplete rebalancing of global demand.” In order to improve global performance, “ambitious reforms and coordinated policies are key to achieving strong, sustainable and balanced growth and restoring confidence”. Precisely what these reforms are remain to be seen; more perplexing, the difficulties in coordinating policies between countries with different interests and economic needs can oppose effective coordination. The Eurozone crisis is a case in point.
More on coordination later. One of the more pressing issues on the table at the meeting was the so called ‘currency war’ brewing. Shinzo Abe, Japan’s new prime minister, in a bid to kickstart the Japanese economy, has called for a weaker yen to bolster exports; it has fallen by 16% against the dollar and 19% against the euro since the end of September.The US were (between the lines) somewhat annoyed. Lael Brainard, the top US Treasury official for international affairs, while encouraging Japan’s attempts to rejuvenate the economy and arrest devaluation, was less enthused about weakening the yen. Such a move would result in cheaper Japanese products, stimulate domestic demand and increase exports. For the US, this could lead to capital outflows from country already desperate to reduce their own deficit, and make their own manufacturing sector less competitive leading to unemployment. It could also result in devaluations of currencies of different countries that are competing on the global market.
The G20 responded by saying that the talk of currency wars was overblown and that countries have agreed not to undertake competitive devaluation and target the exchange rate to achieve this aim. Yet, it is unlikely ministers left Moscow confident that this would be the case. There are many ways to devalue a currency, quantitative easing being a particularly useful tool especially as interest rates are so low. It is a tool that is being pushed by Japan and has been used by the US and the UK on a number of occasions, none more so today. At the same time, such currency war may not be a bad thing for the world economy. As Paul Krugman states “what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct. Expansionary policy is what the world needs, so why is this a bad thing?”
To state the obvious, the value of a country’s currency is important particularly in terms of investment into the country. Japan is a country that was recognised up to the 80s as one of the most productive economies in the world in large part due to the Japanese work ethic but also due to the rebuilding efforts post World War II. The investment into the infrastructure allowed Japan to prosper, but in the last 20 years capital inflows have been less forthcoming. Given the growth of other South Asian economies such as China, Indonesia, Singapore, etc., Japan have to find other means to build their economy especially as they are suffering from a growing old age population and lowering birth rates. If there is little investment, or a migration of talent into Japan, devaluation is not enough.
Therefore, a country needs to have a productive economy that can both meet the needs of its people and those to who it chooses to trade with. Ultimately, the problem with the Greek economy, and its failure to meet its debt burden, is that its productive capacity is failing to do either. There is evidence of a humanitarian crisis in Greece as the flows of basic foodstuffs are limited due to a lack of money. The Greek economy is chained by debt with creditors demanding the return of principle, but without a productive economy, it is difficult to see how Greece can meet its debts. Foreign investment is desired but any return is likely to go towards paying off debt. Hardly tempting for an investor.
In Egypt, the ongoing political malaise has resulted in a decline of the Egyptian pound against the dollar and a reduction of dollar reserves. Importers had had to go to the black market to purchase dollars in order to import goods as well as rely on Qatar to transfer billions of dollars to prop up reserves. It means that there are no adequate substitutes in Egyptian. Economists will point out to the argument of comparative advantage, but what products or services can Egypt offer the world? Consequently, Egyptian government are negotiating a $4.8 billion loan from the IMF to stimulate the economy, but without a strategy in how to develop the economy, the loan could be wasted and push Egypt further into debt.
Here we return to coordination. Nation states will be concerned about the interests of their own country but in a highly interconnected world, the actions in one country can have severe ramifications in another country. Barry Eichengreen’s comparative study on the expansionary monetary policy in the 30s and the present found that, “Improved export competitiveness for countries with depreciated exchange rates had as its counterpart worsened export competitiveness for other countries, with the magnitude of this spillover depending on the substitutability of domestic and foreign goods.” The less the substitution, the less the demand for foreign goods while the greater the substitution, the greater the demand. This makes domestic industry less competitive thereby increasing unemployment. It is this that a country has to be worried about. A less productive workforce has long term affects upon a country, especially if migration is limited. Coordination then becomes valuable when a non-pareto efficient situation, efforts can be transferred into another aspect of the economy. To explain, better coordination efforts are needed between countries to see that if a spillover effect is negative, then what other parts of the economy can be improved in order to offset the adverse effect.
Strategic planning between countries is therefore imperative. Multilateral organisations such as the World Trade Organisation and the IMF are excellent in coordinating countries although often the needs of a bigger country can supersede the needs of another. Each country needs to have an equal say and policy makers, academics, businesses and financiers need to discuss the best route to follow, particularly in terms of improving the real economy. But with issues of realpolitik, equal say is quite idealistic although decision makers have to ask themselves, has the alternative been any better?