Overvalued club debate


HONG KONG — American domination of the world economy was challenged last week at the Group of 20 summit in Seoul much the same way that Barack Obama’s Democrats were mauled in this month’s U.S. congressional elections, which the president termed a “shellacking.”

Several countries took on the once almighty United States and declared that the leaders of a broken economy had no business trying to tell fast-growing countries what to do.

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, gave a diplomatic summing up of Seoul, declaring: “This G20 was more of a G20 of debate than a G20 of conclusions.” The failure to achieve anything more than bland promises like the patently untrue “pledge to continue our coordinated efforts and act together” raises doubts about the usefulness of the G20 itself.

Most important, there is clearly no international body with the vision and the political clout to pull the fractious countries together and to suggest practical and constructive ways of solving intractable economic problems.

The spat between the U.S. and China continued after G20 members had gone home or on to the Asia-Pacific Economic Cooperation summit in Yokohama, where the leaders uttered more pious declarations about free trade, but without sketching a map of how to get there. The U.S. president told reporters bluntly after the G20 that the yuan is “undervalued” and that China “spends enormous amounts of money intervening in the market to keep it undervalued.”

China had cleverly taken the high road. Commerce minister Chen Deming in Macao said that China “doesn’t support” monetary easing that causes “imported” inflation in developing countries since such inflows increase the risk of asset bubbles. Jin Zhongxia of the People’s Bank of China added: “Major reserve issuing countries excessively print money to get out of their own economic difficulties, posing a policy dilemma for emerging economies. That will impose greater pressure on capital inflows, bigger bubbles in asset markets and inflationary pressure.”

If Obama had hoped to persuade the G20 of the problems that China was causing by keeping the yuan undervalued, he failed. He clearly underestimated the anxiety and the anger that the renewed policy of quantitative easing by the Federal Reserve had caused, particularly among countries that have seen their currencies rise against the dollar and now face pressures from capital inflows.

The U.S. president failed to convince fellow industrial nations that China was the main culprit. Germany has an even larger current account surplus (5 to 6 percent) than China (4 percent) when measured against gross domestic product. Some economists are already speaking of the pair as “Chermany.”

Berlin has expressed anger both about quantitative easing and about the general policies pursued in Washington. In an outspoken interview with Spiegel before the Seoul summit, finance minister Wolfgang Schauble damned the Fed’s decision to pump $600 billion into the economy, claiming: “There is no lack of liquidity in the U.S. economy. The Fed’s decisions bring more uncertainty to the global economy. They make it more difficult to achieve a reasonable balance between industrialized and emerging economies, and they undermine U.S. credibility when it comes to fiscal policy. It’s inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.”

Germany has a big problem with the U.S. economic model, Schauble said: “The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in deep crisis. The U.S. lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and midsized industrial companies.”

The G20 was heralded as the best international idea since sliced bread when the leaders in London last year pulled together to avert the looming global financial crisis. The group was hailed as the new model for global economic policy coordination, especially since its members account for 85 percent of global GDP and it is the only forum where developed and developing countries meet on a basis of equality.

The best that can be said of the outcome in Seoul is that the declaration managed to paper over disagreements, but when you see expressions such as “The concrete steps we have taken will help ensure we are better prepared to prevent and, if necessary, to withstand future crises. We pledge to continue our coordinated efforts and act together to generate strong, sustainable and balanced growth” — it’s time to run for the hills. Where’s the concrete?

America clearly does not understand the pent-up antipathy in the world to being bossed around plus the feeling that American profligacy and financial greed got us all into the mess. At APEC in Yokohama, Obama got a warmer reception, not least because of hopes that U.S. security will help resolve territorial disputes with China.

China played a clever political game, aided by American blunders. But Beijing’s reluctance to understand that its currency and trade surplus are part of the problem is becoming dangerous. A few economists, such as Jim O’Neill of Goldman Sachs, believe that the idea of a “currency war is like some kind of romantic fiction in people’s minds.” But it is hardly romantic, and even if China’s trade surplus comes down to 3 percent of GDP, it still presages problems.

Beijing is right that there is no quick fix, any more than there is an instant fix to the U.S. deficits, but workable plans for the return of the U.S. to solvency and for China’s growth to rely on consumption rather than exports would be of benefit — especially for China — and might produce a happy ending to the fiction.

It might help if there were a G20 secretariat to develop the nucleus of loyalty to the G20, as opposed to individual national loyalties. But that is a long way off, not least because the G20’s home is not permanent and is set to wander in 19-year-cycles.

Probably the best that can be done is for the IMF, with help from the World Bank and World Trade Organization, to raise its game and work out practical scenarios. Unfortunately all of these bodies are headed by Westerners, and next year’s G20 summit is headed for France.

Kevin Rafferty, formerly in charge of the Financial Times’ coverage of Asia, is editor in chief of PlainWords Media.