from Follow the Money

Should the IMF be silent on exchange rates?

February 3, 2006

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Treasury Under Secretary Tim Adams thinks the IMF should take exchange rate surveillance more seriously.   So do I

The IMF annual check-ups were originally focused on a country's exchange rate and its exchange rate regime.  But over time, they evolved into a report on pretty much every aspect of a country's economic policy except its exchange rate regime.  


These reviews were originally designed to enable the IMF to exercise "firm surveillance" over the exchange rate policies of its members.  ...  My central point is that the pendulum has swung too far in Article IVs. In its bilateral surveillance, the Fund focuses very heavily on domestic economic developments and policies, especially fiscal policy, and addresses structural, demographic, and longer-term factors in considerable detail. These items are admittedly important. But increasingly what is missing is a thorough assessment of exchange rate issues.

A couple of examples.

China's economy is vastly more productive than it was in 1997, or even in 2001.   It exports about three times as much as it did in 2001.  But don't look to the IMF's annual check-up on China for a clear opinion on whether China's exchange rate should have appreciated by more than 3% or so against the dollar over the past five years.  Or for an opinion on whether it made sense for the renminbi to depreciate against the euro from 2002-2004.

The IMF hasn't been willing to go further that calling for greater flexibility.  Yet it is hard for deficit countries to reduce their deficits unless surplus countries reduce their surpluses.   That implies more than just flexibility - it implies a renminbi appreciation.

The IMF's statements on China though are far from the most egregious example of the IMF tendency toward silence on exchange rates.  The Fund has not even called for Saudi Arabia to move toward greater flexibility.   Or to peg to basket that includes oil.  Saudi Arabia has the same exchange rate today that it had back in 1998.  And oil is worth just a wee bit more.   Why is the peg that was right for Saudi Arabia when oil was at $15 also right for Saudi Arabia when oil is $65-70?    Don't look to the IMF's report on Saudi Arabia for an explanation.

I certainly am no fan of the Bush Administration.  But so far, Tim Adams has handled the China portfolio relatively well.   He has sought to broaden the US-Chinese economic dialogue to include steps that China should take to increase its domestic consumption.   He has been pragmatic about the policies that China needs to adopt to stimulate consumption as well - the Bush Administration likes social insurance in China more than social insurance in America.    

And I have long thought that it made sense to multilateralize the discussion about China's exchange rate.  China's peg is not just an item of concern to the US.   It is an impediment to effective global adjustment.  It shouldn't just be a subject of heated discussion between the US and China.

Adams willingness to call for stronger IMF is also a bit of a change.  The IMF is a multilateral institution after all.  His predecessor, John Taylor, certainly did not hesitate to use the IMF to provide big bailouts loans during his time at the Treasury.  See Turkey, Argentina,  Brazil and Uruguay.  Yet before he came to the Treasury, Taylor had argued that IMF should be abolished.  He always seemed a bit embarrassed that he had ended up backing the big rescue (or bailout) loans he had criticized as an academic.  I suspect Taylor would have been far more reluctant to encourage the IMF to take an active role in exchange rate surveillance.   Taylor didn't particularly like the IMF, and he didn't like criticizing other countries' exchange rate regimes either. 


The IMF, of course, shouldn't confine its attention simply to countries running balance of payments surpluses either.  The deficit country - read the US -- also has a role to play in the adjustment process.   The US current account deficit can be thought of as US savings deficits.  Or more precisely, a shortage of savings relative to investment.  If the US government doesn't reduce its fiscal deficit, either private savings has to rise or private investment has to fall to reduce the overall current account deficits. 

Adams mentioned that the US is committed to reducing its fiscal deficit.  So did President Bush in his state of the union.  But Bush is also committed to making the tax cuts permanent, and staying the course in Iraq.   Last I checked, both cost money.  And I suspect those commitments are far more credible than Bush's commitment to reducing the fiscal deficit

Yes, the deficit fell in 2005.  But it is heading back up in 2006.  

The weakest part of Adams speech?  The section discussing what the US itself is willing to do to help bring about a more economically balanced world.

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