What multilateralism means in Washington

Mark Thoma brings up IMF' new policy of surveillance on exchange-rate policies and quotes from a piece by IMF Managing Director Rodrigo de Rato on the subject. He refers to an earlier post of mine and encourages me to return to the topic as I had promised.

I will do that at some point, but for the moment let me just point to the obvious hypocrisy at work here. Rato writes: 

This reform represents a victory for multilateralism that demonstrates ownership of how Fund surveillance will be strengthened and members' willingness to live up to their responsibilities in the process.

A victory for multilateralism? He has got to be kidding. The new policy was instituted at the behest of the United States, with the express purpose of bringing pressure on the Chinese.

And when the IMF staff took "multilateralism" seriously and reported its view that the dollar was overvalued, they were told to mind their own business and not to meddle with U.S. policies. So while we shall see plenty of reports coming out of the IMF on the undervalued Remninbi, don't expect anything on the dollar soon. 

Comments

[conundrum]

It's true that the IMF surveillance of exchange rates is probably just another tool of US foreign policy. But suppose for a second that we live in a perfect world in which the IMF truly does its best to monitor exchange rates. Where is the welfare gain in such a world? What’s the externality the IMF is fixing here?

[hari]

Dani-

I think it's high time to close down not only IMF but also IBRD.

Multilateralism, in D.C., means screw all other's but not US! Hands Off!

[Justin Rietz]

I share similar sentiments to conundrum and hari, though I might not express them quite the same way :-)

For free marketers such as myself, constant intervention by the U.S. in non-U.S. economic matters is quite painful. As the U.S. is often held up as the symbol of capitalism around the world, its meddling lends credence to critics' claims that the U.S. benefits (true or not) at the cost of others, not because it is a bastion of free market economics but because of its political power.

I also see a pit of unforeseen consequences. Call it the economic version of "blowback." The U.S. does not make many friends by imposing its will on others, and this makes future interaction with foreign nations all that more difficult (I am thinking specifically of trade negotations).

Along these same lines, I question how effective controlling exchange rates can be. I am hard pressed to think of a scenario where exchange rate manipulation doesn't have some fairly significant negative externalities. As I often argue, the complexity of the world economy is too great for mathematical models to capture, and trying to manipulate the currency market based on such models is fraught with risk.

[Aqdas Afzal (Pakistan)]

Dear All:

I have a couple of questions. Would appreciate if someone could answer these:

First, granted that the US wants to improve its terms of trade vis-a-vis China by having the IMF pressurize her into realistically valuing her currency. Would this really improve the US bilateral defecit with China? What would the Chinese import from the US especially since China is producing almost everything over there. Is there another mechanism at play here?

Second, are the Americans banking on the fact that a appreciated Chinese currency would make American exports relatively cheaper to other international buyers and thus reducing the overall defecit?

I think undervaluation might work well in China, which gets most her inputs from China itself. However, having undervalued currencies in developing countries like Pakistan that do not have significant raw material resources (they have to import these), only adds to making the final product for export more expensive -- thus loosing any would-be advantages that might have accrued through an undervalued currency.

[hari]

Dani- It's seems there's little reaction to "mutilateralism".

In my opinion, in this 21st Century, after last Gatt/WTO rounds, it's imperative now that for multilateralism to function/provide added value to global market, G-8 have a responsibility to re-make the global negotiations playing ground, and invite China, India, Brazil, SAfrica into the "official" group and rename it!

Unilateralism, a la GWB, has been a devastating defeat/polarizing the global political process and screwing up all our achivements hitherto.

Unless (and until!) the global playing ground is finally levelled, and G-8 recognizes their long term comparative (dis)advantage vis-a-vis China and India, in particular, current BrettonWood Institutions cannot be the facilators; they will become the final bottleneck of the process!

Why?

Because of its weighted voting system which gives OECD members unparallel influence in all critical instituitional decision-making.

[paine]

dr
its absolutely
not about the over valued north currencies
because they make for huge trans nat inc profits off

north--> south
exported capital

and

south--> north
imported products

china bashing has another objective

force open
the PRC's capital markets

[Emmanuel]

Dr. Rodrik--spot on. I had the same reaction three months ago:

http://ipezone.blogspot.com/2007/06/is-imf-americas-lackey.html

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