World Bank pleads for monetary coordination
Chief economist Kaushik Basu calls for coordinated central bank policymaking, amid fears over Fed-induced volatile capital flows in developing economies. He likens such an effort to avoid mutually assured currency destruction to the nuclear non-proliferation treaty.
The IMF annual meeting in Lima last week was decidedly gloomy on global growth prospects. However, the Fed’s more-dovish-than-expected posture in its September meeting and relative calm in China’s stock market after the summer rout calmed some of the more bearish sentiments. While the meeting largely focused on demand-side policies to stimulate consumption in the eurozone and the US, fund officials redoubled calls for emerging markets to enact supply-side reforms, given their relative lack of fiscal and monetary space to stimulate growth.
Yet a key plank of the global economic debate was missing: whether or not the Fed should look beyond its narrow domestic employment/inflation mandate to factor in the impact of its monetary stance on emerging markets and other global efforts to coordinate monetary policies.
In an interview with Euromoney, Kaushik Basu, the World Bank's chief economist, issues a call for monetary coordination.
In early September, you warned the Fed to delay rate rises, citing the potential for negative spill over in emerging markets. Has your thinking changed?
When the US tightens, you are going to have an exchange-rate movement that is sharper in a globalized world than in a non-globalized world
I am concerned about the asynchronous policies between industrialized countries’ central banks [and the developing world]. We have a 50-year-old globalized world in terms of capital flows, but the current level of financial globalization is at historic highs. When you have a bunch of countries injecting liquidity, you have more debt around. And when the US tightens, you are going to have an exchange-rate movement that is sharper in a globalized world than in a non-globalized world. I feel the US has this concern: that when it moves [to hike rates], it will have an exchange-rate movement.
Ultimately, the Fed will have to act despite this. When the Chinese volatility took place in August I was very worried that if the Fed was going to be moving very quickly I would see many of my client countries suffer. I believe we are seeing a more enlightened Fed, given its recognition that this is a more integrated global economy. Fates are tied in a way that they have not been in the past.
If it [the Fed] moves very quickly and the exchange rate moves, that will affect its exports, and the turbulence that is created in countries like China, Turkey, India is not going to be good for the US. I feel the mood is changing because China appears to be stable.
The space for [monetary] autonomy is shrinking because of the nature of the globalized economy.
In US, inflation did not pick up domestically during QE, but inflation was rising in places like Turkey, Vietnam and all around the world. It was rightly believed that even the US was losing its autonomy because money was spilling out of the country, and QE was not doing what it was supposed to do.
In addition, technology is bringing labour pools ever closer. That is causing a lot of unemployment pressure in developed markets [through offshoring]. This is curbing the autonomous space for policymakers.
One thing you have to do as a consequence of all this is empower multilateral organizations.
If the currency-war worry gets big enough, we will see the pressure for a non-proliferation treaty grow. We can use organizations like the World Bank/IMF, G20 to bring countries to a common table and say: 'Look, the policies that once worked were when countries were nicely shielded from other countries.'
Do you remain a fan of conventional inflation-targeting frameworks for emerging economies?
I feel emerging-economy central banks imitate rich-country policies. They have learned the rules from rich countries. But it’s a diverse world. I think emerging-market central banks ought to be more experimental.
How concerned are you about China?
If China’s growth drops to below 4%, it would cause big worries.
But China is such a puzzle. If you had China’s growth and you didn’t know China’s economic structure, you would say its high growth rate is because of the fact it is a market economy. In China, however, the state-owned enterprises represent 40% of GDP, but in India it’s only 14%. According to textbooks, therefore, China should not be functioning, with such a large SOE structure. China has defied the laws of textbook economics for many years, certainly from 1978 – even before that.
But there comes a time for China to step back [from heavy interventions in the economy]. It’s such a powerful government, it is difficult to resist the temptation to step back. It can forestall a crisis with interventions.