by Morris Goldstein, Peterson Institute for International Economics
Op-ed published in Korean in JoongAng Ilbo
December 9, 2003
and in English in JoongAng Daily
December 11, 2003
© JoongAng Ilbo
After the troublesome experience with competitive depreciations in the 1920s and 1930s, there was a consensus that international rules were needed to discourage “beggar-thy-neighbor” policies. Indeed, this was one of main motivations for establishing the International Monetary Fund. Under the IMF’s charter, each member country agrees to avoid manipulating exchange rates to prevent effective balance-of-payments adjustment or to gain an unfair competitive advantage over other countries. In addition, the IMF is charged with overseeing the compliance of each country with these obligations.
A key question is what constitutes exchange rate manipulation. This question has recently taken on increased prominence in the ongoing debate about the appropriate value for the Chinese currency, the renminbi (RMB). Korea has an important interest in this debate. Not only is the exchange rate of the RMB material for Korea’s competitiveness, but also Korea itself was on several occasions in the late 1980s classified by the US Treasury as an exchange rate “manipulator.”
In thinking about exchange rate manipulation, three points merit emphasis.
First, certain kinds of exchange market intervention are suggestive of manipulation. Under the IMF rules, countries can “fix,” “float,” or adopt a wide array of intermediate exchange rate regimes. Also, countries are permitted to intervene in exchange markets and are expected to do so when intervention is necessary to counter disorderly market conditions. But countries are not permitted to engage in protracted, large-scale intervention in one direction in the exchange market. The latter is an indication that the country is seeking to maintain, via intervention, the “wrong” exchange rate. In the case of the Chinese RMB, there has been prolonged, large-scale exchange market intervention in one direction for the better part of two years.
Second, just because a country maintains a fixed nominal exchange rate over an extended period of time does not mean that it cannot be manipulating its exchange rate. What counts is how a country’s real (inflation-adjusted), trade-weighted exchange rate has been behaving against the backdrop of its overall balance-of-payments position. True, China’s nominal exchange rate has been fixed at roughly 8.3 RMB per US dollar over the past eight years. But it also true that the US dollar has been falling on a real, trade-weighted basis over the past 20 months or so, and that the real, trade-weighted value of the RMB has been falling along with it—and this at a time when China has been running surpluses on both the current and capital accounts in its balance of payments and has been experiencing very large increases in international reserves. A balance-of-payments surplus and large reserve accumulation call for an appreciating real exchange rate—not a depreciating one, and lack of movement of the nominal exchange rate in such circumstances hinders effective adjustment.
Third, it is crucial that judgments about exchange rate manipulation be made in a nonpoliticized way and that the IMF take seriously its surveillance obligations in this area. Otherwise, currency manipulation will be evaluated in a bilateral context, with less attention to the right fundamentals (see, for example, a set of bills now before the US Congress that seek to penalize China for its alleged currency manipulation).
Unfortunately, the IMF has provided little assurance that it is prepared to enforce international rules on currency manipulation. During the past 25 years, there have been only two cases (Sweden in 1982 and Korea in 1987) in which the IMF was willing to send a special mission (a so-called “supplemental consultation”) to investigate an exchange rate problem. In the case of the RMB, the IMF has said that it favors increased flexibility but has suggested that the timing of such a move should be left to the discretion of the Chinese authorities; imagine the reaction if a WTO panel found a country guilty of breaking the international rules on trade policy but left the timing of the correction (or of the retaliatory action) to the discretion of the offending party. Moreover, the IMF has so far failed to place the under-valuation of the RMB within an appropriate global perspective. The US current-account deficit—projected to be on the order of $550 billion this year—is much too large. Its reduction to a more sustainable level is clearly in the global interest and requires, among other policy measures, a further depreciation of the US dollar. A dollar depreciation of the needed size will be difficult to achieve without an appreciation of Asian currencies (which, inclusive of Japan, account for roughly a 40 percent share in the trade-weighted dollar). And most Asian economies will not permit much exchange rate appreciation to occur unless the RMB appreciates. A misaligned RMB is thus of greater systemic consequence than a simple calculation of China’s share of global trade would suggest.
Given the increasing weight of emerging economies in the global marketplace, controversy over alleged currency manipulation will not go away anytime soon. International norms for exchange rate policy are no less necessary than those for trade policy. Korea should support efforts to see that the currency manipulation issue is addressed seriously, even-handedly, and expeditiously within the IMF.