Another Start-Up: Global Financial Governance

Thursday, 18 April 2013, 1:00pm – 2:00pm

Panelists:

  • Kaushik Basu, Senior Vice President and Chief Economist, World Bank
  • Mauricio Cárdenas Santamaría, Minister of Finance and Public Credit, Colombia
  • Charles Dallara, Chairman of the Americas, Partners Group

Moderator:

  • Robin Harding, US Economics Editor, Financial Times

The world needs more monetary policy coordination

The 2013 Spring Meetings of the World Bank and International Monetary Fund (IMF) are likely to focus on the need for better coordination among the most powerful countries on economic, fiscal and monetary policy, according to members of a panel on global financial governance at the 5th annual Bertelsmann Foundation-Financial Times conference in Washington, DC.

"The palpable lack of coordination in economic policies among the major economies of the world, I expect, will be a source of considerable tension and debate," said Charles Dallara, chairman of the Americas for Partners Group.

Unilateral action by a major world government, such as Japan's new monetary easing, can send out ripple effects across the globe that have serious consequences for other countries. "We're at a great risk right now of seeing more monetary stimulus in the world, especially in the developed world, that can have very negative spillovers for growth in the emerging world," said Colombian Finance and Public Credit Minister Mauricio Cárdenas Santamaría.

The world economy is more connected than ever before, and the present time is especially delicate and in need of coordination, added Cárdenas Santamaría. That makes dramatic steps like Japan's easing or the US sequestration process especially damaging. "We can head in the direction of sustained recovery for the world economy as a whole or we can... actually end up in a situation that does not move forward but moves backwards," he warned.

The World Bank and IMF meetings are unlikely to result in a new coordination regime, but if they can at least lay a foundation for future discussions that would be sufficient, said World Bank Senior Vice President and Chief Economist Kaushik Basu. Japan's action is certainly understandable, given the state of the country's economy, but not so the unilateral action. If 20 major governments could work together and jointly announce any quantitative easing, it would erase the notion that the action was motivated by a desire for a cheaper currency.

"You will get the benefits of the easing without the exchange rate speculation," Basu said. "These things have collateral damage, and a lot of it is on the exchange rate."

It's a paradox that after an integrated world economy has fueled increases in living standards across the globe, there should be growing indications of nationalism, regionalism and parochialism in the major countries. The G20 has steadily declined in influence without being replaced by an alternative, Dallara noted.

"We're at that stage where the major countries have increasingly lost a sense of why they should be committed to global coordination. It may take another crisis to remind them of that," he said, also citing the Japanese easing. "It was an act of desperation and it was an act taken with virtually no regard for its global consequences. Do we really want to live in a world where arguably the second or third most important central bank in the world acts unilaterally in a way that is clearly going to have very strong implications for Latin America, for Africa, for the Middle East, and other parts of Asia?"

The 20 or 22 big economies with central banks should sit down together and coordinate on monetary policy, Basu said. That would rule out speculation that their individual actions are motivated by currency valuation or that an exchang- rate war was breaking out.

The challenge of coordination is how to limit the discretion of individual countries through some kind of international structure, said Cárdenas Santamaría. The IMF should also be empowered to hold each of its shareholders accountable to the commitments they make to the coordinating group, Basu said, suggesting a new name: “G Major”.

"In trade we have achieved a modicum of success through the WTO coordination," he said, noting there is also an international labor body. "We don’t have anything similar in terms of monetary and fiscal policy."

The US should be careful not to take for granted its position as reserve currency, nor to discount the importance of international coordination for the world's biggest economy, Dallara said. "The problem when you are a reserve currency is that you never realize that you are abusing the privilege of being a reserve center until it's too late," he said. "Is the US smart enough [to avoid this]? I don’t know."

Greater competition for the status of reserve currency would be healthy for the global economy, said Cárdenas Santamaría. More reserve currency options would make it harder for a single central bank to act based solely on domestic considerations without looking at international consequences. Another building block to the solution is greater IMF representation from countries whose currencies aren't yet considered for reserves.

Basu expressed optimism that coordination will eventually happen, perhaps with announcements of important global policies every three months. "I am very hopeful because I feel the costs are becoming so palpable of not coming together," he said. "We are pretty close to it."

Government leaders need to recognize that independent action is somewhat of an illusion, due to the interdependence of the global economy, Dallara said. "Right now we have very fragile publicly traded bond markets," he said. "Markets will again react with a sudden break of confidence if they perceive the major players... are fundamentally unable to work together."

Developing countries such as Colombia are aware that the benefits of higher US growth are a double- edged sword. Any capital inflow could reverse and wreak havoc. Not only monetary policy but financial supervision should be coordinated on a global basis, said Cárdenas Santamaría.

Finally, Basu called for new ideas and innovative proposals. For instance, when firms invest in developing countries, they should look beyond asset purchases to ideas such as subsidizing employment. "These are the kind of ideas we need to bring on the table in addition to coordination," he said.