October 12, 2010
The IMF’s semi-annual meeting in Washington this weekend has failed to produce concrete proposals aimed at avoiding a currency war. The unrealistic pressure put on China to allow the yuan to suddenly appreciate by 20 percent has been strongly resisted by Zhou Xiaochuan, the Chinese central bank’s governor. He had good reason to do that: a big rise in the yuan’s exchange rate would harm the Chinese economy by hurting exporters and by generating mass unemployment. Instead, he has proposed a gradual appreciation of the yuan by a few percentage points each year, a policy that incidentally George Soros found adequate during a recent BBC interview.
Underlying the currency crisis is sluggish growth in the West compounded by austerity measures which are weakening domestic demand. Not being able to rely on internal consumption for growth, countries are looking to export their way out of trouble and to allow their currencies to depreciate. This, in turn, leads to currency and trade wars and pressures politicians into adopting protectionist measures.
Sluggish growth in the West determines investors to look elsewhere for profits. Emerging markets and the eurozone economies are thus confronted with an influx of “hot money”, which makes their currencies appreciate quickly, hurting their exporting ability. This is why countries such as Brazil, Thailand, South Korea and even Japan are now in the process of adopting currency control measures aimed at diminishing the flow of hot money into their economies.
Currency problems are also caused by the existence of large trade deficits between China/South East Asia and US/EU economies. Since the 1980’s, the official neoliberal policy of many international corporations, especially Anglo-Saxon ones, has been the outsourcing of manufacturing to Asia. By concentrating on design, marketing, distribution and service (which represent some 70 percent of the total product price), Western corporations were thus able to reap huge profits, but hollowed out their home countries’ industrial base. Asian nations, at the same time, have amassed between 3 and 4 trillion USD in forex reserves as a result of their efforts and saving habits. They are now being blamed for the outcome of neoliberal outsourcing policies.
Unfortunately, there are no quick fixes to the ills of the global economy, as the same Zhou Xiaochuan pointed out at a post-IMF meeting press conference. Resisting currency wars, protectionism and inflammatory rhetoric, however, would be steps in the right direction for politicians worldwide. (sources: IMF Briefs, Reuters, Le Monde, The Guardian, Xinhua)Florian Pantazi