Mareeg.com-NEW YORK – There was a remarkable similarity between European Central Bank President
Mario Draghi’s statement after a recent meeting of the ECB Governing Council and US
Federal Reserve Chair Janet Yellen’s first testimony to Congress: both asserted that
their policy decisions would take into account only domestic conditions. In other
words, emerging-market countries, though subject to significant spillover effects
from advanced economies’ monetary policies, are on their own.
This confirms what emerging-country authorities have known for a while. In 2010 –
following the Fed’s announcement of a third round of quantitative easing – Brazilian
Finance Minister Guido Mantega accused advanced countries of waging a global
“currency war.” After all, advanced economies’ policies were driving large and
volatile capital flows into the major emerging markets, pushing up their exchange
rates and damaging their export competitiveness – a phenomenon that Brazilian
President Dilma Rousseff later referred to as a “capital tsunami.”
Recently, the impact of the advanced economies’ withdrawal of monetary stimulus has
been just as strong. Since last May, when the Fed announced its intention to begin
tapering its asset purchases, capital has become less accessible and more expensive
for emerging economies – a shift that has been particularly painful for countries
whose large current-account deficits leave them dependent on foreign finance. In
response, Raghuram Rajan, Governor of the Reserve Bank of India, has called
advanced-country policies “selfish,” declaring that “international monetary
cooperation has broken down.”
To be sure, emerging economies have plenty of their own problems to address. But
there is no denying that these countries have been victims of advanced economies’
monetary policies, which have increased capital-flow volatility over the last three
decades. According to the International Monetary Fund’s April 2011 World Economic
Outlook, though the volatility of capital flows has increased worldwide, it is
higher in emerging market economies than in advanced economies. Boom-bust financial
cycles are driven largely by shocks generated in advanced economies, but they are
key determinants of emerging markets’ business cycles.
Moreover, the spillover effects of advanced economies’ monetary policies extend
beyond financial shocks. Emerging economies are also suffering from the effects of
developed countries’ external imbalances – particularly the eurozone’s swelling
In the last few years, the deficit economies of the eurozone’s periphery – and, more
recently, Italy – have undertaken massive external adjustments, while Germany and
the Netherlands have sustained their large surpluses. As a result, the burden of
offsetting the eurozone’s rising surplus has fallen largely on emerging economies,
contributing to their growth slowdown.
Such spillover effects are precisely what international policy cooperation – such as
the “mutual assessment process” that the G-20 established in 2009 – was supposed to
prevent. The IMF has created an elaborate system of multilateral surveillance of
major countries’ macroeconomic policies, including the “consolidated multilateral
surveillance reports,” the spillover reports for the so-called “systemic five” (the
US, the United Kingdom, the eurozone, Japan, and China), and the “external sector
reports” assessing global imbalances.
But this system has proved to be utterly ineffective in preventing spillovers – not
least because the Fed and the ECB simply ignore it. Given that the US dollar and the
euro are the top two international reserve currencies, spillovers should be
considered the new normal.
Adding insult to injury, the $1.1 trillion appropriations bill for
federal-government operations agreed last month by the US Congress does not include
any money to recapitalize the IMF, the main instrument of international monetary
cooperation. That decision represents yet another setback for IMF reforms aimed at
increasing the influence of emerging economies.
Given the considerable benefits that stable and prosperous emerging countries bring
to the world economy – exemplified by the role that they played in propping up
global growth in the wake of the recent crisis – it is in everyone’s interest to
change the status quo. The G-20 and the IMF’s International Monetary and Financial
Committee must work to align reality with the rhetoric of macroeconomic-policy
cooperation. For that, the recent statements by Draghi and Yellen should be treated
as ground zero.
José Antonio Ocampo, a professor at Columbia University, has served as United
Nations Under-Secretary-General for Economic and Social Affairs and as Minister
of Finance of Colombia. He is the co-author (with Luis Bértola) of The Economic
Development of Latin America since Independence.