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The agenda: Currencies

Progress may be slow, but G20 leaders moving in right direction Add to ...

The last big attempt to bring order to the global economy occurred during the Second World War. It took some doing. The negotiations that resulted in the Bretton Woods accords began in October, 1942, and ended in December, 1945.

Changing the world order takes time. Group of 20 leaders, who gather for their fifth summit this week in Seoul, have been meeting as group for only two years. There is reason to question their commitment to solving the thorniest issues. The group still hasn't figured out a way to let systemically important banks fail, and the Doha trade talks remain in a coma. Add the mostly rhetorical "currency war," and there is lots of fodder to make the case that the G20 is failing. A closer look suggests something else. G20 officials have made more progress at bringing order to the international economy then they tend to get credit for.

The G20 is a chaotic assembly that is still figuring out how to work together. The Bretton Woods negotiations amounted to economist John Maynard Keynes, representing Britain, trying to dislodge the United States from its initial position. No one country dominates today as the U.S. did after the war. Mr. Keynes was supremely frustrated by the Americans, but it is by no means obvious that he would fare any better in today's menagerie of competing global interests.

If one believes in the free flow of ideas and perspectives, this is all for the good. Yet some of the critics appear to miss the days of hegemony.

They bemoaned the failure of finance ministers and central bankers to negotiate a formal end to currency tensions last month at the annual meetings of the International Monetary Fund in Washington and a plenary session for the G20 summit in Gyeongju, South Korea, a couple of weeks later. Last week, decisions by several major central banks to do quite different things prompted more anxiety about the breakdown of international co-operation.

Actually, something that resembles a system is starting to take shape. It isn't formal in the way Bretton Woods - which broke down in 1971 - demanded that the countries fix their exchange rates. Nor is it entrenched enough to ensure success. But with a little good faith, some academics and former government officials say it could make a difference.

In Seoul, leaders will discuss the U.S. proposal to set a limit for trade surpluses and deficits. In Gyeongju, U.S. Treasury Secretary Timothy Geithner suggested targeting the current account balance, which measures the difference between the money a country earns from exports and inward investment and the cash that leaves the country through the opposite channels.



Geithner pulled a rabbit out of the hat. Wendy Dobson, Rotman School of Business




Excessive current-account surpluses or deficits reflect the mismatches in the global economy that set the stage for the financial crisis. Exchange rates are an important determinate in the direction of trade, but not the only one, therefore the G20 could have a conversation about risks to global stability without a direct focus on the politically sensitive issue of currencies.

"Geithner pulled a rabbit out of the hat," said Wendy Dobson, the co-director of the Institute for International Business at the University of Toronto's Rotman School of Business and a former associate deputy minister in Canada's Finance Department. Before the IMF meeting, Prof. Dobson said there was little evidence of progress at the G20. Heading into Seoul: "I'm very optimistic."

Setting Targets

A current-account target would achieve two things. One, it would make help G20 governments sell difficult policies at home. (Debt-burdened advanced economy to voters: "Yes, we're lifting the retirement age, but the Asians are raising their exchange rates.") Second, a target would strengthen the peer review process. This effort got a significant push late Friday when the IMF's board of directors agreed to a reallocation of voting shares that will strengthen the clout of China and other emerging markets, while diminishing the role of older powers such as Belgium. This means the IMF is finally in a position to act as a legitimate arbiter. But the job of holding the G20 to account would be made easier with a defined standard to hold those countries against.

Critics will say these targets are meaningless without a penalty for missing them. But there is a penalty: falling out of favour with international investors.

Too little is made of how the growing use of "naming and shaming" in recent years has brought about policy change. The World Bank's annual reports on the ease of doing business in its member countries has created a scramble in many emerging markets to clear away red tape in order to achieve a higher ranking in the hope of luring capital.

The Organization for Economic Co-operation and Development has used a similar approach to get international tax havens to allow more transparency. The OECD, the World Trade Organization and the United Nations have published regular reports on protectionist trade-and-investment measures since the start of the recession, which have helped avoid the reactionary policies that exacerbated the Great Depression. "No one wants to be on that list," said Ngaire Woods, an expert on global governance at Oxford University.

A system that relies on moral suasion isn't perfect. But it's more than was in place before the financial crisis. The leaders of the G20 just have to show they are serious. Seoul is the test.

 

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