By Philip Fernando, former Deputy Editor, Sunday Observer, Sri Lanka

Currency wars have heated up with charges that Chinese renminbi (yuan) is under-valued. The Chinese countered that banking policies and lowered interest rates in the West caused the trade imbalance. The exchange rate battle is seemingly indicative of the fading economic clout of many Western economies.

ƒÆ’-¡ƒ”š‚ Economies with under-valued currencies tend to amass high export incomes and enhanced trade balances. Creditor countries like China and Germany have reaped much better than debtor countries like USA and Britain.

ƒÆ’-¡ƒ”š‚ The divergent anxieties in general over Chinese currency policy and the lowered banking rates response of USA have spawned a dilemma for those attempting to secure international economic cooperation since the financial crisis of 2008.

Obviously the United States has lost some of the standing required to shape global policy. Not only is Wall Street viewed by many as having initiated the world financial crisis, but also, a number of countries fear that policies by the Federal Reserve (US Central Bank) are pushing down the dollarƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s value – the same kind of currency weakening for which the US administration has criticized China.

Rhetoric versus persuasion

For one thing, China has adroitly deflected criticism of its currency policies by pledging to move at a gradual pace and by pointing to other sources of global imbalances. Western diplomats are trying to strike the right balance between forceful rhetoric and patient persuasion in pressuring China to revalue the renminbi. Cajoling has not worked.

ƒÆ’-¡ƒ”š‚ Complicating the effort is a dispute between the United

States and Europe over how to change board representation within the IMF to give greater voice to the fast-growing economies that are propelling global growth. The Americans want those emerging economies, especially China, to have more representation and thus take on more responsibility. But Europe is reluctant to give up some of its positions on the board.

ƒÆ’-¡ƒ”š‚ The inconclusive IMF stand on the issue means that the renminbiƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s exchange rate will again be a focus when USA and other leaders of the Group of 20 economic powers gather in November in Seoul, South Korea. Many expect the United States to keep up pressure on China between now and that meeting.

Asian-Latin economies fare better

ƒÆ’-¡ƒ”š‚ The crisis has shifted influence away from the bigger powers toward Asia and Latin America, whose economies have weathered the recession much better-in comparison to those of the United States, most of Europe and Japan.

ƒÆ’-¡ƒ”š‚ Most economists believe that Asian and Latin economic models are now dominant. ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-We have come to the end of a model. The time that seven advanced economies can make decisions for the world without consulting the emerging countries is a goner,ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚ said one European official involved in the talks at the IMF recently. ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-Like it or not, we simply have to accept it,ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚ he added.

ƒÆ’-¡ƒ”š‚ The apparent volatility of the situation made China reduce the depreciation of its currency somewhat this year without acceding to the pressure for China to act hurriedly or show a seemingly conciliatory gesture and stand with it at the forefront of the debate.

ƒÆ’-¡ƒ”š‚ In general, the Europeans have taken a far more appeasing line toward China. The French Finance Minister Christine Lagarde, said recently, ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-ItƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s not helpful to use bellicose statements when it comes to currency or to trade.ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚ Need to avoid confrontation is markedly felt.

IMF in the middle

Thomas Kleine-Brockhoff, senior director of policy programs at the German Marshall Fund of the United States, which promotes trans-Atlantic cooperation, warned that ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-things are moving from a consensual to a more confrontational period in global economic governance.ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚

ƒÆ’-¡ƒ”š‚ The 187-member IMF has never been forced into making decisive collective action rather than the customary gradual, incremental fashion associated with changes in national economic policies.

ƒÆ’-¡ƒ”š‚ True, everyone wanted greater attention on the currency problem and for the IMF to play a greater role in monitoring its membersƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢ exchange-rate practices. But the ƒÆ’‚¢ƒ¢-¡‚¬ƒ”¹…”spillover effectsƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢ of each countryƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s economic policies on the rest of the world are too complex.

ƒÆ’-¡ƒ”š‚ A letter issued recently from the IIFƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢s Managing Director Charles H Dallara warned that the world economy faced a situation as critical as that confronted in the early months of 2009. At that time industrial production, world trade and stock markets were contracting at a faster rate than the corresponding period following the October 1929 share market crash. ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-As countries struggle to cope individually with the lack of upward momentum in global growth-and in many cases unacceptably high unemployment-urgent action is needed to arrest the disturbing trend towards unilateral moves on macro-economic, trade and currency issues,ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚ he wrote.

ƒÆ’-¡ƒ”š‚ Calling for policymakers to engage in unilateral negotiation to deliver a set of consistent and mutually-reinforcing measures to address the problems, Dallara warned that a ƒÆ’‚¢ƒ¢-¡‚¬ƒ”¹…”communiquƒÆ’‚¢ƒ¢-¡‚¬ƒ…‚¡ of platitudesƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢ from the G20 next month only risked further undermining market confidence. Obama Adviser and Treasury Secretary Tim Geithner has labelled currency issuer the ƒÆ’‚¢ƒ¢-¡‚¬ƒ”¹…”central existential challenge of cooperationƒÆ’‚¢ƒ¢-¡‚¬ƒ¢-¾‚¢.

ƒÆ’-¡ƒ”š‚ ƒÆ’‚¢ƒ¢-¡‚¬ƒ…-Getting the world to buy into a stronger set of norms and behaviours on these issues seemed an impossible task. There is no specific mechanism in the IMF or G-20 that would lead to consensus. Avoiding a looks up to the challenge,ƒÆ’‚¢ƒ¢-¡‚¬ƒ”š‚ he said. There is a dire need to change that by encouraging countries to act more multilaterally. G-20 leaders have their work cutout in November.