Aldo Caliari

• Monetary policy changes in rich world are now starting – the reversal of the “currency war” years from the tapering, now hot money outflows
• The US is basically saying it is not our problem
• So we need to rethink reform of the monetary system – we missed an opportunity in 2011
• We are still centred around the US dollar as a currency of choice, when they focus only on domestic needs
• Many items on the menu for change – but we had very minimal changes in each area (capital flows, SDR, surveillance, financial safety nets, etc)
• Global coordination
• Can the IMF be the coordinator of surplus and deficit countries? To handle tendency to deflation
• Most of IMF work is on composition and value of foreign exchange reserves – implicitly blamed the Chinese; but the real issue is the current account
• To deal with current account – it is about boosting consumption on issues like wage policy and social protection
• IMF is ill-equipped to deal with this; surveillance traction is important, but this hasn’t changed since 2011, especially on governance
• Governance reforms are not enough
• Capital control
• Need to manage inflows to smooth out capital flows
• Institutional view did accept some of this, but still problems of stigma
• Developing countries need to be able to avoid currency appreciation earlier, especially to protect manufacturing sector
• Need to be able to use controls without fear of stigma – it can help deal with volatility
• Role of the SDR – Nothing happened in 2011, only thinking of a tiny tinkering of the basket rather than moving towards a real supra-national currency

Amar Bhattacharya, G24

• How did we get here
• Look at history of last five years – developing countries have massively worked to rebalance the global economy
• Excluding China and S Korea, EMDCs are driving global demand with current account deficit in aggregate bigger than US
• This was driven by monetary policy imbalances between rich countries and EMDCs – incentives are there for carry trade, and EMDC corporates to borrow abroad
• Triple play by markets – carry trade, currency appreciation, then short currencies in the crisis
• This is not a question of fundamentals – they were the same when the money went in and when it went out

Lessons

• You can’t take a benign view of currency movements, you need to have the degrees of freedom
• Views of the Fund were not appropriate – needed to be stronger on leaning against the wind and help countries do this
• Macroprudential regulations are pervasive and effective in EMDCs, but we need more in the source countries
• What are the risks? Spillovers and spillbacks are serious; biggest source of risk is prompt adjustment of interest rates; most vulnerable country is the US!
• What are implications for the architecture:
• Developing countries do not have deep pockets to match the unlimited swaps that advanced economies have
• The IMF is the only option for EMDCs, it has limited capital and availability
• We need to set IMF resources based on market perceptions, not “fundamentals”
• Global coordination – Janet Yellen speaks differently to G20 and the US audience

Bhumika Muchhala, TWN

• We need to focus on the political economy issues, this is not about the fundamentals
• The narrative is always about the economic fundamentals and the political instabilities (ie elections in the fragile five)
• US as the reserve currency issuer, it is the only country to be able to do QE like this; but its narrative was to use QE for US investment, but it all went abroad
• Search for yield – it is speculative financial trading, and this is roaring
• US narrative is also about boosting exports, the US motive was for competitiveness; US exports have spiked in the last few years; burden of adjustment shifted to emerging markets
• Raghu Rajan has spoken out on the end of QE and its impact; who is paying the cost keeps shifting, from peripheral Europe to EMEs
• GFSR – it says portfolio flows are responding to global conditions, not the fundamentals of the EMEs; despite higher reserve levels and more prudential policies
• Trend of contradictions within the IMF – rhetoric versus reality gap is immense

Discussions
Q: capital flows create volatilities, but on sovereign debt workout mechanisms – what would EMDC leadership look like?

Q: Raghu spat with Bernanke yesterday – 0-sum game building up; political economy of SDRs as a new reserve currency? US needs dollar depreciation to deal with US inequality?

Q: why don’t we see a stronger push on surveillance traction from the g24? What can we do to get surveillance right?

Amar:

• IMF is not completely silence on debt restructuring, G24 view is that we need something more fundamental. We need to raise the profile and get more attention, that it is in the G24 communique is a big move for us. We will use voice in UN and in the IMF. We support Argentina, the issue is not Argentina but the impact will be on LICs who are borrowing now in the markets.
• Is US/EU and Japan all did massive tightening at the same time we would have global disaster – clearly need to coordinate; but in the US the politics are that they need to focus on US interests only
• Not just India, Brazil is also interested. Mantega discusses “cascading inequities”
• On US dollar depreciation – the real difficult issues are the EU where there are internal imbalances. The US needs more demand, but I don’t think a massive depreciation is coming
• On surveillance – G24 stresses always on focussing surveillance on where it should, not where you can have traction; most important venue for surveillance is G20 – the MAP is a productive exercise – the right issues come out, and we shifted away from the US versus China debate
• We need a reality check on the rhetoric, community needs to set up metrics to evaluate the G20

Aldo – on SDRs, the US were clearly against, the French in 2011 didn’t want to antagonise the US; it would take the US to also push for the dollar not to be the reserve currency; but the nationalistic climate makes it difficult in the US

Bhumika – we need to also think about the reduction of EMDC dependence on foreign capital, work needed on a wage-growth led model of development