Averting a war

The decision taken by the finance ministers of G-20 countries in South Korea on Saturday to avoid competitive devaluation of their currencies may help to avert a currency war that was looming large. The currency crisis, brought about by the differential rates of growth, with developing countries growing at a faster pace than the developed ones, especially the US, could have led to a trade war and resort to increasing protectionist measures.

The US, which wants to boost its economy through increased exports, encouraged a slow devaluation of the dollar, leading to an appreciation of the currencies of other countries, including India. This not only made exports from the developing countries costlier but also led to the flooding of these countries with cheap dollar. The funds available in the US at zero interest rates moved to emerging markets where there were high returns. India also saw the consequences of this shift of funds with a surge in stock markets. This could lead to higher inflation in these countries and cause turmoil if the fund flow suddenly reversed.

Some countries like South Korea and Brazil had even taken steps to prevent the inflow of unwelcome dollars, and others were debating the need to take their own measures. These could have created tensions and worsened the crisis. Last week’s agreement may have temporarily prevented an aggravation, but more effective decisions may have to be taken at next month’s G-20 summit in Seoul. The US plan to print billions of dollars and let them loose in the market in the coming weeks may be frowned upon by others.  The ministers also agreed that the International Monetary Fund (IMF)  will monitor the implementation of the norms agreed to last week.

The decision to make the IMF more representative of the economic power balance in the world through some long-sought-for steps will also make  that task easier. The vote share of the emerging countries in the IMF has gone up from 39.5 per cent to above 45.5 per cent, and  Europe will give away two of its seats in the 24-member IMF board to these countries. They contribute more than 48 per cent of the global GDP.

The share is growing and they are entitled to still better representation and a bigger say. However, the bigger emerging countries—China, India, Brazil and Russia—are among those with the 10 largest quotas now, and this has increased the legitimacy of the institution.

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