For poor nations, the easy monetary policies in advanced economies
are leading to big swings in capital flows that could destabilize
emerging markets. For rich countries, the hoarding of currency by
developing nations is blocking progress toward a more stable global
Those tensions, which have been brewing for years, seemed to be
rising as finance ministers and central bank chiefs from the Group
of 20 economies gathered last week in Washington, as evidenced by
harsh words from Washington and Delhi.
Both rich and poor say they are acting in their own self interest,
and what makes the conflict so intractable is that both have very
Even though the G20 agreed the global economy was on better footing,
the tensions suggested little progress ahead in rebalancing the
global economy away from a state where the rich world borrows
massively to buy things from the poor world.
"This is not a healthy place," Raghuram Rajan, governor of India's
central bank, told a panel ahead of the G20 meeting.
Rajan has become a leading agitator for reforming the global
monetary order, and he urged central bankers in advanced nations to
avoid experimental monetary policies that might hurt the global
He argued that years of easy money policies in the developed world
had pushed emerging markets to hold bigger dollar reserves so they
can intervene in currency markets to protect their economies from
big swings in capital flows.
The need to hoard is only growing, as it now appears that the United
States, Europe and Japan could keep easy money policies in place for
several more years.
"You have to consider the feedback or spillover effects on other
economies," Brazilian central bank chief Alexandre Tombini said of
rich nation policies, speaking alongside Rajan.
Developed countries, led by the United States, argue their stimulus
efforts are in the best interest of emerging nations because they
lift the global economy. They say the poors' reliance on currency
interventions is holding the world back.
Emerging markets often build dollar reserves by keeping their
currencies weak to spur more exports, forcing developed economies to
borrow to cover their import tab. Many economists feel heavy
borrowing by the world's biggest consumer, the United States, fueled
the asset bubble that sparked the 2007-09 financial crisis.
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"Resistance in many emerging markets to moving more quickly to
market-determined exchange rate regimes are hindering the
rebalancing needed to ensure a lasting, strong global recovery," a
senior U.S. Treasury official told reporters.
Officials in rich countries have largely rejected a call by Rajan
call for increased coordination of monetary policy.
Vitor Constancio, the vice president of the European Central Bank,
said a more cooperative approach among policymakers would work if
emerging markets allowed their currencies to strengthen more, but
that this had already failed.
"There was never the acceptance of some degree of appreciation in
the emerging economies," he said, speaking on the same panel as
Tombini and Rajan.
The root problem could be that central bankers are trying to do too
much because their governments are doing too little.
Most economists think politicians around the world could do a lot
more to help their economies grow. But rich nations are hesitant to
rely on deficit spending and poor countries habitually lag in
promoting competition in their markets.
If the governments stepped up, monetary policies wouldn't have to
play such an outsized role in spurring economic growth and
maintaining financial stability. Eswar Prasad, an economist at the
Brookings Institution and Cornell University, said this bodes poorly
for future global growth.
"We end up having the central bankers fight proxy battles on behalf
of politicians who are feckless and not willing to do the right
thing," he said. "I don't see this moving in a productive
(Reporting by Jason Lange; editing by Tim Ahmann)
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