There is a saying in Hindi, “Ab aaya oonth pahad ke neechay”. This means that someone has suddenly agreed to see reason. No better example of this can be found than in a recent IMF blog which says it’s okay for central banks and governments to intervene in foreign exchange markets. This, after years of saying it was sinful to do so but also, equally absurdly, looking away when it happened.
It depended on who was doing it. India was always lectured more sanctimoniously than, say, China. And of course never the West.
The publication I am referring to is a blog on the Fund’s website. Blogs are not the official view. But if they are on your official website they acquire some salience. That’s why I felt it was important to draw attention to it.
This is what the blog says: “Intervention, when appropriate, should be used as part of an integrated policy approach that incorporates other policy levers to mitigate risks.” This is what India has been saying for three decades.
The IMF’s economists say they have done a lot of research in 2019 and 2020 to develop a ‘conceptual and quantitative framework’. Result: go ahead and intervene to your heart’s content because, hey, guess what?
“Cross-border capital flows provide significant benefits but may also generate or amplify shocks.” This is what Kaushik Basu said back in 2011 when the term ‘tsunami of dollars’ was coined. He was told not to be a cry baby.
Vulnerable to swings
The blog goes on to say that economies “can be particularly vulnerable to swings in international capital flows.” Till now the IMF’s solution to this was to use completely flexible exchange rates to equilibrate the exchange rate. But this isn’t any good any longer, it seems. Cholbe na, as the Bengalis say.
The blog says “…flexible exchange rates may not offer full insulation from external shocks, for example, when financial markets do not work perfectly.” Indian economists and the Indian government have been saying this since 1991.
You only have to read the late SS Tarapore’s writings and his two reports when he chaired two successive committees on capital account convertibility. His message was simple: no full convertibility till the fiscal deficit is under control.
The blog also says that countries tend to play it by ear when they face problems. To prevent this the IMF has developed an integrated approach to help them find better solutions. This is like the bishop developing a handbook for adultery.
The victims of uncontrolled printing of dollars by the US may well say thanks, but no thanks, we have long memories. The last time we took your advice we landed in the Asian financial crisis.
But derision for the IMF aside, the non-US, non-Western economies have to deal with both the immediate problems of volatility and the medium term problem of the global reserve currency being at the mercy of American politicians.
It is also the economic equivalent of a monkey with a machine gun. Such a monkey causes both risk and uncertainty. The risk is you don’t know what it will do. The uncertainty is you don’t know when it will do it. The only certainty is that it will cause problems.
The real answer lies in controlling America’s need for massive budget deficits. The same thing had happened as a result of the Vietnam war and it took a huge recession of the early 1980s to solve the aftermath.
The IMF knows all this but can’t say it. After all, America is its largest shareholder. But it can at least get its intellectual ducks in a row because otherwise it just looks silly.