As members of Congress head home to campaign for the November midterm elections a different crowd arrives in Washington, D.C., this coming weekend. Finance and development ministers, government representatives from the Group of 20 developed and developing nations, and heads of multilateral institutions are all meeting for the semiannual International Monetary Fund and World Bank meetings. They’ve got a lot on their plate.
For starters, how to rebalance the world economy, and how to strengthen the green shoots of a fledgling global economic recovery. Rebalancing China’s undervalued exchange rate is stealing the spotlight in the discussions on global imbalances as the finance officials in the United States and Europe called out China earlier this week about their undervalued currency. But equally important is how to create jobs for the tens of millions of people worldwide cast out of work by the financial crisis and the Great Recession.
A bill passed by the U.S. House of Representatives last week aiming to pressure China toward revaluation raises the stakes for discussions on China’s renminbi. The U.S. and Chinese economies are deeply intertwined through capital flows, trade, and currency exchange rates. For decades, China has pegged its currency to the U.S. dollar to manage its stability and depress its international value. This made Chinese exports cheaper for U.S. buyers, thereby contributing to the U.S.-China trade deficit. This distorts global trade flows not just between the United States and China but with all of China’s trading partners.
The pressure is in the right direction but this issue is bigger than our bilateral relationship. That’s where the Group of 20 leading developed and developing nations fits in. Asian and European economies also feel the pinch of China’s exchange rate policy—tension that contributes to the recent flare-up in Sino-Japanese relations—not to mention developing countries that are being priced out of export markets or pressured into undertaking competitive currency devaluations of their own.
The undervalued renminbi poses serious problems for China, too. For years, China’s exchange rate policy supported rapid development and employment growth, underpinning social stability at home. China’s leaders are understandably cautious about doing anything—especially letting their currency appreciate too quickly—that could disrupt this domestic balance. But the undervalued exchange rate and resulting trade surplus are also fueling inflationary pressures and stock market and real estate bubbles in China that threaten to be potentially just as socially and economically destabilizing as any employment effects from revaluation.
The Group of 20 deputies meeting provides an excellent opportunity for the Obama administration to exercise global leadership by forging a multilateral response to China’s exchange rate misalignment, demonstrating that American concerns are not merely election year China-bashing. Getting serious about the renminbi means getting other countries on board. By consolidating the groundwork this weekend, the deputies can set the stage for a unified front when the Group of 20 leaders meet next month in Korea.
Exchange rates alone, however, should not dominate the discussions. China’s slow pace of reform offers no excuse for not addressing growth and job creation worldwide.
European governments, for their part, are turning tail from supporting employment-creation policies. Instead, they’re deciding to contract their economies through harsh budget austerity. The United Kingdom, Germany, France, Italy, Ireland, Portugal, Spain, and Greece are cutting budgets, employment, and wages in the mistaken belief that they will starve themselves back to good health. The IMF estimates that for every additional percentage point of GDP in fiscal austerity, the unemployment rates go up one-third of a percentage point and economic growth falls by half a percentage point.
Economic growth is once again taking root in the United States. But pain of the downturn lingers on for the 14.9 million workers still unemployed and the countless families fighting just to make ends meet. Conservatives in Congress are unfortunately holding hostage efforts to extend expired unemployment insurance benefits as well as President Barack Obama’s plan to cut taxes for 98 percent of Americans.
European and American belt-tightening constricts demand and investment, which in turn fuels unemployment in developing countries, especially in the export sectors. It also changes the structure of employment in developing countries. Rather than entering the ranks of the unemployed, many take up informal forms of work where conditions are poorer, wages are lower, and social protections are fewer if not lacking all together. This means smaller export markets for American and European goods and services, too.
This cascading worldwide unemployment and contentious international economic imbalances are precisely the problems that John Maynard Keynes and others designed the IMF and World Bank to address. Meeting at these institutions in Washington, D.C., this weekend, it is time for these global governance institutions to put job creation back at the center of the agenda.
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