Breakdown in global monetary co-operation? Why India’s RBI chief is wrong

A few days ago, India’s central bank governor, Raghuram Rajan, berated developed nations for following selfish economic policies that are sparking turmoil in emerging markets.

His argument: emerging markets had helped the global economy out of the devastating financial crisis of 2008, and developed countries seem to have forgotten all about that as they go about implementing policies that are tripping emerging markets.

Clearly, the Reserve Bank of India (RBI) governor was referring to the US Federal Reserve’s decision to taper (wind-down) its mammoth bond-buying programme, the money from which has supported asset prices and currencies across several emerging nations.

“International monetary co-operation has broken down,” Rajan complained in an interview to Bloomberg TV, “Industrial countries have to play a part in restoring that [co-operation], and they can’t at this point wash their hands off and say, we’ll do what we need to and you do the adjustment…We need better co-operation and unfortunately that has not been forthcoming so far,” he said.”

These are some interesting comments, which have attracted considerable attention from international monetary policy experts.

My take (albeit a little late in the day) on this is that I think the RBI governor’s isn’t entirely correct in his views.

Let’s start with the fact that emerging markets helped developed nations  — and the global economy — by adopting fiscal and monetary stimulus measures during the global crisis, and developed nations should return the favour by considering the impact of their policies on emerging markets.

That’s not accurate. As an online commentary by Edwin M. Truman from the Peterson Institute for International Economics notes:” “It is true that many of these countries adopted expansionary policies.

“It is not true that they did so primarily out of a desire to help the advanced countries. Their principal motivation was to counteract the effects of the global slowdown on their own economies.

“Emerging market and developing countries adopted the right policies in 2008–09 in their own interests. In doing so, they participated in a cooperative global effort.”

Indeed. Every country tends to take action that benefits its own economy; you would be hard pressed to find monetary/fiscal authorities deciding on policies with the aim of helping other nations.

The quantitative easing measures undertaken by the Federal Reserve, while benefitting emerging economies, were NOT meant for the benefit of emerging economies or global growth.

They were aimed primarily at propping up the swooning American economy. Emerging markets benefitted from the easy money sloshing around, but that wasn’t the goal of the Federal Reserve in the first place.

Now that the US economy seems to be recovering rapidly, the Fed has decided to gradually remove the monetary prop.

Even so, the claim that the Federal Reserve has acted solely out of self-interest, without communicating to the rest of the world what it plans to do, is patently untrue.

Last year was all about when the Fed would start ‘tapering’ its bond purchases. In fact, the words ‘Fed tapering’ officially became a part of the financial markets lingo. In December, the Fed finally announced it would start reducing its bond purchases from January by $10 billion.

Frankly, there was nothing unexpected about tapering. We all knew it was coming.

So, it’s unclear what Rajan is complaining about. As Truman asks in his commentary, “What should the Federal Reserve and other central banks and governments of advanced countries have done differently?

“Did those policy actions damage the global economy as a whole, which is not the same as inconveniencing a few countries? By omitting any constructive suggestions, he has effectively contributed to international monetary non-cooperation.”

In addition, on the topic of ‘co-ordinated policy’, emerging markets are lucky that developed nations are not co-ordinating their monetary policies anymore.

Japan and the Eurozone are still in monetary easing mode, so it’s not all bad news for emerging nations. But if these nations also started to tighten their policies in ‘co-ordination’ with Fed action, emerging nations would be in far, far worse trouble than they are now.

In the end, it’s really about emerging markets and many of their self-inflicted problems. Countries like Turkey, Argentina et al, had enough time to fix their problems while the money was good.

They didn’t. While some countries, such as India, improved their current account deficits, other challenges, such as persistent inflation and stalled business investments, leave them vulnerable to sudden foreign fund exits.

Emerging markets (India’s Rajan included) want to blame the Fed for their problems.

But as I’ve argued in this blog post written earlier, the Fed is not the problem here.

[Image Credit]


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