Last year, the Group of 20 managed to pull together. With the Seoul summit only three weeks away, its members are now determined to pull in opposite directions. US attacks on China’s undervaluation are becoming shriller. Beijing berates the US for flooding the world with liquidity. Most others, caught in the crossfire, blame both – and Brazil’s top representatives are not even attending this weekend’s meeting of finance ministers. Little wonder the Korean hosts had hoped to keep the topic of global rebalancing off the table.
In an attempt to pour oil on this troubled water – though perhaps adding petrol to the fire instead – Tim Geithner, US Treasury secretary, has written to other G20 finance ministers proposing to broaden the focus from exchange rates. G20 countries, he says, should commit to keep their current accounts – whether deficits or surpluses – within a percentage limit of national output.
Reorienting the discussion towards current accounts makes good sense. They are at the heart of the global imbalances; exchange rates are merely instruments – and far from the only ones – for influencing them. Current account targets would leave open how excessive balances are to be shrunk – through nominal or real exchange rate adjustments or through other policies that affect public or private sector surpluses and deficits.
The proposal could be politically fruitful as well as economically sound. In the best of cases, it would encourage China to rebalance in ways it finds more congenial than a very visible concession on the renminbi – such as letting inflation rise or boost households’ spending power. (Though as Mr Geithner makes clear, exchange rate adjustments are needed too.)
Mr Geithner allows exceptions for “structurally large exporters of raw materials”. Quite right. In 1977 Norway ran a current account deficit of 14 per cent of output as it sucked in capital to develop the North Sea. Today it is a 16 per cent surplus. Such imbalances are not distortions but a natural result of investment and savings needs that vary in time and place.
Nobody should have any illusion that the G20 – a grouping Indian prime minister Manmohan Singh says is in “serious difficulties” – will make progress on this idea. However one is entitled to wonder what the G20 is for, if not this. And Mr Geithner’s letter shows that, in time, people come round to good ideas. Current account caps were proposed by John Maynard Keynes at Bretton Woods in 1944 – and rejected by the Americans.