In the sea of catchy acronyms for emerging markets it is hard to make a difference. Be it Brics, Mint or Cement, the list is long. The search for the common denominator that would justify such groupings, though, is still missing.
Most emerging markets are too heterogeneous to be reduced to a simple acronym, a point generally acknowledged. The very notion of emerging markets is itself problematic, and by most economic metrics, largely outdated.
However, one common trait does exist unambiguously. Those countries suffer from the fact that they are without international monetary power: they are Wimps.
International monetary power is the ability to conduct economic policy without immediate regard to external constraints. Wimp, an unflattering label, describes the reality most countries face of not being able to use their national currencies freely in international financial transactions.
Most countries use one of the key currencies, in particular the dollar but also the euro, to manage international liquidity and maintain national stability. Access to key currencies therefore determines the ability to make or forgo needed economic adjustments in the event of external shocks, and to meet national policy objectives.
Countries with large international reserves, or even better the ability to print a key currency, do not need to conduct economic policy to ensure international liquidity is adequate.
Countries that face international liquidity constraints will often have to subordinate their national policy objectives to some external anchor. They may need to tighten policy unduly to prevent a capital outflow that could result in a sharp depreciation of their currencies and undermine the ability of the country’s economic agents to meet their external obligations.
Therefore, to a large extent it is international monetary power that shapes countries’ economic policy conduct and their room for manoeuvre.
In economic policy gatherings, it is striking how many policy makers attest that one of the most pressing concerns today is the effect of an increase in the Federal Reserve’s policy rate. It is this aspect, that a single central bank possesses this extraordinary influence on the rest of the world, that represents one of the greatest defects of the international economy.
On the one hand there is a core country with economic policy autonomy, and on the other hand a periphery dependent on its ability to adjust to the core. This problem was thought to affect only countries with fixed exchange rates, as is the case in Europe between Germany and the rest of the euro area.
But it can also at times concern countries with floating exchange rates. The recent appreciation of the dollar and its effect on other countries highlights the importance of the international dimension of US monetary policy.
Countries are trying to leave the Wimp group. China is the most prominent example. Its efforts to internationalise the renminbi stem largely from the aim of no longer being a Wimp nation. If the renminbi were a freely usable currency, China could shift policy attention to attaining certain national objectives.
Other countries are attempting similar escapes by moving towards local currency international settlement. The pending 2015 revision of the International Monetary Fund’s special drawing rights basket may signal change.
Other possible measures include greater economic policy co-operation between the core and the periphery, and the hording of ever larger international reserves and establishment of bigger international financial safety nets, including ramping up the financial resources of the IMF.
Only the diversification of key currencies would bring permanent relief. Co-ordination is plainly unlikely given that the Fed has an obligation only to its national constituencies. The financial safety net is improving but is unlikely ever to suffice and cannot overcome the fact that only the Fed can really create international liquidity.
International investment performance remains highly contingent on international monetary power. Wimp countries will increasingly try resisting following the core. Some will fail; many have become much better at dealing with it. For the time being though, international monetary power, or lack thereof, remains a key investment benchmark and will soon be tested again.
Ousmène Mandeng is senior fellow on the Reinventing Bretton Woods Committee
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