China threw a firecracker into global markets Tuesday by devaluing its currency. The sudden move by the world’s second largest economy, which will give its exports a boost, came as the United States, the world’s largest economy, plans to raise interest rates for the first time in years. The US move, aimed at heading off inflation, might also roil markets. The message from both actions is clear: A tightly knit global economy needs a new system to help countries rise above economic nationalism and take better regard of others before they act.
China’s surprise manipulation of its exchange rate is the type of beggar-thy-neighbor move that various global rules since the 19th century have tried to prevent. Beijing seeks a competitive edge for domestic needs without much consideration of the greater global good. In the US, too, the Federal Reserve has no mandate to consider foreign concerns as it prepares to hike interest rates.
The two giant economies are asleep as they roll in a very crowded global bed.
The last big attempt at arranging global financial rules was the 1944 agreement negotiated in Bretton Woods, New Hampshire. The agreement pegged currencies to the US dollar, which was linked to the value of gold. That system began to break down in the 1960s. The International Monetary Fund, which was created at the time, still tries to form a consensus on when to control exchange rates or interest rates. But the rise of China as well as Brazil, India, and Russia has challenged the IMF consensus. These nations do not always share the values of that consensus, which was based on lessons learned from the militant nationalism of two world wars.
China, in fact, argues against the idea of universal values. It instead wants greater power and prestige based on the size of its economy. This is reflected in its demand for more say in IMF decisions and on the conditionality set on loans to troubled nations. It has also set up its own organizations in Asia that will control rules on financing new infrastructure.
National power alone, however, without a legitimacy based on shared values, is a very short-term perspective. In contrast, Germany has been careful to weave a consensus with other European nations to deal with the Greek debt crisis rather than throw around its economic weight in repairing the eurozone.
The former president of Ireland, Mary Robinson, says this year is “the Bretton Woods moment for our generation.” The world already has two big negotiations due for completion this year, one on climate change and another to set new goals to reduce poverty. Why not start talks for new rules in global financial governance?
The world economy should not be based only on mutual interests in a transactional way. It needs to be based on shared values, or a recognition of a common basis for progress. That can help financial leaders think beyond their national borders.