BOGOTA, LIMA, SANTIAGO – International economic coordination is as necessary as it is elusive. During the global financial crisis, the G-20 became the primary forum to agree on basic principles in areas such as the fiscal-policy response and the role of the International Monetary Fund. By underscoring the need to avoid trade protectionism and other beggar-thy-neighbor policies, it also put some pressure on governments concerning what not to do. In these respects, the G-20 was clearly a step forward.
Lately, however, as the G-20 has tried to reconcile divergent national economic interests and recovery strategies, it has been far less successful relative to its initial meetings in Washington and London in 2009. Indeed, the G-20’s Seoul summit in early November exposed a deep divide.
Global imbalances and currency misalignments could well wreck the global recovery and push the world into the protectionist mire. Most nations would suffer, but nations caught in the middle would suffer the most. Today, the emerging economies of Latin America could become some of the first casualties in the economic crossfire between the United States and China.
Consider Colombia, Chile, and Peru. These economies face two serious problems. The first is the flood of short-term capital heading their way. If there was ever any doubt, events of the last few years should have reinforced the lesson that too much capital chasing short-term yield can distort exchange rates and asset prices, potentially leading to financial catastrophe.
Recipient countries can attempt to throw up barriers, but the tsunami of liquidity threatens to sweep over them. The dollar depreciation engineered by the US Federal Reserve seems an appealing proposition from the American standpoint, but the economies of Latin America cannot and should not bear the burden of dollar realignment.
Then there is China. The Chinese authorities’ reluctance to allow the renminbi to appreciate slows down global rebalancing and impedes world growth. Exports from Latin America are among the victims. Renminbi undervaluation has also caused Latin America to reduce its share of global manufacturing exports and become even more specialized in raw materials.
As a result of the premature decline of the manufacturing sector, unemployment is high in many Latin American countries. To be sure, the re-commoditization of Latin America has causes that go beyond China’s exchange-rate policies. But it is becoming increasingly difficult for factories in the region to remain in business under conditions of weak global demand and strong local currencies.
These issues should be put on the table by the G-20’s Latin American members – Argentina, Brazil, and Mexico. But countries like Argentina and Brazil fear Chinese retaliation aimed at their commodity exports. For example, Argentina is worried about keeping the Chinese market open for soybean oil, after it was closed earlier this year. And Brazil has already said that it has no issues to raise with China, which recently became its largest export market.
At the other extreme is Mexico, where competition with China is fierce. Out of both conviction and convenience, Mexico invariably sides with Washington and points to China’s undervalued exchange rate as the cause of its economic stagnation.
Colombia, Chile, and Peru have nearly 100 million people combined and a total GDP of more than $600 billion. Their sound financial systems, strong fiscal frameworks, low public debt, and strict adherence to inflation targets give them credibility. To reduce their dependence on commodities they also have signed free-trade agreements with the US (inexplicably not approved by the US Congress in the case of Colombia).
These three countries are thus in a unique position to demand that the G-20 stop the US and China from pursuing beggar-thy-neighbor policies that represent a major threat to global economic stability. The problem is that Colombia, Chile, and Peru are not members of the G-20.
If the G-20 wants to play a major role in the post-crisis global decision-making process, the issue of legitimacy vis-à-vis the smaller emerging countries needs to be addressed now. If countries are not adequately represented, international economic coordination will return by default to the multilateral institutions where it made little progress in the years that led up to the crisis.
We propose changing the status quo by allowing these countries to take a rotating seat at the G-20 table. They can help steer the world toward coordinated recovery and save many emerging economies from becoming innocent casualties in other people’s wars.