Ilene Grabel: An IMF internal report says it’s been unfairly critiquing China and other Asian countries currency manipulations while ignoring similar practices by Western countries

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In the presidential election just passed, there was a lot of discussion about China, particularly accusations that China was manipulating its currency to keep its currency low and favor its exports to the detriment of the U.S. economy and its exports. Well, a new IMF report, an internal report on the IMF, says this position—and particularly actually targets its own organization, the IMF—is a little hypocritical—my word, not theirs, but that’s the substance of it—that there’s—the IMF tends to critique countries like China when they try to perhaps manipulate their currency, but they don’t say much about it when it happens in the West, for example the United States with quantitative easing, which was all about manipulating its currency.

Well, now joining us to talk about the IMF and this report is Professor Ilene Grabel. She teaches international finance at the Josef Korbel School of International Studies at the University of Denver. She also writes for TripleCrisis blog. And her book with Ha-Joon Chang, Reclaiming Development, is set to be reissued by Zed Press in late 2013.

Thanks for joining us again, Ilene.

ILENE GRABEL, CODIRECTOR, GLOBAL FINANCE, TRADE, AND ECONOMIC INTEGRATION, UNIV. OF DENVER: Thank you. Pleasure.

JAY: So tell us a little bit about this kind of seems like dual standard and what this report said.

GRABEL: Sure. The IMF’s independent evaluation office, which is an internal auditing body at the IMF, has been examining the quality and the tone of the IMF’s advice to developing countries on the matter of excess reserve accumulation in the years leading up to the financial crisis.

And as I’m sure your listeners know, many countries keep large holdings of reserves—they’re called official reserves. They’re analogous in some sense to a country’s own bank account. And in the years after the East Asian financial crisis of 1997, many developing countries really started to hoard official reserves. They tried to build up a lot of official reserves to protect their economies so that they’d never have to deal with the IMF again. And so we know that countries like China, Brazil, South Korea are [incompr.] countries that built up a lot of official reserves in the decade or decade and a half that followed the East Asian financial crisis.

In that time, the IMF has been looking very closely at that matter and has been arguing that developing countries build up [incompr.] official reserves; that creates global financial instability. And so the IMF has issued many reports over the last decade and a half essentially indicting developing countries for having too big of a bank account in the form of these large official reserve holdings. And what happened was in late December—.

JAY: Let me ask a question here.

GRABEL: Oh. Sure.

JAY: So just to be clear, so far, part of the motivation to have these big official reserves is they don’t have to borrow money from the IMF. Is that right?

GRABEL: That’s right.

JAY: And then the accusation of the IMF or the critique of the IMF is that countries use this large reserve to manipulate their currency, meaning that if they want their currency to go down, they can use these reserves to go buy another currency, another country’s currency, and in other words pressure it up, and that way maneuver their currency down.

GRABEL: That’s right. So governments use these holdings of official reserves in order to keep their exchange rate competitive. And so they’re trying to keep what the IMF thinks of as an artificially depreciated exchange rate, so that their exports are cheap to consumers around the world and they can export a lot. And that certainly has been one motivation behind the accumulation of these official reserves on the part of developing countries.

The other motivation is that countries want to make sure that they have the resources that’s really necessary to protect their currencies and their economies from speculative attack if that occurs, because they don’t ever want to have to go to the IMF again to get a bailout, because those were so damaging and so painful during the East Asian financial crisis.

JAY: Right. So just to be concrete again, for example, China could buy a lot of U.S. dollars, and then their currency goes down a little bit in relationship to the amount of U.S. dollars they purchased, and that makes their exports more affordable. Now, isn’t this exactly, more or less, what the U.S. did with quantitative easing by forcing their own rates down? And if that’s true, then why—their currency rates down? And if that’s true, then has the IMF critiqued the United States?

GRABEL: Two things. It’s an interesting point that you make, Paul.

First, certainly, the U.S.’s three rounds of quantitative easing have had the effect of keeping the dollar at a somewhat depreciated level. And so, certainly the U.S. has been pursuing quantitative easing as a way to keep U.S. rates low, and also with the hopes that that would keep the dollar at a somewhat lower level than it would otherwise be.

The U.S. has not been criticized by the IMF for doing so. The IMF has acknowledged that there are, in the IMF’s language, spillover effects from quantitative easing for the U.S., but it certainly hasn’t criticized the U.S. for its contributions and the spillover effects from quantitative easing on other countries in the world economy.

JAY: And is this a bit of a pattern, this double standard?

GRABEL: It is, it is. In several IMF reports over the last few years, IMF staff have really praised monetary authorities in Japan, and also in Switzerland: they have also engaged in currency market interventions that have been designed to keep their own currencies—the yen and the Swiss franc—from appreciating too much, so as to promote exports from Japan and exports from Switzerland. The IMF supported those kind of interventions, at least in public statements about them, but at the same time has been openly critical of countries like China and other countries that the IMF claims are manipulating their currencies unfairly.

JAY: And it’s countries like China. But is it also specifically targeting China? I mean, is China really the issue here?

GRABEL: It appears to be the case that a lot of the IMF’s criticism of excess reserve accumulation—that’s the language that’s used in this report—really is a kind of trojan horse that’s designed to advance the interests of powerful countries like the U.S. who have long been critical of China’s currency management regime. And so, yes, I’d say that one could read into this recent report that the IEO understands that there is a kind of trojan horse aspect to the IMF’s obsessive focus on what China is doing with its currency.

JAY: Alright. Thanks very much for joining us, Ilene.

GRABEL: Thank you.

JAY: And thank you for joining us on The Real News Network.

End

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