The surge of quantitative easing around the world should be a reason to worry for many emerging economies. In a recent wave of announcements, Japan, under new prime minister Shinzo Abe, has followed the lead of the US and the eurozone by introducing greater liquidity into the markets.
Developed countries are acting to support their economies, but it is emerging markets that have absorbed the bulk of the severe currency appreciation that follows every round of QE – and in particular those countries committed to flexible exchange rate regimes and open markets. This is particularly true in a world where China continues to manage its exchange rate. After all, currency wars are zero-sum games.
This is the case for the most successful Latin American economies – Colombia, Mexico, Peru and my own, Chile – which experienced appreciations of close to 10 per cent against the US dollar in 2012. In the same fashion, in developed open economies such as Australia and New Zealand, currency appreciation against the greenback has reached almost 15 per cent since 2010.
Certainly, Chile’s annual average growth rate of almost 6 per cent in the past three years has had a role to play. This is high compared with most industrialised economies but the appreciation we have seen cannot be explained by this fact alone. The price of copper has not been on a clear upward trend since 2010, so it bears little or no blame for the exchange rate picture. It is hard to escape the conclusion that a significant part of the appreciation we have seen in Chile is the result of the various rounds of QE.
In our economy, which is fully integrated with global capital and product markets, a cheap US dollar is a cause of concern for export sectors, such as copper.
Seen from Santiago, three questions must be asked by countries currently pursuing unconventional monetary policies. First, how long can loose money be maintained without undermining the desired outcomes – growth, higher employment and so on – for those countries actively pursuing it? Monetary policy can be a useful tool to cope with particular demand problems in the short term but it is rather ineffective in fostering sustainable growth over the long term.
Second, is QE effective in a scenario with zero or negative real interest rates? The risk is that a liquidity trap – as notoriously depicted by Japan’s prolonged stagnation of the past two decades – is just around the corner.
Third, will the quick fix of QE mean that countries avoid facing the urgency of implementing much needed structural reforms?
These questions are, ultimately, for the governments of developed countries. But assuming that QE is not going to stop soon, what should emerging economies do?
The answer begins with a responsible fiscal policy that keeps public spending in check so that appreciation can be limited.
In Chile we have pursued this objective by expanding public spending significantly less than the growth of gross domestic product in the past two years.
But sometimes that is not enough. Countries can also fight appreciation through foreign exchange purchase programmes, but this is an expensive tool that would probably generate losses for central banks’ balance sheets. Purchase programmes could, though, be complemented with so-called “macroprudential” measures such as limits on banks’ foreign exchange exposure. These measures could therefore prevent short-term speculative capital inflows.
Less virtuously, severe appreciation pressure upon domestic currencies entails the risk that countries embrace the appeal of capital controls. In addition, the detrimental effect of real exchange rate appreciation on exports could induce the temptation of new forms of trade protectionism.
One thing is unmistakably clear: the greatest share of the exchange rate adjustment costs resulting from quantitative easing is absorbed by a small group of developing and open economies, particularly in Latin America.
This is the real world effect of the beggar-my-neighbour policies pursued by developed countries. By seeking relief at the expense of other economies, QE is, in its essence, a globally counterproductive policy.
The writer is Chile’s minister of finance.
“Los temores de una guerra de divisas se extienden en las naciones latinoamericanas” por John Paul Rathbone, Editor para Latinoamérica – Financial Times
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