By William Branigin
Washington Post Staff Writer
Wednesday, October 6, 2010; 12:23 PM
Treasury Secretary Timothy F. Geithner warned China on Wednesday that its resistance to currency reform risks undermining international economic growth and cooperation, and he called on other countries to join the United States in creating "an effective multilateral mechanism" to resolve the issue.
In a speech at the Brookings Institution, Geithner cited the currency issue as one of a series of challenges for finance officials of the Group of 20 nations in meetings this month ahead of a G-20 summit in November.
His remarks represented an escalation of a verbal battle between Washington and Beijing over the Chinese currency, but it also signaled an effort to turn the dispute from a bilateral feud into a more global issue.
"The greatest risk to the world economy today is that the largest economies underachieve on growth," Geithner told the gathering. He said a "change in the pattern of global growth" is needed to sustain the current recovery from the financial crisis that nearly plunged the world into a depression two years ago.
"For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours," Geithner said. "Countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off. Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand."
The International Monetary Fund echoed those sentiments in its latest World Economic Outlook report, saying that the global recovery "remains fragile and uneven" and that unemployment is still "a major economic and social challenge" worldwide.
For a stronger recovery and more employment growth to take hold, the IMF said Wednesday, government policies need to be coordinated to achieve "internal and external rebalancing," with emerging countries increasing domestic demand and "removing distortions" in their economies.
The IMF predicted that the world economy would grow by 4.8 percent in 2010 and 4.2 percent next year. Those projections respectively were 0.2 percent more and 0.1 percent less than forecast in July. The predicted growth is powered mainly by the emerging and developing economies, led by China. They are forecast to grow by 7.1 percent this year and 6.4 percent next year, with China recording 10.5 percent and 9.6 percent growth rates.
In the advanced economies, growth is projected at 2.7 percent in 2010 and 2.2 percent in 2011, with unemployment remaining "persistently high for some time." The U.S. economy is expected to grow by 2.6 percent this year and 2.3 percent next year, down 0.7 percent and 0.6 percent respectively from the IMF's projections in July.
In his speech at Brookings, Geithner said the "major emerging economies," especially those with significantly undervalued currencies, need to adopt "more flexible, more market-oriented exchange rate systems."
"This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," Geithner said. "This sets off a damaging dynamic. . . . Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports."
Stressing that this is "unfair" to countries with more flexible systems, Geithner called the issue "a multilateral problem" that "requires a cooperative approach to solve."
Geithner noted that a framework agreement reached last year for global growth and reform of the structure for international economic cooperation was designed to be accompanied by "higher savings in countries like the United States, complemented by reforms to strengthen domestic demand in surplus countries like China, other emerging economies, Germany, and Japan." As part of the deal, the emerging economies would get a greater stake in the international financial institutions, he said.
Geithner warned: "We have made some progress on the 'Framework,' but that achievement is at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in the surplus countries and by the extent of foreign exchange intervention as countries with undervalued currencies lean against the pressures for appreciation."
An agreement to modernize governance of the International Monetary Fund must be accompanied by more progress by the surplus countries in reforming their exchange rate policies, in reducing reliance on exports and in strengthening domestic demand, Geithner said.
Staff writer Howard Schneider contributed to this report.