With exports comprising close to 15% of Brazils GDP, he has reasons to fear mass currency devaluations by other exporting peers that are desperate to swim to safety from the still potent economic downturn. As domestic consumer demand stays in reverse gear in Great Recession-hit countries, they are resorting to boosting export revenues by fiddling with currency exchange rates.
By ratcheting up the problem to the level of a war, Mantega could well be laying the ground for the Brazilian real to be devalued to keep up with the Joneses. But he also went one step beyond by advocating collective action and citing the precedent of the 1985 Plaza Accord, when the five biggest economies of that time jointly intervened in currency markets to depreciate the US dollar vis--vis the Japanese yen.
That China is the Japan of todayan exporting colossus which scares advanced as well as emerging economies with its combination of an undervalued yuan, subsidised exports and massive trade surplusesis evident. Brazil itself has a trade surplus with China, but that shrank by 40.6% this year as imports from China surged by a whopping 57.7%.
If there is a Plaza Accord II at the G-20, the renminbi will be foremost in the line of fire for a sharp appreciation. Whether this is possible remains in doubt, however, as the 1985 agreement occurred among close political allies within the capitalist camp in the context of a renewed Cold War. China has shown itself to be hardly malleable to external pressure on its currency, even if the entire G-20 is aligned against it.
Political tensions between China and Japan also do not bode well for a consensus on currency rebalancing. In September, even before the territorial dispute over Senkaku
Islands was reignited, Tokyo expressed bafflement at Chinas sudden purchase of Japanese short-term government securities, while simultaneously disallowing Japan from buying Chinese sovereign bonds. The record acquisition of Japanese debt by foreign investors in the wake of a weakening US dollar forced Tokyo to intervene and appreciate the yen.
It is debatable as to how decisive Chinas diversification of foreign exchange reserves away from the dollar and into the yen was in precipitating the currency crisis in Japan. But the episode and its aftermath of yen appreciation dealt further blows to the norm that states should not intervene in currency markets, where demand and supply must decide values. Central banks in Thailand, Colombia and South Korea have now performed delicate acts of winking at or directly weakening their currencies to keep exporters happy. The US is all set to follow this path through quantitative easing, as soon as Congressional elections are out of the way.
For many emerging economies, the threat of currency appreciation is all the more dreadful because of the inflow of hot money in the form of dollars from foreign investors hungry for higher returns. The depressed condition of equities and interest rates in advanced economies and the conversely upbeat market sentiment in fast-growing developing countries has set a platform for capital flight to ascendant regions in the Global South. These capital flows, if unchecked, can appreciate local currencies and further dampen export prospects.
The global financial crisis has exposed multiple imbalances, not all of which are favourable to emerging economies. For the latter to sit back and refrain from implementing stricter controls on speculative capital flows would be suicidal, as hot money stimulates asset bubbles and currency appreciations.
Economist Anatole Kaletsky contends that we now live in an era of capitalism 4.0, where market fundamentalism has given way to conscious state management of exchange rates and trade balances. Intervention is no longer a bad word, but the macro-dilemma is whether it can be multilateralised through coordination or if we will see individualistic state interventions, which fuel more clashes of interest and wars.
The author is Vice Dean of the Jindal School of International Affairs