World Bank President Robert B. Zoellick warned Thursday against the outbreak of a global currency war while his counterpart at the International Monetary Fund said China must quicken its pace of currency reform if it hopes to gain a greater voice in the international organization.
The unusually blunt remarks on sensitive matters came as the two sister organizations prepared for a weekend meeting of 187 world finance ministers in Washington, with discussions centering on increasing strains over currency issues and a proposal to give China and other major developing nations greater voting power on the groups’ boards of directors.
Mr. Zoellick said tensions are growing because unemployment remains high in the United States and other developed nations, causing political leaders to focus public anger on nations like China whose fast-growing exports appear to have taken away manufacturing jobs.
“Whenever you have high unemployment, you have risks of other tensions,” said Mr. Zoellick, who was a top U.S. trade official in the George W. Bush administration. “That puts political pressures on people.
“Today, we face currency tensions. Tensions can lead to trouble if not properly managed,” he said, urging the U.S., China and other nations to work out their disputes through collaboration within the Group of 20 economic powers.
“If ever there were a time we shouldn’t turn our backs on international cooperation, it’s now,” he said, warning of the risk of a debilitating trade war like the ones that broke out during the Great Depression and worsened economic conditions in the 1930s.
“History shows there is no future in ‘beggar thy neighbor’ policies,” he said.
At the same time, IMF Managing Director Dominique Strauss-Kahn threw his weight behind the U.S. in calling for quicker Chinese action on currency value if Beijing hopes to see an increase of at least 5 percent in voting representation for itself and other developing countries on the IMF board by the end of this year.
“If you want to have more weight in the IMF, then you need to take more responsibility in the stability of the system,” Mr. Strauss-Kahn said. “There is no formal link, but I think it’s right to insist … that the more emerging country will have a voice and representation in the fund, the more they have responsibility.
“You can be at the center of the system or you can be at the border of the system. But if you want to be at the center of the system … it goes with having also more responsibility on what you do and the consequences of what you do in the global economy.”
Mr. Strauss-Kahn said Treasury Secretary Timothy F. Geithner was correct Wednesday when he said that China’s policy of linking its currency, the renminbi, to the U.S. dollar has suppressed its market value, causing distortions in trade and contributing to the biggest imbalance in the global economy: the U.S. trade deficit with China.
“We believe that the renminbi was substantially undervalued and that something has to be done to fix this problem over time,” he said, suggesting that China should speed up the 2 percent appreciation of the renminbi that it has allowed so far this year.
“This problem is not going to be fixed in five minutes. It’s a long-term problem,” he said. “Progress has to be made. It certainly can be made more rapidly than it has been made until now.”
Some analysts are saying that growing disputes over China’s currency and the dollar are so far-reaching and involve so many other nations that the G-20 may need to engineer a currency accord like the Plaza Accord of the 1980s, which led to a significant, worldwide devaluation of the U.S. dollar.
French President Nicolas Sarkozy, who will play host to the 2011 G-20 summit, has suggested that the U.S., European Union members and other nations work out an arrangement with China on currencies. But a meeting he held with the Chinese premier this week ahead of the IMF meeting made little progress on the issue.
Mr. Strauss-Kahn and Mr. Zoellick took different positions on the matter. Mr. Strauss-Kahn questioned the need for what he described as a “Louvre” accord, saying that the “mood” is not right for such a major endeavor.
But Mr. Zoellick said nothing should be ruled out in the interest of resolving differences peacefully.
“I think there should be a common interest in trying to figure out how to manage this,” he said. “Maybe the time has come. Sometimes when you have a moment like this, it’s important to try to take it and steer it in a constructive direction.”
Mr. Zoellick noted that while China and its exports have benefited from an undervalued currency, other developing nations such as Brazil, which don’t closely control their currency values, have seen their currencies soar against the U.S. dollar, posing problems for them.
South Korea and other countries that compete in many of the same markets as China also have sought to suppress their currencies against the dollar to remain competitive, compounding the trade distortions.
“You now have a wider set of countries” involved in currency matter, Mr. Zoellick said. “I think there’s a role for institutions to play an intermediating part with key countries.” But he added that “I don’t have a specific proposal by any means.”