Friday, October 22, 2010 8:05 AM EDT
By Palash R. Ghosh
Dear G20 Colleagues:
I am writing to offer some suggestions for our meeting later this week. We are obviously at a moment when the world is looking to the G20 to provide a stronger commitment to work together to address the major challenges to a sustainable global recovery. I know that some of you will want to reserve any substantive agreement until the November Leaders' Summit, but I think we should take advantage of the presence of the central bank governors to try to reach agreement on the broad elements this weekend, and put those in a report to our Leaders.
Building on Pittsburgh's Framework for Strong, Sustainable, and Balanced Growth and Toronto's commitments on addressing sovereign debt sustainability, here are three specific suggestions designed to provide a stronger framework of cooperation on international financial issues:
First, G20 countries should commit to undertake policies consistent with reducing external imbalances below a specific share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance. Conversely, G20 countries with persistent surpluses should undertake structural, fiscal, and exchange rate policies to boost domestic sources of growth and support global demand. Since our current account balances depend on our own policy choices as well as on the policies pursued by other G20 countries, these commitments require a cooperative effort.
Second, to facilitate the orderly rebalancing of global demand, G20 countries should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency. G20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals. G20 advanced countries will work to ensure against excessive volatility and disorderly movements in exchange rates. Together these actions should reduce the risk of excessive volatility in capital flows for emerging economies that have flexible exchange rates.
Third, the G20 should call on the IMF to assume a special role in monitoring progress on our commitments. The IMF should publish a semiannual report assessing G20 countries' progress toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward meeting those objectives.
With progress on these fronts, we should reach final agreement on an ambitious package of reforms to strengthen IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies.