Grim Mood At IMF, World Bank Meetings

The International Monetary Fund and the World Bank are holding their fall meetings in Washington, D.C., this weekend. Finance ministers are being urged to cooperate rather than compete on the currency front. U.S. officials are calling on the IMF to impose some badly needed discipline.

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This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Managers of the world economy are in Washington, D.C. this weekend, and their mood is grim. The International Monetary Fund and the World Bank are holding their fall meetings. Governments around the world are impatient with the slow pace of economic recovery. Now they're fighting among themselves for bigger pieces of the economic pie and new choice - weapon of choice: currency exchange rates.

NPR's Tom Gjelten reports.

TOM GJELTEN: War metaphors cannot be tossed around casually at a time when there are real ones being fought. But the tensions over currency rates are getting that serious; there's a real global fight under way.

Dominique Strauss-Kahn is managing director of the International Monetary Fund.

Mr. DOMINIQUE STRAUSS-KAHN (International Monetary Fund): Many are talking about a currency war, which may be a bit too military. (Unintelligible) say that many do consider their currency as a weapon.

GJELTEN: Now, how might a country consider its currency as a weapon to be used against another country? It happens when countries fight over global trade. Here's an example: If the Korean currency goes down in value while the Brazilian currency goes up, steel made in Korea will cost less on the market than steel made in Brazil. So Korea could sell more steel. That's why governments sometimes intervene in foreign exchange markets to push their currency values down: it gives them a trade advantage. But then their rivals will be tempted to do the same thing.

Carmen Reinhart is an international economics professor at the University of Maryland.

Professor CARMEN REINHART (University of Maryland): To the extent that Korea is intervening to avoid their currency from appreciating against the U.S. dollar and to the extent that they have similar exports to Brazilian exports, if Brazil doesn't do the same thing, they're going to become less competitive.

GJELTEN: And you have the beginning of a currency war. If governments all try to de-value their currencies at the same time by selling them on the foreign exchange market, it could destabilize global finance. Plus, deliberate currency devaluations are by their very nature unilateral.

This is what concerns Charles Dallara. He's the managing director of the Institute of International Finance, which represents the world's leading banks. Governments managed to get through the global financial crisis two years ago by working together, Dallara points out. If governments now start taking policies into their own hands, he says, it could derail the fragile economic recovery.

Mr. CHARLES DALLARA (Institute of International Finance): We have to be alert to the risk that these kind of unilateral actions can really have an adverse impact on market confidence and on the sense that businessmen and consumers have around the world that we're all able to move together in the right direction.

GJELTEN: This is why Dominique Strauss-Kahn and World Bank president Robert Zoellick will be pressing governments here this weekend to work together to end currency competition. If ever there were a time we shouldn't turn our backs on international cooperation, it's now, Zoellick said in remarks this week. But unilateral government interventions in exchange markets are on the upswing. China intervenes routinely, but so recently has Korea, Taiwan, Japan, and Switzerland. The result: tensions are growing.

Kenneth Rogoff, a former chief economist at the IMF, says currency moves by governments are visible and take on symbolic importance even beyond their practical significance.

Professor KENNETH ROGOFF (Harvard University): The big concern with this currency devaluation talk, with this currency war talk, is that it's very emotional and could lead to something else.

GJELTEN: A good example of how a currency dispute can escalate to something bigger is the legislation recently approved in the House of Representatives. Members of Congress, angry over what they saw as China's manipulation of its exchange rate, are pressing the U.S. government to consider punitive tariffs on Chinese imports. That could precipitate another kind of war - a trade war.

Tom Gjelten, NPR News, Washington.

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