Quantitative easing in the US and, of course, in Japan has helped avert systemic risk and has helped lay the basis for recovery. However, quantitative easing alone is not sufficient to create the conditions for fundamental, sustainable growth. Quite frankly, I think we are expecting too much, in the US and perhaps elsewhere such as in Europe, the UK and Japan, from this policy instrument.
The beneficial effects of quantitative easing have been unfortunately partly offset, in the US as well as in Europe, by the intensity of regulatory reforms these last years. It was necessary, obviously, to strengthen capital liquidity requirements for banks, but the pace of that intensification, especially in Europe, when they agreed in the autumn of 2011 to accelerate the new Basel III capital requirements, has really made it very difficult for the transmission mechanism of monetary policy to work. I think it’s a bit unfortunate that, broadly speaking – and this is as much an issue in Japan as in the US and Europe – policymakers have not always viewed monetary and regulatory policy within the same framework, and not considered the extent to which one would perhaps mitigate the beneficial effects of another.
There is a more fundamental issue here, which is that aiming quantitative easing at creating the conditions for improved labour markets is expecting a lot from the policy. The labour markets really need many different sets of policies, and I think that governments to a certain extent have found it convenient for monetary policy to carry the burden of addressing labour market conditions, because they themselves have found it so difficult to find the right policies, which are often structural and often very difficult. Although I have always been a supporter of the dual mandate of the Federal Reserve, and I do consider it to be a beneficial framework, I nevertheless think that there are times when governments use it as a bit of an excuse to avoid coming to grips with their own responsibilities.
Another, very important issue to consider is coordination of the “exit” policies – the so-called “tapering” of quantitative easing. It has been interesting to observe that in times of true crisis coordination seems to emerge, but then, as the crisis recedes, coordination seems to recede even faster. I think this requires some reflection by policymakers. I have noticed a trend over many years now, going back to the late 1980s, against coordination. The International Monetary Fund and the G20 have tried valiantly to strengthen coordination at times, but it is a bit unfortunate that, as we sit in here in 2013, the Plaza accord of 1985 [to depreciate the dollar against the Japanese yen and the Deutschmark, signed by the US, the UK, France, Japan and Western Germany] may have been the high water mark of coordination among policymakers.
The G20 deserves credit for the collective stimulus and guidance provided by the London summit in 2009. However, in recent years government policymakers and central banks seem increasingly inclined to believe that their responsibility is only to their own back yard. Primarily, that is true, but they also have a responsibility to the system at large, particularly countries whose economies are so powerful and so strong – and that certainly includes the US, Germany, Japan, China and some of the other major emerging markets. They seem to have – to a certain extent – lost the sense that there is a framework to coordinate among themselves, and we are seeing the unfortunate effects of that today.
However, some emerging markets have left themselves a little more vulnerable than others to the tide of liquidity going out. This happened because of current account deficits, because of lack of structural reforms and in some cases because of inflationary pressures. It’s important that these economies use this period of unsettlement or instability to re-galvanize their efforts on structural reform.
At the same time, what surely could happen and should happen is a much better ex-ante dialogue before major policies are taken by leading countries of the world with their developing country and emerging market colleagues, to at least talk out the potential implications for others of their actions. And secondly, there should be consideration of collective supportive action. Individual countries have their own responsibilities, and they need to deepen capital markets in some of these countries, which can obviously mitigate the adverse effects of outward bound capital flows. They need to strengthen their underlying investment attractiveness in the eyes of investors, both domestic and foreign, and reduce barriers to investment.
But it is also a good time to ask ourselves whether or not some collective support framework is needed. The IMF could provide the right forum for this, and the contemplation of some substantial credit lines available for countries under pressure could be a confidence-inducing factor. In this world, confidence and psychology in markets are crucial. One thing that could be done would be for markets to see more clearly that, if emerging markets are hit by some temporary instability, there is a support framework in place.
Charles Dallara was managing director of the Institute of International Finance between 1993 and 2013. He is currently executive vice-chairman and chairman of the Americas for the global investment management firm Partners Group.