Currency Wars, Revisited
By THE EDITORIAL BOARD, NYT FEB. 7, 2014
In recent years developing countries like Brazil complained that the United States and other industrialized countries were waging a “currency war” against them by artificially driving down the value of dollars, euros and yen. Now officials in some nations, like Argentina and Turkey, are blaming foreign “vultures” and “the interest rate lobby” for the sharp depreciation of their currencies.
Policy makers fear any big and sudden changes in the value of their currencies. A rapid appreciation makes their country’s exports less competitive on the world market, while a fast depreciation raises the cost of imported commodities like oil and makes it harder for governments to repay loans they took out in dollars or euros.
So it should come as no surprise that officials are upset by the recent market movements. But their anger is misplaced. There is no foreign conspiracy against the Argentine peso, the Turkish lira or other currencies that have fallen against the dollar. The Federal Reserve’s recent decisions to slow its bond-buying program have strengthened the dollar. But most of these currencies have declined primarily because of domestic problems.
For example, the Argentina peso has been under pressure for months because misguided government policies caused inflation to surge to 28 percent last year. The peso has fallen nearly 22 percent against the dollar since the end of November. The Turkish lira has fallen about 9 percent in the same period because Turkey’s central bank has been too slow to raise interest rates despite an annual inflation rate of 7.4 percent. And investors have been unnerved by the autocratic style of Prime Minister Recep Tayyip Erdogan, who has tried to squash corruption investigations of senior officials.
What leaders of developing countries ought to be doing now is addressing economic problems like inflation and corruption while investing in infrastructure and education. Going forward, emerging markets could better protect themselves from the rapid flow of foreign capital into and out of their financial systems by regulating them. Unfortunately, many countries, including India and Turkey, made themselves more dependent on speculative foreign capital flows in recent years, according to the economists Dani Rodrik and Arvind Subramanian. That has made their economies more vulnerable to sudden changes in the sentiments of investors.
Blaming the Fed is particularly misguided. Its bond-buying program, which was always meant to be temporary, has lowered interest rates and offset some of the damage from the financial crisis, though not nearly enough. Had the Fed not intervened, the global economy would have suffered a much deeper and longer recession.