Getting Surplus Countries to Adjust

by John Williamson, Peterson Institute for International Economics

January 2011

It has been 80 years since John Maynard Keynes first proposed a plan that would have disciplined persistent surplus countries. But the Keynes Plan, like the subsequent Volcker Plan in 1972–74, was defeated by the major surplus country of the day (the United States and Germany, respectively), and today China (not to mention Japan or Germany) exhibits no enthusiasm for new revisions of these ideas.

Williamson evaluates the two earlier attempts and several new proposals now on the table. Morris Goldstein proposes using the International Monetary Fund (IMF) to discipline surplus countries. Countries showing large and persistent current account surpluses would receive a Fund mission with the purpose of judging whether the country had a misaligned exchange rate. Penalties would depend on the size and persistence of any misalignment the Fund diagnosed. Aaditya Mattoo and Arvind Subramanian propose that countries could bring a case for unfair trade through currency undervaluation to the World Trade Organization (WTO) dispute settlement system. The WTO would seek to establish the facts of the matter from the IMF. C. Fred Bergsten proposes that either a reserve currency country or the IMF itself should be able to engage in counter-intervention to push up the value of a currency that is being deliberately held down to an undervalued rate through intervention. US Secretary of the Treasury Timothy Geithner, echoing ideas of the Korean G-20 summit hosts and endorsed by Yi Gang, a vice governor of the People's Bank of China, has proposed that members of the G-20 should commit themselves to limit their current account imbalances to a maximum of 4 percent of GDP. Daniel Gros and Gary Hufbauer have advanced other ways of disciplining surplus countries, by limiting or taxing the assets that surplus countries can hold.

Williamson suggests incorporating ideas from the various proposals into a feasible mechanism for disciplining surplus countries. He finds the Mattoo-Subramanian proposal most attractive for typical countries: They focus attention on the exchange rate rather than reserve holdings, seek to use the IMF in an area where it undoubtedly has expertise, but also exploit the greatest success in international cooperation in recent years, namely the dispute settlement mechanism of the WTO. To deal with the problem when a member of a monetary union—which by definition does not have an independent exchange rate—has an excessive surplus, Williamson suggests running the Goldstein proposal in parallel—perhaps operated by the European Central Bank rather than the IMF, and with the focus on the level of demand rather than the exchange rate.

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