Raghuram Rajan writes,
In other words, before the 2008 global financial crisis, emerging and developed countries were locked in a dangerous symbiosis of capital flows and demand that reversed the equally dangerous pattern set before the emerging-market crises of the late 1990s. In the aftermath of the 2008 crisis, the pattern reversed itself once again, as capital flowed to emerging markets from developed countries, setting up fragilities that will come fully to light as developed-country monetary policy tightens.
In an ideal world, the political imperative for growth would not outstrip an economy’s potential. In the real world, where social-security commitments, over-indebtedness, and poverty will not disappear, we need ways to achieve sustainable growth. Above all, we need to avoid beggar-thy-neighbor policies, such as unconventional monetary policy or sustained exchange-rate intervention, that primarily induce capital outflows and competitive currency devaluations.
The bottom line is that multilateral institutions like the International Monetary Fund should exercise their responsibility for maintaining the stability of the global system by analyzing and passing careful judgment on each unconventional monetary policy (including sustained exchange-rate intervention). The current non-system is pushing the world toward competitive monetary easing, to no one’s ultimate benefit. Developing a consensus for free trade and responsible global citizenship – and thus resisting parochial pressures – would set the stage for the sustainable growth the world desperately needs.