Policy Divergences: Structural Versus Relations Power

Deutsche Bank’s Emerging Market analyst, Markus Jaeger, explains what I think is a relevant nuance between the role of foreign currency reserve, and one of a national currency (or one that is not)-e.g. US dollar versus Philippine peso or China's yuan.

Mr. Jaeger writes, (bold emphasis mine)

Put differently, the US pursues an economic policy – namely a lax fiscal policy and quantitative easing – it deems to be in its interest and however the EM respond to it is of little consequence to the US. This is a prime example of continued US “structural power”. Structural power is the power of a state to indirectly influence others by controlling the structures within which they must operate – in this instance, the international monetary system. This differs from “relational power”, or the ability of one state to influence another state's behaviour directly in pursuit of specific outcomes. This describes the situation quite accurately, for Washington is not seeking to influence other countries’ policies. It is simply pursuing policies it deems to be in its interest. Meanwhile, the EM have no way of influencing US macro-policy and are therefore left to deal with the QE-driven capital inflows and the implications of rising US government debt.

Some thoughts:

I agree with the essence of the differentiation.

But I think this observation underrates the role played by external influence on US policies. For instance, has Federal Reserve’s QE been aimed solely at ‘jumpstarting aggregate demand’? Or has it been designed to protect the banking system? Or has it been engineered to promote exports? Or possibly all of the above?

Point is: Policymakers can read external goals combined or as part of internal or national interests too. In short, instead of a black and white, gray areas (mixture of internal and external interests) can be assumed to determine policy objectives (The Fed’s loan to Libya’s Gaddafi in 2009 should be an example).

Two, this appears to underscore the Triffin dilemma dynamics—conflicts of interests that may arise from international and domestic objectives from a country whose currency is considered as foreign currency reserve. For example, the US may be applying policies for its own interest but because of its currency reserve status, her policies affect other economies and consequently their policies.

Three, although the implication is that the US has a lopsided influence on the world with its internally driven policies, I think this perspective lacks the perspective of the feedback mechanism as consequence from US policies. Think currency arbitrages (carry trades) or real economic effects of QE-e.g. greater demand for food or oil or other commodities.

Nevertheless, the best evidence that proves or disproves such proposition is if the next bust emanates from Emerging Markets (such as China), then here we should see whether US policies will remain impervious and or unaffected or will adjust accordingly along with economies affected by the EM recession or crisis.