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Currency undervaluation and sovereign wealth funds : a new role for the World Trade Organization

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  • Mattoo, Aaditya
  • Subramanian, Arvind

Abstract

Two aspects of global imbalances - undervalued exchange rates and sovereign wealth funds - require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund has not been effective in dealing with undervalued exchange rates. This paper proposes new rules in the World Trade Organization to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The World Trade Organization would not be involved in exchange rate management, and would not displace the International Monetary Fund. Rather, the authors suggest ways to harness the comparative advantage of the two institutions, with the International Monetary Fund providing the essential technical expertise in the World Trade Organization's enforcement process. There is a bargain to be struck between countries with sovereign wealth funds, which want secure and liberal access for their capital, and capital-importing countries, which have concerns about the objectives and operations of sovereign wealth funds. The World Trade Organization is the natural place to strike this bargain. Its General Agreement on Trade in Services, already covers investments by sovereign wealth funds, and other agreements offer a precedent for designing disciplines for these funds. Placing exchange rates and sovereign wealth funds on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups.

Suggested Citation

  • Mattoo, Aaditya & Subramanian, Arvind, 2008. "Currency undervaluation and sovereign wealth funds : a new role for the World Trade Organization," Policy Research Working Paper Series 4668, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4668
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    References listed on IDEAS

    as
    1. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
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    Cited by:

    1. Tsani, Stella, 2013. "Natural resources, governance and institutional quality: The role of resource funds," Resources Policy, Elsevier, vol. 38(2), pages 181-195.
    2. Ho-don Yan & Cheng-lang Yang, 2012. "Does an Undervalued Currency Merit Economic Growth? – Evidence from Taiwan," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(1), pages 37-57, March.
    3. Auboin, Marc & Ruta, Michel, 2011. "The relationship between exchange rates and International Trade: A review of economic literature," WTO Staff Working Papers ERSD-2011-17, World Trade Organization (WTO), Economic Research and Statistics Division.
    4. Petr Sedláček, 2010. "State-Run Investment Funds: Major Institutional Investors on Global Financial Markets," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(2), pages 3-22.
    5. Marcus Giamattei & Johann Lambsdorff, 2015. "Balancing the current account: experimental evidence on underconsumption," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 670-696, December.
    6. Arvind Subramanian & Martin Kessler, 2013. "The Hyperglobalization of Trade and Its Future," Working Paper Series WP13-6, Peterson Institute for International Economics.
    7. Timilsina, Govinda R. & Shrestha, Ashish, 2008. "The growth of transport cector CO2 emissions and underlying factors in Latin America and the Caribbean," Policy Research Working Paper Series 4734, The World Bank.
    8. Reisen, Helmut, 2008. "How to spend it: Commodity and non-commodity sovereign wealth funds," Research Notes 28, Deutsche Bank Research.
    9. Bernard M. Hoekman, 2013. "Global Governance of International Competitiveness Spillovers," RSCAS Working Papers 2013/33, European University Institute.
    10. Juan Marchetti & Michele Ruta & Robert Teh, 2012. "Trade Imbalances and Multilateral Trade Cooperation," CESifo Working Paper Series 4050, CESifo Group Munich.
    11. Schalast, Christoph & Tiemann, Marcel & Tuppi, Pascal, 2009. "Staatsfonds - neue Akteure an den Finanzmärkten?," Frankfurt School - Working Paper Series 114, Frankfurt School of Finance and Management.
    12. José Antonio Ocampo, 2016. "Global macroeconomic cooperation and the exchange rate system," WIDER Working Paper Series 049, World Institute for Development Economic Research (UNU-WIDER).
    13. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
      [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
      ," MPRA Paper 51332, University Library of Munich, Germany.
    14. Alhashel, Bader, 2015. "Sovereign Wealth Funds: A literature review," Journal of Economics and Business, Elsevier, vol. 78(C), pages 1-13.
    15. Mattoo, Aaditya & Subramanian, Arvind, 2008. "Multilateralism beyond Doha," Policy Research Working Paper Series 4735, The World Bank.
    16. L. Alan Winters, 2012. "Living with China—Locally and Globally," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(4), pages 37-58.
    17. Bernardo Bortolotti & Veljko Fotak & Giacomo Loss, 2017. "Taming Leviathan: Mitigating Political Interference in Sovereign Wealth Funds’ Public Equity Investments," BAFFI CAREFIN Working Papers 1764, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    18. L Alan Winters, 2015. "China and the World Trading System: Will ‘In and Up’ be replaced by ‘Down and Out’?," RSCAS Working Papers 2015/82, European University Institute.
    19. Sauvé, Pierre, 2013. "The Road to Bali: ERIA Perspectives on the WTO Ministerial and Asian Integration," Papers 645, World Trade Institute.
    20. Freund, Caroline & Pierola, Martha Denisse, 2008. "Export surges : the oower of a competitive currency," Policy Research Working Paper Series 4750, The World Bank.
    21. Tsani, Stella, 2015. "On the relationship between resource funds, governance and institutions: Evidence from quantile regression analysis," Resources Policy, Elsevier, vol. 44(C), pages 94-111.

    More about this item

    Keywords

    Emerging Markets; Debt Markets; Economic Theory&Research; Trade Law; Currencies and Exchange Rates;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations

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