The Foreign Service Journal, February 2011

F E B R U A R Y 2 0 1 1 / F O R E I G N S E R V I C E J O U R N A L 19 needed — and the position of the United States within that frame- work — are issues in which the State Department must play an im- portant role. But State need not — indeed, should not — be involved in decisions Federal Reserve Chair- man Ben Bernanke makes to set monetary policy. George Shultz, who headed both the State Department and the Department of the Treasury (among many other governmental positions), has rightly observed that those are the two Cabinet departments with the strongest interest in, and appreciation for, the importance of a stable international economic framework. Leaders in both departments un- derstand that the Bretton Woods system that grew out of the ashes of World War II needs to be modernized and strengthened. In today’s dynamic global economy, national economies must constantly adjust to far-reaching changes in tech- nologies and competitive situations. Past financial sys- tems — including the fabled gold standard and the Bretton Woods system—were not effective in facilitating such adjustments. Floating international exchange rates provide a system that can be more effective in accommodating big shifts, such as the rise of the emerging nations (e.g., the BRIC countries: Brazil, Russia, India and China) and major technological advances that drive economic change. A floating exchange rate system only works well, however, if the major economies in the system refrain from manipu- lating their currencies for competitive advantage. Other- wise, the costs of adjustment will not be shared fairly, and the system will become financially, economically and po- litically unsustainable. Today, the international payments system is funda- mentally out of balance and unsustainable. China is fol- lowing a growth strategy based on artificially depressing the value of its currency in order to promote exports. Eu- rope’s commitment to the integrity of the euro zone is under challenge because the European Union has not maintained the internal discipline it promised on national budget deficits and financial sector surveillance. As for the United States, the anchor of the system, we are widely suspected of following a monetary policy de- signed to depress the value of the dollar and take advantage of its role as a reserve currency to evade budget discipline. The U.S. must rein in its budget deficit to safe- guard its economic future and the stability of the global economy, as well as its national security. For the system to become bal- anced and sustainable, it needs stronger mechanisms to enforce discipline on the major stakehold- ers and make them more account- able for the policies they pursue. Members of the Group of 20 and international organizations like the International Monetary Fund must formulate stronger international rules to avoid exchange rate manipulation. American ambassadors, deputy chiefs of mission and economic ministers in G-20 countries will have detailed interactions with foreign officials and economists on these issues. Thoughtful and knowledgeable State Department officials such as Secretary of State Hillary Rodham Clin- ton, Under Secretary for Economic Affairs Robert D. Hormats, Assistant Secretary for Economic, Energy and Business Affairs Jose W. Fernandez and their advisers need to be a part of the diplomacy that builds this new in- ternational framework. Peer reviews of national economic policies conducted by organizations such as the IMF and the Organization for Economic Cooperation and Development need to be more searching, more rigorous and more public. In the future, the private sector and international business com- munity will be more vocal about the policy changes that governments need to make. The Role of State To build a transformed global economy, the State Department will need to revamp the way in which it conducts economic diplomacy. Sec. Clinton’s recently completed Quadrennial Diplomacy and Development Review wisely advocates strengthening the economic ca- pabilities of the State Department and putting the focus on promoting economic growth. As a result, the State Department and its diplomats have an increasingly important role in reporting foreign thinking about the management of our economy to Wash- ington—which the Obama administration, Congress and F O C U S Sec. Clinton’s QDDR wisely strengthens the economic capabilities of the State Department and puts the focus on economic growth.