In a world economy dominated by America, the U.S. Treasury secretary carries enormous responsibility and power. Robert Rubin resigned from that exacting post Wednesday, but it's not clear whether his designated replacement, Deputy Treasury Secretary Lawrence ("Larry") Summers, is the right man for the job.
The market, finding it hard to part with Rubin, wants to believe that Summers is a younger, uncouth version of his former boss. Comments about Summers can be summarized thus: Yes, he can be arrogant and lacks Rubin's charm, but he's an intellectual powerhouse who contributed much to recent Treasury policies. And, anyway, during the remaining 18 months of the
presidency, international markets are unlikely to be anywhere near as volatile as they have been over the past couple of years.
If only life were that simple.
In fact, Summers, a former
economist who's been at the Treasury since 1993, faces a wide range of challenges -- across the globe.
Russia still teeters on the edge of economic collapse and severe political instability. Much of Latin America remains sickly. U.S. relations with Europe are deteriorating, due to trade spats and sluggish growth in many
countries. Japan's economy stubbornly sticks to the doldrums. And, at home, Summers faces political and intellectual enemies eager to attack him on issues like the size of the U.S. trade deficit and funding for the
International Monetary Fund
"Summers has got an incredibly easy treatment from the media, but he has been responsible for the misdirection of the Treasury's international economic policy," says Charles Calomiris, professor at
Columbia Business School
According to Calomiris, one of the biggest Rubin-Summers foul-ups was Russia's surprise devaluation in August last year just weeks after the Treasury pushed hard for a $22 billion IMF-led aid package for the country.
It's ironic, then, that Rubin's resignation should happen the very day that President
sacked his popular prime minister
, plunging Russia into a constitutional crisis. This creates a huge headache for Summers. The IMF late last month agreed to new loans of up to $4.5 billion for Russia, even though the country had, in preceding months, defaulted on most of its foreign and domestic debts. It wasn't immediately clear Wednesday whether Primakov's sacking would prompt the IMF to put its new loans on hold.
It is widely accepted that the U.S. Treasury and
heavily influence the IMF's Russia policy. The U.S.' recent desire to gain Russia's acceptance of
Kosovo strike may have been the main factor behind the IMF's most recent decision to lend to Russia. One has to wonder: Was it this IMF move that finally persuaded Rubin to leave? In an address Wednesday, Clinton said Rubin told him of his desire to leave the Treasury two weeks ago -- just about the time the IMF announced its Russia loans.
Critics say that IMF loans create moral hazard in the global economy. If the West props up one country with a bad economy, then investors will not be afraid to invest in other troubled nations, which will go on to have their own crises later. For example, Brazil's devaluation in January this year was only six months after Russia's. And Brazil's currency crunch also followed an IMF package.
The moral hazard theory is hard to prove. But, assuming it is valid, what might be the next emerging nation to blow up? Argentina, with its poor fiscal and trade performances, looks increasingly vulnerable. And, worryingly, the IMF seems all too ready to re-deploy its lend-no-matter-what strategy. This week, the IMF gave indications that it's going to agree to a relaxation of Argentina's fiscal deficit target -- for the second time this year.
In the developed world, Europe and Japan present difficulties for Summers. The U.S. has an historically large current account deficit because Europe and Japan, due to a lack of economic growth, are not importing large amounts of American goods. The larger the current account deficit, the greater the chance that the dollar will slide precipitously. In addition, a large trade deficit is also being seized upon as a political issue by U.S. industries hit by cheap imports, like steel.
The recent trade disputes with the European Union over bananas and beef show how strained relations can become. Summers may end up having to call on the EU to cut interest rates and speed up structural reforms to get growth, says Adam Posen, a research fellow at the
Institute for International Economics
. The Europeans may not take kindly to jawboning from Summers. That said, this tactic seems to have had some effect on the Japanese, who have recently moved to stimulate and reform their economy, using some of the policies Summers strongly recommended.
In fact, Japanese relations may be one bright spot for Summers, says Posen. He notes that
, a long-time academic acquaintance of Summers, is likely to soon hold the No. 2 bureaucratic post at the Japanese Ministry of Finance after the expected departure of the
, currently the No. 1 civil servant in the ministry and also an old friend of Summers.
It may be China that really tests Summers. U.S. relations with the country have been friendly for most of Rubin's term. After the NATO bombing of the Chinese embassy in Belgrade, that has changed. Tense issues could include China's possible membership in the
World Trade Organization
and the size of the U.S. trade deficit with the country. Both issues would be massively complicated if China were to devalue, as some expect.
U.S.-Chinese relations need to be handled with sophistication and sensitivity. Not Summers' strong points.