New Economist: Global imbalances: Martin Wolf warns of 'painful' adjustments ahead
リンク: New Economist: Global imbalances: Martin Wolf warns of 'painful' adjustments ahead.
Global imbalances: Martin Wolf warns of 'painful' adjustments ahead
Plenty has been written about the vexed issue of global imbalances lately. Brad DeLong has an illuminating post-Jackson Hole account of the two opposing sides in the coming dollar crisis debate (see also the comments). Stephen Roach explains the asymmetrical risks of global rebalancing and discusses timing the rebalancing call. And of course the IMF's latest World Economic Outlook devotes a whole chapter to Global Imbalances: A Saving and Investment Perspective (PDF). The report also features an excellent 23 page appendix How Will Global Imbalances Adjust? (PDF) by Doug Laxton and Gian Maria Milesi-Ferretti.
Martin Wolf responds to the IMF research in today's Financial Times: Do not put off imbalances correction (subscribers only, but long quote over the fold). He discusses the two contrasting views of what is driving global imbalances:
As the latest World Economic Outlook from the International Monetary Fund notes, analysts have advanced two contrasting views of what is driving the global pattern of surpluses and deficit. The first is that the fiscal deficits of President George W. Bush and monetary laxity of Alan Greenspan, Federal Reserve chairman, have caused the US external deficits. The US is chronically under-saving, rather than the rest of the world over-saving.
The alternative view is that the driving force has been an increase in the surplus of savings over investment particularly in emerging Asia and, more recently, in the oil exporting countries. These surpluses have been channelled to the US as borrower and spender of last resort. US profligacy is thus a mirror image of the thrift of others. Without it, the world would have suffered from chronically weak demand.
Regular readers will know that I have long taken the second of these views. The most compelling justification for this is that the “blame America” view could, as the WEO notes, “not explain the low level of real interest rates”. Lower net savings in the US would, on its own, raise world real interest rates, not lower them. Equally, if the Federal Reserve’s monetary policy were too lax one would expect to see more signs of global inflationary pressure.
This is not a blanket defence of US policy: its structural fiscal deficits are perilous. Yet, it should not be hard to accept that countries with large current account surpluses bear at least as much responsibility for global “imbalances” as those with the deficits.
The WEO makes four observations on what is driving these surpluses, summarised by Wolf:
First, across the world as a whole, global investment and savings rates have tended to fall since the early 1970s.
Second, while investment rates have converged in the advanced countries, at about 20 per cent of gross domestic product, savings rates have not. Among the significant advanced economies, savings remain highest in Japan and lowest in the US, with the eurozone in the middle. This explains why Japan has a current account surplus, the US has a huge deficit and the eurozone is roughly in balance.
Third, Asian countries both save and invest a much higher share of GDP than other emerging market economies and than oil producers. But China’s savings and investment rates have exploded to extraordinarily high levels, with savings outstripping investment. In other east Asian economies savings have remained steady, but investment has fallen sharply since the 1997-98 crisis.
Fourth, China’s savings rate is now running at close to 50 per cent of GDP. Government savings are close to 12 per cent of GDP, household savings at 16 per cent and company savings at 22 per cent. Should China’s investment rate decline to 40 per cent of GDP, from its recent peak of more than 45 per cent, China would run a current account surplus of 10 per cent of GDP.
This picture makes one thing quite clear. While changes in current account surpluses require adjustment of the relationship between savings and investment, the better response is not always (or even normally) a reduction in savings rather than an increase in investment. In many countries, higher investment would be highly desirable, since investment is exceptionally weak and corporate savings correspondingly high.
Desirable adjustment would then see higher investment in many parts of the developing world, higher savings in the US and a smooth shift in the global pattern of deficits, all without a significant recession.
The IMF provide three scenarios: a benign market-led adjustment, a malign adjustment and a policy-driven adjustment.
Under the first, US savings rise and the dollar depreciates by a further 15 per cent, in real terms. There is also some slowdown in US economic growth. But the current account deficit falls to a sustainable 3 per cent of GDP in the long run, with net liabilities stabilising at 70 per cent of GDP. The principal counterpart is in emerging Asia, where a sharp rise in consumption offsets some decline in investment, while real exchange rates appreciate by about 15 per cent, because of relatively high inflation. The impact on Japan and the eurozone is limited.
The more abrupt market-led adjustment assumes rising protectionist pressures, a loss of confidence in US assets and abandonment of exchange-rate pegs. This generates a significant slowdown in the US. The dollar experiences a sharp decline and US inflation jumps, generating a sharp rise in interest rates. Asian emerging countries suffer sharp appreciations and also a slowdown in activity. Growth slows sharply in Japan and the eurozone.
Finally, the WEO explores policy options. Greater exchange flexibility in Asia, it argues, would facilitate a smoother adjustment, by stimulating domestic consumption and containing inflationary pressures. Again, fiscal consolidation in the US, leading to a balanced budget by 2010, lowers the current account deficit by about 2 per cent of GDP over 10 years. The WEO looks at structural reform in the eurozone and Japan, which generates an investment boom. This helps adjustment, but considerably less than US fiscal consolidation.
Wolf concludes:
The bottom line is straightforward: to be confident of a benign adjustment one needs changes in policies in several places at once. Among the most important elements of such policies are significant movements in real exchange rates, higher savings in the US and higher spending, relative to GDP, in the rest of the world, but particularly in emerging Asia. The result would not only be more balanced global growth, but each region would be better off.
Is this benign outcome likely? No, is the short answer. It is far more likely that the world will continue as it is, since there are strong vested interests in current policies in every country. If the postponed adjustment ultimately proves painful, however, let nobody dare say they were not warned.
