Recall all the angst about “global imbalances” a couple of years back? For how long, said the critics, could the US continue to splurge on consumption, while the industrious Chinese exported their goods and recycled their surpluses into US treasurys?
On one side were those who said that these imbalances would lead to a financial Armageddon, on the other were supporters who said the arrangement was sustainable and closely resembled the earlier Bretton Woods global economic arrangement, with China and the developing nations taking the place of Europe.
Last month, the economists who were the original proponents of the Bretton Woods II world-view—Messrs Michael Dooley, David Folkerts-Landau and Peter Garber—published a paper reiterating that, in the middle of the financial and economic crisis, the Bretton Woods II system is still alive and kicking.
The paper, titled Bretton Woods II still defines the international monetary system compares the current crisis to “a temporary breakdown in the plumbing”. To be specific, this is what they state: “As asset values recover somewhat, US households will partly return to a relatively low savings, debt building, equilibrium. Nearer term and more certain, any slack from tired households will be picked up at least for a while by the large fiscal stimuli that are programmed for the next few years. Emerging markets will be even more convinced that reserve accumulation and export-led growth are the safest development strategy in an uncertain world. Even if recovery is low and growth is sluggish, the pattern of imbalances will be the same in the down-cycle as in the up-cycle. We will still have the same outcomes for current account relation between Asia and the US, the same low real risk-free rates in the industrial countries, and eventually the same accumulation of foreign exchange reserves, just on a subdued scale.”
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It’s true that one of the linchpins of the old system—the continued recycling of surpluses into US treasurys by China—is still continuing.
Recent events, however, seem to suggest that the tide may finally be turning. In January, Japan logged its first current account deficit in 13 years and its largest deficit since comparable records began in 1985. Germany, another big exporter, saw its current account surplus in January shrink at least threefold from the surplus it had a year ago. And most important of all, China’s trade surplus saw a huge decline in February, as exports plunged off a cliff. The mirror image of these declining surpluses was a reduction in the US trade deficit and the US trade gap in January, which was the lowest since October 2002. If this trend continues, those “global imbalances” are likely to disappear of their own accord. But that’s only if governments allow them to. The strange thing is that governments seem to be doing their best to get the global imbalances back.
The US personal savings rate, which dipped into negative territory in 2006, is now back at 5%. That’s higher than the household savings rate in Japan. But the US government is hell-bent on trying to get the US consumer spending again. The same logic applies to China as well. As Dooley et al point out in their paper, “The recent stability of the renminbi clearly suggests that China will attempt to mitigate the decline in exports. Moreover, recently announced policies by China to underpin existing export levels via VAT (value-added tax) rebates, slowdown of appreciation of the currency and subsidies to small export industries are aimed at keeping the export-driven growth programme on track.”
Several other commentators have warned that many of China’s fiscal stimulus measures seemed to be aimed at reviving output in the export sector, which is just another way of dumping its excess capacity on the rest of the world. To be sure, there are plenty of homilies on emerging markets needing to focus on their domestic economies and ditch their one-point agenda. But the problem, as Morgan Stanley’s Stephen Roach wrote in the Financial Times, is:“Apparently, it is too hard for Asian policymakers to establish robust social safety nets and stimulate internal private consumption. Unbalanced Asian economies are desperate for unbalanced US consumers to start spending again and spark another post-crisis recovery.” A recovery which, needless to add, will set the stage for another boom and probably a bigger, even more spectacular bust.
Roach comments: “What a reckless way to run the world.” But what if the attempts to go back to the pre-crisis world are doomed to failure and global rebalancing continues, as the current data seems to suggest? Writing in the Chinese economic magazine Caijing, economist Andy Xie says: “The stimulus could stabilize the economy, but not restart high growth. Exports and property were contributing 6-8 percentage points to GDP (gross domestic product) growth rate per annum in the last cycle and are now contributing a negative amount of similar magnitude. No amount of stimulus could completely offset the impact of their contraction. Further, China is already investing too much and shouldn’t push it excessively to pump up the economy temporarily and face a worse downturn later.” He advocates increasing Chinese household demand and says that “the quickest solution is to redistribute government wealth to the people”. The role model going forward seems to be the relatively insular Indian way, with domestic consumption demand driving growth.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org