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SPEAKING
FREELY
Unwinding global
imbalances
By Huw McKay
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
The
global "imbalances mess" - chronic deficits and
low savings in some countries, with chronic
surpluses and high savings in others - is a
structural issue, not a cyclical one. At the most
basic level, understanding both the disease of,
and the cure for, imbalances means a detailed
investigation of the supply and use of global
savings. The sooner this fundamental point is
acknowledged within the US administration,
breaking the current fixation with exchange rates,
the better it will be for all
concerned.
For
every dis-saver, there must be a willing and able
lender to accommodate such behavior. When a gross
degree of dis-saving emerges in a single large
economy, we can deduce that either an economy of
similar scale has increased its savings in
lock-step, or a number of regions have
simultaneously increased their savings to the
degree necessary to accommodate the dis-saving
shock. This is the "emboldened large borrower"
thesis. Alternatively, the causation may run the
other way. A structural break in savings behavior
in one region, reflected in a shift from current
account deficit to surplus over a short time
frame, may encourage other regions to increase
their consumption demand as relative prices shift.
Our view on the evolution of global
imbalances is that the latter scenario describes
the five years following the Asian economic
crisis. A sharp rise in savings across developing
Asia, and to a lesser extent elsewhere in the
emerging world, lowered the price of capital, and
encouraged higher Anglo-Saxon consumption. A more
productive allocation of global capital was
evident in the pre-crisis world, when capital
accumulation in the developing world was funded by
the capital-rich industrial countries. The former
scenario - the "emboldened large borrower" - is
the apposite characterisation of the last three
years, which have seen a large downswing of the US
dollar.
To illustrate this view, consider
the trade positions of the US, G7 minus the US,
developing Asia, the Western Hemisphere and the
Middle East. The US and G7 positions mirrored each
other prior to the Asian crisis, before diverging
significantly after that time. This structural
shift can only be interpreted as a response to the
austerity regime imposed in crisis-ridden Asia,
and to a lesser extent the rest of the developing
world. It is worth noting that not only Asia, but
Latin America and the Middle East significantly
boosted their national savings around this time.
So in this first case, the US was the consumer of
last resort. However, in recent years, it has
became an "emboldened large borrower" accessing
cheap offshore funding to sustain the degree of
affluence it has become accustomed to. The US's
ugly twin deficit position (trade deficits and
government fiscal deficits) is the result.
The world economy now faces the unwelcome
task of getting back toward a more efficient
allocation of capital without engineering a major
slowdown in activity. The hope is that stronger
growth in domestic demand in the developing world
will offset any slowdown in the US. Pension reform
in Asia is part of the answer. Vietnam saw a 5% of
GDP decline in the national saving rate due to
credible public pension reform. Higher
consumption/investment in Asia would raise the
cost of capital globally by limiting the supply of
savings. This would call the bluff of the
emboldened borrower(s): notably the US, but also
the UK, Australia and New Zealand.
A
shifting composition of Asia's growth toward
domestic demand would also be accommodative of
currency appreciation in that region. However, we
do not see currency movements (ie, a spectacular
across-the-board USD decline) as the circuit
breaker for the imbalances issue. Empirical
studies find mixed evidence relating to the impact
of exchange rate swings on the investment-savings
balance. The reason that a line of causation
running from exchange rates to investment/savings
decisions is difficult to find empirically is that
exchange rates react to shifts in the underlying
fundamentals: they do not bring about the shift
themselves. They are a symptom, a residual.
That is why the US's recent focus on the
valuation of the Chinese currency is so
wrongheaded. Attempting to badger China into
further flexibility in its exchange rate policy is
an awkward strategy with an indeterminate payoff
matrix. Given that indigenous US and Chinese firms
compete directly in very few industries, and the
two countries exhibit extremely different
comparative advantages, the impact on bilateral
trade flows of even a large revaluation would be
minimal in a volume sense.
The very real
risk is that the "debate", if we can call it that,
is turned over to the US Congress. The
"Schumer-Graham Bill", which calls for a punitive
tariff of 27.5% on all Chinese goods if sufficient
revaluation is not forthcoming, is an unwelcome
document. The recent withdrawal of this bill,
following China's modest 2.1% revaluation of the
yuan, only increases the likelihood of a further
politicizing of the issue further down the line.
If China continues to closely manage the
yuan-dollar exchange rate within a tight band (the
average daily move since the revaluation has been
–0.006%), the manufacturing lobby and the
politicians who are influenced by them will again
start beating the drum. China's move to a more
liberal foreign exchange regime has clearly only
delayed, rather than extinguished, the onset of
the sword of Damocles that the US Congress seems
so eager to wield.
The US trade balance
can undergo a cyclical improvement in the absence
of a structural turnabout in regional savings
preferences. A lower oil price will assist in the
first instance. But it cannot undergo a structural
improvement if the developing world, particularly
Asia, refuses to revert to its natural role as a
net international borrower. The existing
imbalances will unwind graciously if Asia shifts
gradually but assertively back toward net borrower
status. If the US attempts to impose this outcome
through regressive policies that reinforce its
growing unilateralism, it is unlikely that global
economy can exit the imbalance era without a
damaging interregnum for global growth.
Huw McKay is a senior
international economist at Westpac Bank in Sydney,
Australia. He is the bank's spokesperson on
pan-Asian economic and market issues.
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click
here if you are interested
in contributing. |
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