The IMF's meeting this spring was lauded as a breakthrough, with officials given a new mandate for "surveillance" of the trade imbalances that contribute significantly to global instability. The new mission is crucially important, both for the health of the global economy and the IMF's own legitimacy. But is the fund up to the job?
There is obviously something peculiar about a global financial system in which the richest country in the world, the US, borrows more than US$2 billion a day from poorer countries -- even as it lectures them on principles of good governance and fiscal responsibility. So the stakes for the IMF, which is charged with ensuring global financial stability, are high: If other countries eventually lose confidence in an increasingly indebted US, the potential disturbances in the world's financial markets would be massive.
The task facing the IMF is formidable. It will, of course, be important for the fund to focus on global imbalances, not bilateral imbalances. In a multilateral trading system, large bilateral trade deficits are often balanced by bilateral surpluses with other countries. China might want oil from the Middle East, but those in the Middle East -- with so much wealth concentrated in so few hands -- might be more interested in Gucci handbags than in China's mass-produced goods. So China can have a trade deficit with the Middle East and a trade surplus with the US, but these bilateral balances indicate nothing about China's overall contribution to global imbalances.
The US is jubilant about its success in expanding the IMF's role, because it thought that doing so would ratchet up pressure on China. But the US' glee is shortsighted. If one looks at multilateral trade imbalances, the US stands head and shoulders above all others. Last year, the US trade deficit was US$805 billion, while the sum of the surpluses of Europe, Japan, and China was only US$325 billion. Any focus on trade imbalances thus should center on the major global imbalance: that of the US.
The task of assessing trade imbalances -- whom to blame and what should be done -- involves both economics and politics. Trade imbalances are the result, for instance, of household decisions about how much to save and how much -- and what -- to consume. They are also the result of government decisions: how much to tax and spend (which determines the amount of government savings or deficits), investment regulations, exchange-rate policies, and so forth. All of these decisions are interdependent.
For example, the US' huge agriculture subsidies contribute to its fiscal deficit, which translates into a larger trade deficit. But agricultural subsidies have consequences for China and other developing countries. Were China to revalue its currency, its farmers would be worse off; but in a world of free(r) trade, US farm subsidies translate into lower global agricultural prices, and thus lower prices for Chinese farmers. By extending its largesse to rich corporate farms, the US may not have intended to harm the world's poor, but that is the predictable result.
This poses a dilemma for Chinese policymakers. Subsidizing their own farmers would divert money from education, health, and urgently needed development projects. Or China can try to maintain an exchange rate that is slightly lower than it would be otherwise. If the IMF is to be evenhanded, should it criticize US farm policies or China's exchange-rate policies?
Ascertaining whether a country's trade imbalances are the result of misguided policies or a natural consequence of its circumstances is also no easy task. A country's trade deficit equals the difference between domestic investment and savings, and developing countries are normally encouraged to save as much as they can. Evidently, China's population has more than responded to such admonitions. Stronger safety net programs might reduce the need for precautionary savings in the future, but such reforms cannot be accomplished overnight. Investment is high, but further investment growth risks misallocating money, so reductions in China's trade imbalance may be hard to achieve.
Moreover, a change in China's exchange rate would do little to alter the multilateral trade deficit in the US. Americans might simply switch from buying Chinese textiles to imports from Bangladesh. It is difficult to see how a change in China's exchange rate would have a significant effect on either savings or investments in the US -- and thus how it would redress global imbalances.
With the US trade deficit the major global imbalance, attention should focus on how to increase its national savings -- a question that US governments have struggled with for decades, and one that was frequently debated when I was chair of former US president Bill Clinton's Council of Economic Advisers. While it's true that tax preferences might yield slightly higher private savings, the loss of tax revenues would more than offset the gains, thereby actually reducing national savings. We found only one solution: reduce the fiscal deficit.
In short, the US bears responsibility both for trade imbalances and the policies that might quickly be adopted to address them. The IMF's response to its new mission of assessing global imbalances will thus test its battered political legitimacy. At its spring meeting, the fund failed to commit itself to choosing its head on the basis of merit, regardless of nationality, and it did not ensure that voting rights are allocated on a more limited legitimate basis. Many of the emerging-market countries, for example, are still underrepresented.
If the IMF's analysis of global imbalances is not balanced, if it does not identify the US as the major culprit, and if it does not direct its attention to the US' need to reduce its fiscal deficits -- through higher taxes for the rich and lower defense spending -- the fund's relevance in the twenty-first century will inevitably decline.
Joseph Stiglitz, a Nobel laureate in economics, is professor of economics at Columbia University and was chairman of the Council of Economic Advisers to former US president Bill Clinton and chief economist and senior vice president at the World Bank.
Copyright: Project Syndicate
China badly misread Japan. It sought to intimidate Tokyo into silence on Taiwan. Instead, it has achieved the opposite by hardening Japanese resolve. By trying to bludgeon a major power like Japan into accepting its “red lines” — above all on Taiwan — China laid bare the raw coercive logic of compellence now driving its foreign policy toward Asian states. From the Taiwan Strait and the East and South China Seas to the Himalayan frontier, Beijing has increasingly relied on economic warfare, diplomatic intimidation and military pressure to bend neighbors to its will. Confident in its growing power, China appeared to believe
After more than three weeks since the Honduran elections took place, its National Electoral Council finally certified the new president of Honduras. During the campaign, the two leading contenders, Nasry Asfura and Salvador Nasralla, who according to the council were separated by 27,026 votes in the final tally, promised to restore diplomatic ties with Taiwan if elected. Nasralla refused to accept the result and said that he would challenge all the irregularities in court. However, with formal recognition from the US and rapid acknowledgment from key regional governments, including Argentina and Panama, a reversal of the results appears institutionally and politically
In 2009, Taiwan Semiconductor Manufacturing Co (TSMC) made a welcome move to offer in-house contracts to all outsourced employees. It was a step forward for labor relations and the enterprise facing long-standing issues around outsourcing. TSMC founder Morris Chang (張忠謀) once said: “Anything that goes against basic values and principles must be reformed regardless of the cost — on this, there can be no compromise.” The quote is a testament to a core belief of the company’s culture: Injustices must be faced head-on and set right. If TSMC can be clear on its convictions, then should the Ministry of Education
Legislators of the opposition parties, consisting of the Chinese Nationalist Party (KMT) and the Taiwan People’s Party (TPP), on Friday moved to initiate impeachment proceedings against President William Lai (賴清德). They accused Lai of undermining the nation’s constitutional order and democracy. For anyone who has been paying attention to the actions of the KMT and the TPP in the legislature since they gained a combined majority in February last year, pushing through constitutionally dubious legislation, defunding the Control Yuan and ensuring that the Constitutional Court is unable to operate properly, such an accusation borders the absurd. That they are basing this
RSS