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
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