Two troubling features of the ongoing economic recovery are the depressed nature of world trade and the early revival of international global payment imbalances. Estimates by the IMF and the UN indicate that the volume of international trade this year will still be 7 percent to 8 percent below its 2008 peak, while many or most countries, including industrial nations, are seeking to boost their current accounts.
Indeed, if we believe the IMF’s projections, the world economy’s accumulated current-account surpluses would increase by almost US$1 trillion between last year and 2012. This is, of course, impossible, as surpluses and deficits must be in balance for the world economy as a whole. It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy.
Under these conditions, export-led growth by major economies is a threat to the world economy. This is true for China, Germany (as French finance minister Christine Lagarde has consistently reminded her neighbor), Japan and the US. Countries running surpluses must adopt expansionary policies and appreciate their currencies. More broadly, to the extent that major emerging-market countries will continue to lead the global recovery, they should reduce their current-account surpluses or even generate deficits to help, through increased imports, spread the benefits of their growth worldwide.
While that implies that emerging-market currencies must strengthen, disorderly appreciations would do more harm than good. To use an American saying, it might mean throwing out the baby (economic growth) with the bathwater (exchange rate appreciation).
Consider China, which accounts for the largest share by far of world trade among emerging economies. Real appreciation of the yuan is necessary for a balanced world economic recovery but disorderly appreciation may seriously affect China’s economic growth by disrupting its export industries, which would generate major adverse effects on all of East Asia. China needs a major internal restructuring from exports and investments, its two engines of growth in past decades, to personal and government consumption (education, health and social protection in the latter case). However, this restructuring will tend to reduce, not increase, import demand, as exports and investment are much more import-intensive than consumption.
Moreover, a sharp appreciation of the yuan could risk domestic deflation and a financial crisis. Chinese authorities certainly seem to have that interpretation of the roots of Japan’s malaise in mind as they seek to avoid rapid revaluation.
The only desirable scenario, therefore, is a Chinese economy that transmits its stimulus to the rest of the world mainly through rising imports generated by rapid economic growth (ie, the income effect on import demand), rather than by exchange-rate appreciation (the substitution effect). This requires maintaining rapid growth while undertaking a major but necessarily gradual domestic restructuring, for which a smooth appreciation is much better suited.
Now consider other major emerging markets. Here, currency appreciation is already taking place, pushed by massive capital inflows since the second quarter of last year, and in some cases it can already be said to be excessive (for example, in Brazil).
These countries can, of course, resist upward pressure on their currencies by accumulating foreign-exchange reserves, like they did before the global financial crisis. The result is, of course, paradoxical: Private funds that flow into these countries are recycled into US Treasury securities via investment of accumulated reserves. Why should emerging-market countries’ undertake this peculiar financial intermediation, which represents a major cost, as the yield of private funds is higher than that of reserves?
The implication here is that relying on free movement of capital to achieve exchange-rate appreciation and current-account deficits may generate a myriad of problems, including slower economic growth and the threat of asset bubbles and financial crises of their own. So, a more orderly way to induce current-account deficits without risking disruption of emerging economies’ growth should be considered.
One solution (already adopted to some extent by a few countries) is broader use of capital-account regulations. This issue, however, has been entirely absent from current global debates on financial reform. Fortunately, the IMF opened the door to discussion of this issue in a recent staff position paper.
Equally important, a desirable scenario is possibly one in which most developing countries run current-account deficits. However, this requires major reforms in the global financial system to reduce the vulnerabilities that such deficits generated in the past and that were reflected in major financial crises in the developing world.
These past crises gave rise to a form of “self-insurance” among developing countries through reserve accumulation. This helped many of them weather the recent storm, but it also contributed to global payments imbalances.
Recent IMF reforms are just a step in the direction of trying to create better financial instruments to help these countries. It is essential, in particular, to create reliable large-scale financing for developing countries during crises, through a mix of counter-cyclical issuance of Special Drawing Rights and emergency financing without onerous conditions.
Jose Antonio Ocampo, a professor at Columbia University, is a former UN under-secretary-general for economic and social affairs, and former Colombian finance minister.
COPYRIGHT: PROJECT SYNDICATE
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
As Maldivian President Mohamed Muizzu’s party won by a landslide in Sunday’s parliamentary election, it is a good time to take another look at recent developments in the Maldivian foreign policy. While Muizzu has been promoting his “Maldives First” policy, the agenda seems to have lost sight of a number of factors. Contemporary Maldivian policy serves as a stark illustration of how a blend of missteps in public posturing, populist agendas and inattentive leadership can lead to diplomatic setbacks and damage a country’s long-term foreign policy priorities. Over the past few months, Maldivian foreign policy has entangled itself in playing
A group of Chinese Nationalist Party (KMT) lawmakers led by the party’s legislative caucus whip Fu Kun-chi (?) are to visit Beijing for four days this week, but some have questioned the timing and purpose of the visit, which demonstrates the KMT caucus’ increasing arrogance. Fu on Wednesday last week confirmed that following an invitation by Beijing, he would lead a group of lawmakers to China from Thursday to Sunday to discuss tourism and agricultural exports, but he refused to say whether they would meet with Chinese officials. That the visit is taking place during the legislative session and in the aftermath