|
By Pier Carlo Padoan*
PARIS (InDepth News) - One of the side-effects of the global
crisis has been a temporary narrowing of current account imbalances
among the world's major countries and economic areas. This is good
news, but will it last? Policy actions may be needed.
Prior to the crisis, current account imbalances, measured as the
sum (in absolute value) of the world's current account surpluses
and deficits, had risen gradually to reach about 5% of the world's
GDP in 2008. The US accounted for the lion's share of the world's
combined current account deficits. Germany, Japan, China and the
oil-exporting countries made up the bulk of the world's
surplus.
Global imbalances nearly halved in the aftermath of the crisis,
reflecting not least the slowdown in activity around the world and
falling oil prices. Tensions over such external imbalances are not
new, but experience shows that living with sizeable imbalances can
be risky. Until the 2000s, global imbalances had rarely exceeded 3%
of world GDP, except for brief spells. Corrections usually took
place on the back of large, often abrupt, capital and exchange rate
movements.
In the early 1970s, mounting current account mismatches led to the
demise of the Bretton Woods system. In the 1980s, they resulted in
international efforts to co-ordinate exchange rate movements, such
as the G5/G7 Plaza of 1985 and Louvre agreements two years
later.
MIX OF SURPLUS COUNTRIES
What is interesting today is that the mix of surplus countries is
also changing. Japanese surpluses used to be the main counterparts
to the persistent (albeit variable in size) current account
deficits of the US, particularly in the 1980s through the mid-
1990s. But since then, Germany, China and the oil exporting
countries have also become important surplus counterweights to the
US deficits.
Larger imbalances are not a problem as long as they reflect a more
efficient reallocation of savings between surplus and deficit
countries. Globalisation and financial market deepening may have
made it easier for savings to flow from surplus to deficit
countries, which is a positive development.
Deficit countries can therefore turn to foreign savings to finance
investment and growth. By the same token, people in surplus
countries may find higher rates of return for their savings and
investments abroad. This interaction leads to greater efficiency
and helps support global growth.
But now, other, less desirable forces may be driving global
imbalances. A case in point is a lack of exchange rate flexibility
in many emerging-market economies and oil exporting
countries.
How does this work? To maintain a stable exchange rate with the
US, certain countries with high domestic savings have accumulated
international reserves. It is a process that some refer to as
Bretton Woods II, after a fixed exchange rate system that prevailed
until the early 1970s. By implication, the current account deficit
of the US is often said to be driven essentially by demand by
surplus countries, such as China, for liquid assets which they use
to invest their savings in more developed, liquid financial
markets.
HIGH SAVINGS
High savings in several emerging market economies tend to reflect
caution. Households save -- probably more than they need -- because
they cannot rely on social safety nets, such as healthcare and
unemployment insurance that would allow them to smooth consumption
when confronted with an illness or a job loss. They also need to
save for retirement, because pension schemes are usually
underdeveloped. This is the experience of several Asian countries,
including China.
Governments in Asia also save too much for a similar reason; by
building up their international reserves, they create a large
cushion against possible international shocks. Fresh memories of
the Asian crisis of the late 1990s, when investors withdrew huge
sums of money from the region, causing currencies to decline, make
this strategy hard to argue against. Nevertheless, by expanding the
reach of social protection programmes on a durable basis,
governments would reduce their own saving and at the same time make
for lower precautionary household savings.
But that is for the longer term. For now, export-led growth
coupled with inflexible exchange rates will continue to mean
capital, in the form of loans and investments, flowing from poor to
rich countries. This could lead to unsustainable tensions in terms
of exchange rates.
Of course, current account surpluses are not exclusive to large
emerging-market economies. They often reflect demographic structure
too, as in Japan, whose large surpluses are now dwindling, as an
ageing population prepares to tap the vast pool of savings
accumulated in previous years.
In addition, if financial markets are underdeveloped, firms may
decide to retain, rather than distribute, large chunks of their
profits. In more mature economies, a surplus may come from
investing too little, rather than saving too much.
This is the case with restrictive regulations in product markets,
which shield domestic firms from foreign competition and so
discourage entrepreneurship and investment. This is the case of
Germany, for example, as recent analysis carried out by the OECD
shows.
The common point between these underlying drivers of global
imbalances is that they are essentially structural. The trouble is,
in the absence of policy action, the world's current account gaps
will likely widen again as the recovery takes hold.
They may not reach pre-crisis levels, given that at least some of
the drivers of excessive consumption and risktaking are no longer
in place.There is plenty of room for remedial action. To begin
with, greater exchange rate flexibility would be a great help. This
is especially the case for the US dollar and the Chinese renminbi
parity. But exchange rate flexibility is not enough.
Measures to address the root structural causes of surpluses and
deficits are needed. From the above, that means actions directed at
savings and investment: strengthening social protection in surplus
emerging market economies, for instance, and financial and product
market reforms to encourage companies to invest.
These policies would foster greater social cohesion and so should
be welcome in their own right, but would have the added bonus of
lowering savings and rebalancing growth towards domestic sources.
OECD policy advice to China has included policy action in all these
areas.
There is no shortage of options to induce less heated consumption
and higher savings in deficit countries. They include for example
scrapping income tax deductibility for mortgage payments in the US
or shifting the tax base from incomes to consumption.
The panoply of economic and structural initiatives that can be put
in place to correct global imbalances also requires an appropriate
time horizon and policy coordination to succeed. The G20 Framework
for Strong, Sustainable and Balanced Growth, which the OECD
supports, offers an instrument for addressing these challenges by
facilitating policy coherence across countries.
*The writer is Chief Economist, OECD.
Originally published by Inter Press Service. ©
www.streetnewsservice.org
|
