Themes and IssuesGlobal Rebalancing

Charles AdamsSeptember 2010

LKY School of Public Policy

Themes and Issues• Have provided a background paper on Asia’s contribution to the global

rebalancing effort and will draw on the arguments in that paper and some ongoing work.

• I am going to use my allotted time to make five set of arguments that fit well with this session’s focus on the scope and potential for economic policy coordination (or, at least, cooperation) to help address the global imbalances. Note that cooperation is a softer version of coordination.

• The first set of arguments I want to make is that the problem of global economic imbalances continues to remain one of the key challenges facing the international economy . To be sure, the most visible manifestation of these imbalances—current account deficits and surpluses– narrowed sharply during the global crisis but effectively this has just shifted the problem around.

Themes and Issues• What has happened is that the imbalance problem has

become a “growth” problem and has (once again) become an exchange rate problem (with worrisome tensions between the US and China risking evolving into a tit for tat for trade war). The underlying imbalances in spending and saving remain and have still to be fully addressed for the economic imbalances to be resolved.

• In principle , the broad solutions to the global economic imbalance problem are relatively well understood, even though there are significant differences in view across countries about the role that is to be played by greater exchange rate flexibility in helping address the imbalances.

Themes and Issues• Most notably, there is relatively wide agreement that low saving countries

such as the US need to contain consumer spending relative to income while high saving countries such as China need to do the reverse. And there is agreement that these adjustments will require support from a range of policy and other measures.

• Equally important, there appears to be agreement that the required adjustments will ultimately be in the interest of both deficit and surplus countries (as well as the system as a whole). This is because they would not only help to slow down the hitherto excessively rapid rates of international reserve accumulation, but would also help deficit and surplus countries achieve their medium-term growth and employment objectives.

• Accordingly, there is no inherent conflict between reducing global economic imbalances and what is in the major deficit and surplus countries own best interest. This suggests, at least in principle, that the scope for policy cooperation should be high.

Themes and Issues• The second set of points I want to make relates to the need to recognize

that the type of rebalancing challenge that the international economic system is currently facing is not new. There have been many episodes in the past involving significant current account imbalances; where (long standing) asymmetries and N-1 issues in the international monetary system appear to favor one country over another and have made cooperation essential; and in which there have been stark differences across countries regarding the appropriate role of the nominal exchange rate in the international adjustment process.

• What is different this time has been the sheer size and persistence of the underlying imbalances and that the issues cut across both new emerging powers and the established powers in circumstances where the established machinery of global economic governance (including the IMF) are evolving. And, related to the latter point, the established and newer “institutions” for both formal and informal economic cooperation (including the G20) having been having difficulty encouraging the key players to adopt solutions.

Themes and Issues• The third set of points I want to make is that we need a much clearer

understanding of the contribution current international monetary arrangements system have made to the imbalance problem before considering a set of feasible alternative monetary arrangements. In short, there is a need to determine whether the arrangements are the problem or whether it is the underlying policies that are the problem (and whether and how these are connected).

• To be sure, it is not entirely appropriate to refer to the current international monetary arrangements (different exchange rate regimes, a laissez faire approach to international liquidity provision etc) as a system. It is important to remember that this non-system was adopted in the 1970s because it was not possible even at that time, and with a much narrower set of key players, to agree on a new rules based approach to replace the Bretton Woods system of pegged but adjustable exchange rates. It would presumably be even more difficult today.

Themes and Issues• Even more importantly, however, it should be recognized that ANY

international monetary system—and perhaps, more so, one built on fixed exchange rates—would have difficulties absorbing the shocks of the last couple of decades, including the integration of large emerging economic powers of the size of China and India, and would have difficulty adjusting to the huge differences in spending and saving patterns across new and established players. The system has been exposed to a massive stress test.

• Against this background, it is not clear to me that we can avoid addressing the factors underlying current large economic imbalances as a sina qua non for making any system work well. Looking forward, there may be advantages to a somewhat symmetric international monetary system with less reliance on a single national based international reserve asset and with more symmetry in international adjustment but means need to be found to better address the underlying sources of economic imbalances .

Themes and Issues• The fourth set of points I want to make is that the ongoing and entirely

appropriate efforts to strengthen international economic governance and provide a greater voice to emerging economic powers (especially in Asia) need to be supported by greater efforts on the part of new powers to become responsible stakeholders in the international system. International economic stability has the character of a public good (jointness in consumption and non excludability) and risks, as in the case of other public goods, being undersupplied.

• Along with increasing economic power, must come greater responsibility to support the system in times of stress. From time to time, this may call for “compromises” from the most preferred policies that are set from a narrow short run perspective but can ultimately be in everybody’s interest. Most importantly, the smaller players in the system are most vulnerable to the system coming under stress.

Themes and Issues• The final set of points I want to make concerns the need to recognize that

that even though the underlying sources of imbalances in Asia differ (too little saving in some countries, too little investment in other countries) there are many common elements related to high dependence on external extra regional demand. And, in particular, it needs to be recognized that that the effectiveness of rebalancing in the region will depend critically on the potential to exploit mutually reinforcing feedback effects in the economic and financial space.

• For a number of reasons, the deep levels of cooperation sought in Europe would be neither desirable or feasible in Asia. And even relatively modest attempts at cooperation in the context of Asean + x (plug in an appropriate number for x) have been very difficult. At the same time, however, enhanced regional cooperation across a relatively broad range of areas could potentially help the region in the rebalancing effort and increase its resilience. But the progress to date has been disappointing

Themes and Issues• It is still not clear (at least to me) what the most productive and feasible

modalities may be for enhancing regional economic and financial cooperation will be. As in the international area, the conditions for mutually beneficial cooperation appear to be present and efforts continue to be made.

• But thus far, success has not been easy to achieve notwithstanding a wide (but somewhat unfocused) set of initiatives including the bilateral and multilateral Chiang Mai swaps, ABMI and ABF I and II, and a very large number of bilateral and plurilateral economic partnership agreements. And, more recently, various RMB swap and settlement initiatives have been added to the list.

• What continues to remain elusive is Economic Leadership and a strategic vision of how the pieces fit together.