Focus on Global Imbalances
By BRUCE BARTLETT,
Posted: June 24, 2010
On June 25, the finance ministers of the so-called G-20 nations will meet in Toronto to discuss global economic issues. Among those on the agenda will be global imbalances, which I discussed in my column last week. Following are some analyses of this problem, which involve excessive capital outflows from some countries and excessive capital inflows by others that many economists blame for recent global economic instability.
On June 23, the Center for Economic Policy Research in London published an eBook on rebalancing the global economy. It contains essays by Catherine Mann, John Williamson, Ronald McKinnon, Jeffry Frieden, Anne Krueger and other well known international economists.
On June 14, economist Kati Suominen published a commentary on the problem of global imbalances. She reviews the theory and recent history of international capital flows and their contribution to economic instability.
On June 10, Peterson Institute economist C. Fred Bergsten warned that global imbalances may become a problem once again as the Eurozone moves toward current account surpluses that will likely migrate to the U.S. This could sow the seeds of a new financial crisis, he says.
On June 7, University of Wisconsin economist Menzie Chinn posted a study of global imbalances and their contribution to the economic crisis. The combination of excess saving (over domestic investment opportunities) in emerging market economies combined with insufficient domestic saving to finance investment in the U.S. are what led to large capital inflows into the U.S., he argues.
A May 24 study from the Federal Reserve Bank of Cleveland examined foreign capital inflows into the U.S. in recent years. It argues that such inflows raised the real value of the dollar by 16 percent, thus reducing U.S. exports and raising imports (because U.S. goods become more expensive in terms of foreign currencies and foreign goods become cheaper in terms of dollars). The combined effect raised the U.S. current account deficit by 2 percent of GDP, the study concludes.
A May 20 Federal Reserve Bank of San Francisco paper by economists Reuven Glick and Michael Hutchison examined the effectiveness of capital controls in insulating economies from a currency crisis. They are not effective and more likely to lead to overvaluation of the exchange rate and thus cause fluctuations in real GDP, the economists say.
A May paper from the International Monetary Fund looked at the relationship between fiscal balances and the current account. It concluded that a one percentage point of GDP improvement in the fiscal balance is associated with a 0.2 percent to 0.3 percent of GDP improvement in the current account balance.
In a fall 2009 article, Menzie Chinn and Harvard economist Jeffry Frieden argue that the U.S. economy has essentially suffered from a foreign debt crisis of the sort that has been seen in Russia, Mexico, Argentina and many other countries over the last 20 years. Large foreign capital inflows stimulated a boom, encouraged financial leveraging and risk taking, and eventually led to a crash, they conclude.
Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He blogs daily at The and writes a weekly column at The Fiscal Times. Read his most recent column
here
. Bartlett has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).
Previous posts:
June 17: Focus on Sin Taxes
June 22: Focus on Inflation
June 21: Focus on Energy and the Environment
June 18: Weekly Roundup