from Follow the Money

Do we live in a world dominated by private flows? Or official flows?

August 30, 2006

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Emerging Markets

“The IMF has been asleep at the wheel in an era when private capital flows have been growing at an unprecedented pace” 

So says Tim Adams, the Treasury Under Secretary (in the New York Times).

I think it would be more accurate to say that:

“The IMF has been asleep at the wheel in an era when official capital flows have been growing at an unprecedented pace”

It is true that private capital flows to emerging markets have recovered, more or less, to their pre-crisis levels.   If they are now growing fast, it is only because they fell so far.  In absolute terms, they must be a smaller share of the world economy than in the mid-1990s. 

And what are those capital flows now used for?   In aggregate, to build up the emerging world’s reserves.   Private capital flows to the emerging world come back to the industrial world as official capital flows.   

I used to work for the Treasury, so I know that the notion that we live in a world dominated by private capital flows is part of the Treasury’s boilerplate.   But it is time to retire that boilerplate! 

The defining feature of today’s world economy is how big a role official actors – central banks and oil investment funds – play in the global flow of capital. Don’t believe me?    Look the WEO data.   The IMF may be a bit sleepy, but it usually gets its numbers right.

Try Table 35 of the WEO's statistical appendix.   Emerging and developing countries added $525b to their reserves in 2005.   That is the change in their reported stock of reserves.   Adjust for changes in the dollar/ euro and the real "flow" increase was well over $600b.   You also might want to add the $90b in “other official outflows” that appear in Table 33 from the Middle East to that total.   That presumably picks up on the activities of the Gulf’s oil investment funds.   

Compare that sum – it is about $700b – with the $250b net private flows to the emerging world the IMF reports in Table 1.2 in the WEO.   Incidentally, the IMF reports $580b in reserve growth here (I am not quite sure what explains the difference, as I don't think the IMF adjusts for valuation – it may be the IMF folks are including all the Saudi’s central banks foreign assets in table 1.2).  The sum of official outflows and reserve outflows in table 1.2  is around $720b.   

$700b in official outflows.  $250b in private inflows.  What is bigger? 

Think a bit.  Where are the big savings surpluses of the world now found?   China, Japan and the oil exporters.   Only in Japan are private flows the vector that carries those domestic saving surpluses into global markets.   China’s central bank invests the dollars generated by China’s current account (savings) surplus – along with the dollars coming in from private capital flows.    The Russian central bank manages most of Russia’s savings surplus.  T The Saudi surplus is managed by the Saudi Monetary Agency and a host of other quasi-official bodies.  No one knows for sure where the Emirates savings surplus is found, but the Abu Dhabi investment authority seems like a might good guess.

Russia’s reserves were up $15b in July.  The Saudi Monetary Agency’s foreign assets rose by $7b.    Annualize $22b a month.  It is real money.  And there are lots of other countries that produce oil too.

Or just read Martin Feldstein’s Jackson Hole comments.  He gets it. 

That said, I am being a bit unfair on my Treasury friends.   Their boilerplate is dated.  But their policy is not. 

China – and a host of other countries – do need to be given a larger stake in the IMF.  Otherwise they will opt out of the “system” even more than they have already.
Dan Drezner asked all the right questions earlier today.  I won’t repeat them.   The Treasury is gambling that increasing China’s stake in the institutions of international economic governance will prompt China to act like more of a responsible stakeholder – and be a bit less inclined to rely on exports and under-valued currency to drive its own growth.   It is a gamble though.

I’ll answer Dan’s last question directly.  Dan wrote:

If I had told you five years ago that Weisman would write the following sentence:

But because the I.M.F. has not recently had a major crisis, some economists joke that with little to do, board members have the luxury of squabbling among themselves for power over an organization with an ill-defined mission”

would you have believed me? 

The answer is no.    I should know.  I spent a year and a half writing a book about IMF crisis lending.  I thought it was an important issue.   It just happened to be published when the IMF stopped lending.  Bad timing.

Yet the next time trouble strikes, if nothing changes, it could well be that the IMF does NOT resume lending.   China might decide not to outsource crisis lending to the IMF, so to speak.   

One of more consequential decisions the US made in the 1990s was not to bailout lending itself, and instead rely on the IMF.    Make no mistake though, the US had the financial capacity to do big bailout itself.    The Bush Administration has shown that the Treasury can borrow big time to finance a war (and a remarkably unsuccessful reconstruction).  It certainly could borrow big time to finance crisis lending.   But after Mexico, the US decided to invest in building up the IMF’s lending capacity rather than creating the institutional mechanisms needed to do bilateral crisis lending.   China will likely be faced with the same choice at some point.  

That is one other reason why the debate over IMF governance matters.

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