from Follow the Money

Too much to read …

September 17, 2006

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I really liked Krishna Guha’s analysis of global imbalances that appeared in Wednesday’s FT.    His emphasis on the role of exchange rate adjustment in global rebalancing seemed right to me.  Exchange rate adjustment alone isn't enough.   But it is also vital.   

Otherwise, dollar depreciation just might serve only to increase the surpluses of the emerging economies in the dollar block.   That after all, is what happened when the dollar depreciated from 2002-2004.   Euro strength eventually generated a deficit in Europe.   But Asia's surplus soared even in the face of rising oil prices.

I also enjoyed Alan Beattie’s pithy summary of why nothing much is likely to happen this weekend, apart from a squabble over IMF governance.    Neither China nor the US is willing to really adjust their policies.

But this project (multilateral surveillance) rests on the misconception that lack of international co-ordination is the main obstacle to correcting global current account imbalances. It is not. The problem is that the sides fundamentally disagree.

The US says deliberate misalignment of exchange rates is one of the prime causes of imbalance; China says US fiscal profligacy is to blame. Without accepting China's argument, the US says it is committed to medium-term fiscal balance but does nothing about it. While rejecting the US case, China says it is moving towards a flexible currency but does very little about it.

The former US Treasury Secretary (John Snow) did his part to prove the Beattie thesis  during the Spring meetings by publishing an oped arguing that US fiscal deficits had no impact on the US current account deficit.   Japan and China are now doing their part -- they are strenuously resisting efforts to have the IMF play a bigger role in exchange rate surveillance.

It probably is no coincidence that both Japan and China have quite weak real exchange rates and are among the (rare) oil-importing countries that also have stable (Japan) or rising (China) current account surpluses.  Beattie might want to encourage Lex to stop grading China's exchange rate adjustment on such a generous curve.   It is true that China has shown some willingness to change.  But the 2% initial revaluation was too small.  And the 2% appreciation against the dollar since then has been too small as well.  For one, it hasn't prevented the RMB from depreciating in real terms as the dollar slumped.  and more importantly, it has been too small to help China achieve its own goal of rebalancing its economy.  China is more dependent on exports and investment for growth than it was last summer.

I keep stumbling over the IMF’s lowball ($185b) estimate of China’s 2006 current account surplus.  I consequently stumbled when I read that section of the IMF’s Asian-Pacific Regional outlook.  The IMF’s estimate for 2006 Chinese export growth (21%) also looks small.  August was above 30%.  YTD, Chinese exports are up 25%.   

Forecasting problems away doesn’t make them go away.   The fact that China’s current account surplus is set to grow even larger this year – not just stabilize at a high level – is important.   The IMF wants to keep its criticism of Chinese policies private.  But I don't see why that should preclude offering accurate forecasts ... 

However, the section of the Regional Outlook on personal consumption in Asia is quite good.  China sure looks like an outlier, with both personal and public consumption falling as a share of GDP. One reason why consumption is falling as a share of GDP?  Wages are falling as a share of Chinese GDP.  The IMF (Robin Brooks and Enirc Fernandez):

"Where household survey data is available (China, the Philippines and Thailand) there is evidence that a decline in household disposable income relative to GDP explains much of the decline in the private consumption to GDP ratio. ... The fall in disposable income relative to GDP in much of the region reflects primarily falling wages (as a share of GDP), driven by a slowdown in job creation as the capital intensity of production has risen."

The fact that China's current policy mix hasn't spurred as much job creation as one might expect is a fact that is worth a bit more attention. 

The roughly 8% slump in China's consumption to GDP ratio (see p. 52) during China’s recent boom (the 2000 to 2005 period) does much to explain talk of a global savings glut.   I am not convinced that there is a global savings glut – but there certainly has been a glut of Chinese savings, along with a glut of government savings in the world’s oil exporters.  And China and oil are driving the global data.

The G-7 communique didn’t seem to say much new.  I liked the language calling for exchange rate flexibility from all emerging markets with current account surpluses. I, though, would have named a few additional countries besides China.   Mostly oil exporters.    And the G-7 Finance ministers did seem to agree coordinated set of talking points on the yen, even if the communiqué itself didn’t talk about the yen. 

Japanese firms make good cars (often using US factories) and US firms are paying a price for betting too heavily on SUVs and heavy pick-ups.    But the weak yen probably also probably has something to do with the recent success of Japanese auto firms.  And for that matter, Boeing has benefited from both dollar and yen weakness v. the euro, as Japanese firms are big suppliers to Boeing.

The Economist’s survey of the growing impact of the emerging world on the world economy is also interesting.  Pam Woodall notes the gains from globalization, but also highlights that the current form of globalization, one based on the uphill flow of capital, has created a world where “An alarming number of economic variables are currently way out of line with what conventional economic models would predict.” 

She also recognizes that it is a bit of a problem if the median worker is sharing in the gains of globalization, and advocates a set of policies that one wouldn’t normally expect the Economist to embrace.

“Workers' share of national income in those countries has fallen to its lowest level for decades, whereas the share of profits has surged. It seems that Western workers are not getting their full share of the fruits of globalisation. …Governments may need to harness the tax and benefit system to compensate some workers who lose from globalisation.”

The last item that caught my eye: Tim Geithner’s speech on hedge funds.  It certainly looks to be laying the ground work for a significant policy initiative.  

More on that later.

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