from Follow the Money

The world would be a somewhat better place if …

April 20, 2006

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The policy makers gathered in Washington this weekend listened to Martin Wolf's advice.  And skimmed his powerpoints.  

Everyone with authority in the global economy read Gian Maria Milesi-Ferretti's box on global imbalances in the first chapter of the WEO (charts here, and here).   My translation from IMFese: The US current account deficit is only sustainable if everyone continues to dump money into the US when they would have gotten a better return if they joined Americans in investing outside the US.   Since the US is running a big deficit, it needs a lot of financing.  But to keep the US net debt from going up, US markets have to do much worse than foreign markets.   Like the IMF, I don't think that combination is very likely to last for a long time.  And yes, the dollar does need to fall against both East Asia and the oil exporters.

The Wall Street Journal replaced its appallingly bad Moody's data feed in its global economic snapshot with data from the IMF WEO's statistical appendix.  That way the Journal's readers would know that China's 2006 current account surplus will be close to 7% of its GDP, not 2.3% as seems to think.

More articles were written pointing out that Asia's current account surplus hasn't fallen even as the oil exporters' surplus has exploded.  In 2004, Asia (Japan, NICs and emerging Asia in the IMF data) ran a surplus of $356.  It went up to $405 billion in 2005.  Fuel exporter's surplus went from $189 billion to $347 billion.  If the surpluses of the two surplus regions (one oil exporting and one oil importing) of the global economy go up by $200 billion, the global current account can only balance if either there is a huge swing in Europe's balance or the US goes deeper into deficit.     The euro zone's surplus did fall.  But the US deficit widened even more.

More people took note of the fact -- judging from the WEO data -- that the real exchange rate of the major oil producing countries in the Gulf has depreciated significantly since 2002, despite the run-up in oil prices.  No wonder their imports haven't increased more.

Economic journalists started to use the WEO statistical appendix to fact check their articles.   

Right now, US economic journalists - including really, really good journalists - consistently write articles indicating that France isn't growing when, in fact, it has grown faster than its major continental counterparts (Germany, Italy) over the past ten years, it grew faster in both 2004 and 2005, and the IMF forecasts that it will grow faster than Germany and Italy in 2006 as well.    And France is growing on the back of domestic demand.   After you adjust for the fact that France has lower population growth than the US, there isn't a huge difference between the IMF's forecast for 2006 demand growth in the US (3.2%) and in France (2.6%).

Of course, even though France has outpaced Germany and Italy over the past few years, but it certainly hasn't kept pace with Spain or the US.  And there is no doubt that France has a high unemployment rate, a relatively low labor force participation rate and, at least recently, subdued job creation.   

But I think it is also true that France had relatively strong job growth at the end of the 1990s (see Ceteris Paribus; you don't need to read much French to follow his graphs) and that France's labor force participation rate has trended up over the past few years (despite its rigidities) while the US labor force participation rate has trended down (despite the United States' flexibility).  See page 6 of this OECD report.  It only goes through 2004, and 2005 helps the US and hurts France.  But from 2000 to 2004, labor force participation was up slightly in France and down somewhat in the US.  I continue to think the "if France could only reform, it could join America in creating tons of jobs" story line oversimplifies.    The story line that seems to best fit the data, best I can tell, is that a housing boom has supported domestic demand in both the US and France, and in both the US and France recent job growth has been somewhat disappointing, despite different labor market institutions.

Geostrategists learned a thing or two about "current account deficits" and "current account surpluses" and checked the IMF statistical appendix to see if a country has a current account deficit before they claim that a country desperately needs foreign investment.

Iran happens to have a current account surplus.  Which means it saves more than it invests.  Unlike say the US, Iran could invest more without getting any financing from abroad by drawing on its own savings.    So Iran doesn't really depend on the world for financing, Fred Kaplan (and a host of others, including Ken Pollack) to the contrary:

"Western Europe, Russia, and China may depend on Iran for oil, but Iran depends at least as much on them for capital investment."

Now it may be true that for Iran to develop some oil and gas fields while massively increasing other forms of spending it would need access to foreign (read Chinese) financing.  And Iran may need foreign technology, which it can only get if it also accepts foreign investment.  But with oil stays at $70, Iran has a ton of cash.  Basically, it can use its current oil earnings to finance investment in its future oil production.

I still like Kaplan's approach.  It seems worth trying.  But I also think the fact that Iran can self-finance with oil at $70 (but not with oil at $40) is a real complication.

I think I have now gotten a set of accumulated irritants off my chest.

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