Institutional Origins of Global Imbalances: Don’t Dump on the Anglo-American Model
The argument that global imbalances are attributable to excess consumption in the Anglo-American economies is increasingly being discredited in US policy circles. Ben Bernanke has already identified the role of forced saving in East Asia as a major driver of these imbalances. Glenn Hubbard (free version here) extends Bernanke’s global saving glut thesis, by considering the role of dysfunctional capital market institutions in the emerging economies as a key driver of forced saving:
Key emerging-market economies like China need to absorb more of their domestic savings. Arithmetic makes a powerful case here. Last year, if reserves-rich emerging-market economies had run current account deficits equal to their inflows of foreign direct investment, the aggregate swing in their current account position would have eliminated much of the U.S. current account deficit. And given the spotlight now being cast on China, it is worth noting that such a shift for China alone would have offset about one-sixth of the U.S. current account deficits.
But economics is more than arithmetic. To increase domestic spending in a way consistent with long-term growth, domestic financial systems must be able to allocate capital to its most valued use, improving consumers’ ability to borrow and the efficiency of business investment. Such capital-market efficiency cannot be taken for granted. Consider Japan’s decade-long struggle with nonperforming loans and its current battle over cross-border M&A and the privatization of the slumbering Japan Post. More to the present situation, consider China’s massive and mounting nonperforming loan problem, as state-owned enterprises devour credit better used by entrepreneurs.
Herein lies a clue to the puzzle. If capital markets around the world matched the effectiveness of those in the U.S., one would expect capital to flow on balance from the U.S. and Europe to emerging economies like China. That flow, of course, is not materializing. In a recent economic study, Charles Himmelberg, Inessa Love and I found that weak institutions and capital-market imperfections in emerging economies can lead to very high costs of capital for productive investment at home. In this context, using American leadership to focus on exchange rates alone misses a bigger opportunity—to tackle the much larger need for financial reform that will permit imbalances to ease.
Those who blame global imbalances on Anglo-American consumption are implicitly punishing a successful economic model and endorsing failed institutional arrangements in other parts of the world. It is a sad fact that a large part of economics-oriented blogosphere is now heavily invested in this bankrupt view of the world.
posted on 02 May 2005 by skirchner
in Economics
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Comments
For most of the purposes I’m interested in, questions of blame seem to miss the point. Suppose we accept the Hubbard-Bernanke line. It follows that China (the guilty party in this story) must reduce its net saving. That means that the world interest rate must rise. Capital markets ought to be anticipating this and pricing it into yield curves. If they were, Anglo-Saxon consumption would be unsustainable.
Conversely, the story in which Anglo-Saxon excess consumption is to blame necessarily implies an adjustment process in which Chinese saving (at current interest rates) falls.
Posted by quiggin on 05/02 at 08:33 PM
I’m also not much interested in the blame game, since I don’t see global imbalances as a serious problem for the Anglo-American economies, but to the extent that people are pointing fingers, I want to ensure they are pointed in the right direction.
See my previous posts for scepticism about the importance of China in the determination of Anglo-American interest rates and consumption.
Posted by skirchner on 05/03 at 03:17 PM
I am wary of wandering into the bull ring whilst a pair of massive beasts are locking horns over the issue. Still, I think it time that we descended from the realm of high theory and got down to brute fact on the cause of the US trade deficit. To summarise the debate: <ul>
<li>sk says it is capital account push due to “forced” Asian savings. </li>
<li>jq says it is current account pull due to “frauded” American consumption.</li></ul>
It could, of course, be both factors - per Marshall “We might as reasonably dispute whether it is the upper or the underblade of a pair of scissors that cuts a piece of paper.”
My tendency is to side with jq on this one, but with a nod to sk. It is staggering to me that the PRC is exporting capital during the takeoff phase of its industrial revolution. There is obviously, as sk points out, something fishy about this.
OTOH, the PRC’s capital export cant last forever since eventually it will need to retain more of its surplus for domestic investment or consumption. Or it will start to get cold feet about holding so much US T-bond paper, vulnerable to depreciation in the hands of a notorious con-man and swindler like GW Bush. So it will at some time diversify its export sales to more credit worthy customers.
This will cause an inflow of credit to the PRC, or at least reduce the outflow of credit to the USA, which will draw down the global supply of credit available for the Bush admin to squander. Hence global interest rates must tend to rise as the auction of US T-Bonds fails to clear.
US interest rates must then rise. This will constrain US current consumption and capital speculation, which will likely cause the US to fall into recession.
The mystery about this is the flat shape of the long term yield curve, which is not anticipating any kind of long term global capital shortage. This is even more puzzling giving the aging demographics of the USA and USE.
Can either party identify key empirical indices that support their interpretation? What facts, and when, would count as confirmation or contradiction of either theory?
My friends in the market, when consulting the tea leaves, refer to the financial volatility measures on major indexes. When these start to jump about it is usually a sign of some seismic financial shock, of the kind portended by jq. Apparently these were, until recently, at all time lows, which supports sk’s theory. US industrial productivity continues to surge, which also strenghthens the sk thesis. Also, the US economy has shown remarkable resilience in the face of a series of terrible shocks (dot.com, 911, Enron) that might well have caused a less robust economy to capsize.
Is the US living on the industrial and financial capital accumulated during the terrible Clinton era of peace and prosperity? Or are Bush’s tax cuts doing the supply side trick?
I would like to know some hard facts, instead of wathching you two butt egg heads for donkey’s days without coming to any kind of resolution.
Posted by Jack Strocchi on 05/04 at 04:14 PM
I spend all this time knocking out a well-reasoned and informative comment to be rewarded with a big fat silence. Bah! I’m taking my ball and going home.
Posted by Jack Strocchi on 05/06 at 04:20 PM