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1 The Prospects for Export-Led Growth: Global Imbalances and International Reforms The Prospects for Export-Led Growth: Global Imbalances and International.

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Presentation on theme: "1 The Prospects for Export-Led Growth: Global Imbalances and International Reforms The Prospects for Export-Led Growth: Global Imbalances and International."— Presentation transcript:

1 1 The Prospects for Export-Led Growth: Global Imbalances and International Reforms The Prospects for Export-Led Growth: Global Imbalances and International Reforms Terry McKinley Director, Centre for Development Policy and Research, School of Oriental and African Studies Conference on Export-Led Growth as a Tool for Financing Development Carnegie Endowment for International Peace, 29 June 2009

2 2 The Starting-Point: The Debate on China & Global Imbalances Is the Export-Led Growth Model of East and Southeast Asia (especially China) responsible for Global Imbalances? Has China been the principal driver of global imbalances? CDPR Policy Brief #2: Will Pinning the Blame on China Help Correct Global Imbalances? www.soas.ac.uk/cdpr CDPR Policy Brief #2: Will Pinning the Blame on China Help Correct Global Imbalances? www.soas.ac.uk/cdprwww.soas.ac.uk/cdpr Has the US been driven into running huge current- account deficits because it is the pre-eminent reserve-currency country (the deficit of last resort)? Are such deficits a precondition for developing-country success in future export- led growth? (Hopefully not)

3 3 The China Export-Led Success Story 1. Chinas current-account surplus started a sharp upward trend around 2002-2003 a. By 2005, this surplus had reached $161 billion and by 2008 had reached $440 billion. Figure 2. By 2008, Chinas Reserves reached $ 2 trillion (two-thirds to three-quarters invested in US securities) b. Where Chinas reserves are invested is an independently important questionperhaps more important than how (or why) China achieved large current-account surpluses c. Need to look at Export-Led Growth from the Financial angle as well as the Trade angle

4 4 China and US Current-Account Balances 1990-2008 ($ billions)

5 5 The China Export-Led Success Story By some standard measures, Chinas development success has been spectacular 1. Its income per person (constant prices) increased over ten-fold, from $807 in 1980 to $8,539 in 2008 2. Between 1981 and 2005, it lifted 630 million people out of poverty (WBs $1.25 line) 3. Yet the majority of Chinese are still relatively poor by developed-country standards 4. Have some of the benefits of the Export-Led Model passed them by? Has consumption been unduly restricted in order to generate trade surpluses?

6 6 Why East & Southeast Asia Adopted Export-Led Growth The historical roots are in the successes of Japan and the East Asian Tigers, and in the bitter lessons of the Asia Financial Crisis The countries that had liberalized their trade and capital flows learned from the 1997-98 Crisis that they must avoid, at all costs, current-account deficits (especially if deficits are financed by short-term external loans) They were subjected to speculative attacks on their currencies and recessions, and were forced to endure a heavy and humiliating burden of IMF conditionalities

7 7 What are the Prerequisites for Such Export-Led Growth? Afterwards, East and Southeast Asian countries began to run sizeable yearly current-account surpluses And they amassed large stocks of foreign-exchange reserves Note 1 : The reserves were seen as a necessary form of precautionary savings designed to deal with any attacks on their currencies Note 2: The domestic policy corollary of amassing reserves was the need for tighter monetary and fiscal policies to contain the potentially inflationary impact (e.g., resorting to sterilization)

8 8 What are the Prerequisites for Such Export-Led Growth? Note 3 : The government needs the capacity to align the banking system with its monetary objectives Note 4: Imports need to be contained relative to exports (an undervalued exchange rate, import restrictions, export subsidies) Question 1: Is it necessary to invest a countrys reserves in low-yielding, risky foreign assets, such as US T-bills? Question 2: Is it necessary for capital to be flowing uphill, mostly from middle-income countries and predominantly to one rich country, the US?

9 9 Some Simple-Minded Macroeconomic Accounting The Net Foreign Surplus = Net Private Savings + Net Government Savings – Private Investment (Note that Net Govt Savings includes public investment) If you assume that a country needs sufficient aggregate demand to reach full employment, then export demand is assumed to compensate for insufficient domestic investment and/or insufficient government spending Has China been investing too little? Its Gross Capital Formation approached 40% of GDP during 1990-2004 and more recently has approached 45%. Figure China has an exceptionally high savings rate, i.e., over 50% of GDP in recent years; and the gap between savings and investment has widened

10 10 Investment and Savings in China 1990-2007 (% of GDP) 1990-19941995-19992000-20042005-2007 Gross Domestic Savings 41.24241.152.4 Gross Capital Formation 39.538.838.744.1 Difference between the Two 1.73.22.48.3

11 11 Savings, Investment and Current-Account Surpluses China has been a high-savings, high-investment economy for a long time It has been growing rapidly, channelling its huge rural labour surplus into the production of higher- productivity tradables, i.e., it has been developing Its current fiscal stimulus (5% of GDP) is designed to continue this momentum during the global recession It has ample fiscal space to expand demand without creating unsustainable public debt A Prominent Question: Would seeking to boost domestic consumption (and thus imports) improve Chinas economic conditions?

12 12 Rebalancing Chinas Growth Rebalancing Chinas growth model by stimulating more domestic consumption is possible since its domestic market is large (consumption is already growing rapidly) But striving for consumption-led growth makes no sense (this is a recipe for crisis) But striving for consumption-led growth makes no sense (this is a recipe for crisis) The transition to a growth model based more on domestic demand (particularly consumption) would be a protracted process The transition to a growth model based more on domestic demand (particularly consumption) would be a protracted process China would still have to find a way to contain its import bill and continue promoting the production of tradables (such as through an industrial strategy) China would still have to find a way to contain its import bill and continue promoting the production of tradables (such as through an industrial strategy)

13 13 Rebalancing Chinas Growth While the exports of manufactures have plummeted globally, we project that they will recover smartly in due course as the global economy recovers China will continue, for a while, to rely on this engine of rising productivity and growth Strengthening its import regime is more critical namely, securing continuing access to resources (oil, minerals and metals) China needs to shift from low-return and risky reserve accumulation to higher yielding direct foreign investment in other developing countries

14 14 Managing the Exchange Rate Despite the conventional promotion of flexible exchange rates, many developing countries have opted for managed exchange-rate regimes China has moved to a soft peg to the US dollar, and has been accused of exchange-rate manipulation. Since only 16% of its exports were directed to the US market in 2007 (with a falling trend), pegging to the US dollar does not really look sensible Since only 16% of its exports were directed to the US market in 2007 (with a falling trend), pegging to the US dollar does not really look sensible It should continue managing the exchange rate but preferably pegging to a more diversified set of major currencies It should continue managing the exchange rate but preferably pegging to a more diversified set of major currencies Pegging to the dollar makes more sense in terms of maintaining the renminbi value of its dollar-denominated foreign-exchange reserves Pegging to the dollar makes more sense in terms of maintaining the renminbi value of its dollar-denominated foreign-exchange reserves Otherwise, China would incur huge book-value losses on these assets as the US dollar depreciates Otherwise, China would incur huge book-value losses on these assets as the US dollar depreciates

15 15 The Direction of China's Exports 2000-2007 (% of total)

16 16 Widening Fault-Lines in The International Monetary System Constraints on Export-Led Growth: the US Dollar no longer appears to be a reliable store of value How can it continue functioning as the worlds prime Reserve Currency? Does supplying the worlds monetary needs imply that the US has to run a current-account deficit? Does supplying the worlds monetary needs imply that the US has to run a current-account deficit? The US has had a pronounced tendency to run such deficits since the break-up of the Bretton Woods system in 1973 The US has had a pronounced tendency to run such deficits since the break-up of the Bretton Woods system in 1973 And its current-account deficit has ballooned since the early 1990s, approaching -7% of GDP in early 2006 before recovering modestly And its current-account deficit has ballooned since the early 1990s, approaching -7% of GDP in early 2006 before recovering modestly One contributing factor has been its ability, based on the dollar as the dominant reserve currency, to borrow cheaply to finance it current-account deficit One contributing factor has been its ability, based on the dollar as the dominant reserve currency, to borrow cheaply to finance it current-account deficit There is thus a continuous net transfer of resources from developing countries to one of the richest country in the world There is thus a continuous net transfer of resources from developing countries to one of the richest country in the world

17 17 Widening Fault-Lines in The International Monetary System The dollar has been depreciating since 2002 (except for a reversal between late 2008 and early 2009 when the dollar became a safe haven during crisis) Recent US domestic counter-cyclical monetary and fiscal policies have added to the pressure for further depreciation Since the US borrows in its own currency, it has some manoeuvring room: depreciation reduces the value of its international liabilities But holders of US-denominated reserves, such as China, are likely to suffer huge losses. And if they quickly withdraw such investment, the value of the dollar will collapsean inherently unstable situation

18 18 Reforming the International Monetary System Reserve accumulation represents a subtraction from global purchasing power (Greenwald & Stiglitz 2008) The demand for reserves grows as the international transactions of surplus countries, such as China, grow The demand for reserves grows as the international transactions of surplus countries, such as China, grow As the US increasingly absorbs such reserves (through its growing current-account deficits), the world becomes increasingly flooded with dollars The world economy is subjected to a deflationary bias because of stockpiling of reserves, which US debt-fuelled consumption and government deficit spending attempt to counteract But the consequent threat of dollar depreciation poses a destabilizing threat to the global economy

19 19 Modest Reform of the International Monetary System Issue Special Drawing Rights on a substantial and regular basis (Greenwald & Stiglitz 2008) SDRs could be a stable store of value linked to a diversified set of convertible currencies SDRs could be a stable store of value linked to a diversified set of convertible currencies Reserves could be credited to the IMF accounts of member countries in proportion to their IMF funding positions (note Chinas recent funding of the IMF) Each country would no longer have to bury in the ground some of its purchasing power by precautionary accumulation of its own reserves Any country could run a deficit (net importing of more real resources), which would be equal to its receipts of new reserves without worrying about pressure on its currency and ensuing financial crisis

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