{"id":235,"date":"2010-10-18T16:39:00","date_gmt":"2010-10-18T14:39:00","guid":{"rendered":"http:\/\/fromlet.bbsresearch.se\/?p=235"},"modified":"2010-10-18T16:39:00","modified_gmt":"2010-10-18T14:39:00","slug":"emerging-countries-part-of-global-imbalances","status":"publish","type":"post","link":"https:\/\/blogg.lnu.se\/fromlet-bbsresearch\/?p=235","title":{"rendered":"\u201cEmerging countries – part of global imbalances\u201d"},"content":{"rendered":"

Speech at the annual conference \u201cBaltic Sea Region and China Day\u201d\u00a0 at the<\/strong><\/p>\n

Linnaeus<\/strong> School of Business and Economics, Kalmar, October 18, 2010<\/strong><\/p>\n

\u00a0<\/strong><\/p>\n

1.\u00a0\u00a0 Emerging markets play an increasingly important role in the global economy.<\/em><\/strong><\/p>\n

The past decade has shown a clearly visible and active \u201centry\u201d of (many) emerging markets into the global economy. As a group, emerging economies have increased their share of global exports by more than five percentage points during this period of time. This is a substantial trend \u2013 certainly strongly backed up by the success of Chinese exporters.<\/p>\n

The share of emerging markets\u2019 GDP of global GDP should be 50 percent in four or five years, at least if we measure GDP in Purchasing Power Parity terms(but in the more tradional, exchange rate-based calculation, of course, less than 50 percent). It should be added that emerging countries during the past decade also have become politically more influential, particularly the so-called BRIC countries of Brazil, Russia, India and China which also are members of the G20 group (a club of influential countries that still has to find ways to get to better efficiency).<\/p>\n

However, we should not forget the big number of developing economies in Africa and parts of Latin America, Asia, and Eastern Europe that still cannot participate well in the improved conditions for emerging markets in the global economy \u2013 for whatever reason this might be. At the same time, globalization gives more countries a chance to catch up if certain political, institutional and economic conditions eventually are met.\u00a0\u00a0<\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/em><\/strong><\/p>\n

2.\u00a0\u00a0 The global imbalances in a nutshell<\/em><\/strong>.<\/p>\n

The global economy is currently characterized by major macroeconomic imbalances, particularly when it comes to the current account balances and exchange rates. Two economic superpowers are the main participants in the drama, the U.S. and China. China has very big surpluses in the balance on current account, without allowing its currency RMB to adapt to market forces in order to find a new and higher equilibrium between the RMB and the U.S.dollar. Market forces would almost certainly result in a strongly appreciating Chinese currency, thus, making conditions for Chinese imports more favorable and (somewhat) less favorable for Chinese exporters in the shorter run; in the longer run, however, China would benefit from a stronger currency because of inflation-dampening effects and a more\u00a0 long-term oriented restructuring of Chinese exporters at a (somewhat) higher speed.<\/p>\n

All this means in macroeconomic terms that the world currently is facing a situation with wrong relative prices and exchange rate relations.\u00a0\u00a0\u00a0 <\/em><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n

3.\u00a0\u00a0\u00a0Memory is too short !<\/em><\/strong><\/p>\n

It must be one of the scaring tragedies of our time that so many political leaders, government advisors, economists and journalists do not understand or remember basic preconditions for a well-working global economy (or what we called the world economy before \u2013 by the way, a term that I used several times in my meetings with Milton Friedman and that Friedman each and every time rejcted sharply).<\/p>\n

Why is memory so short? How can any person linked to economics neglect or have forgotten that the depression of the\u00a01930s to a high extent was caused by competing devaluations. And now we have again a number of countries that try to manipulate their exchange rates by non-market oriented interventions. We already can find quite a large number of countries that are ready to go, i.e. both developed and developing countries that already have taken action or are close to the starting point for these negative steps. Among developed countries<\/em>, one can find the U.S. (indirectly) by its extremely soft monetary policy and Japan by direct interventions on the currency market; among developing countries<\/em>, Brazil, India, Korea, Thailand, Columbia, etc. can be mentioned.<\/p>\n

\u00a0<\/em><\/strong><\/p>\n

4.\u00a0\u00a0 Mercantilism gives a lot of damage \u2013 free trade is unbeatable.<\/em><\/strong><\/p>\n

It is very hard to believe that there are still people in responsible positions who think that mercantilism, manipulated exchange rates and\/or direct trade protection can give more than short-term advantages. Did these nationalists or ignorants never study what the great David Ricardo wrote 200 years ago? Do they even reject the great modern work of professors like Jagdish Baghwati and Barry Eichengreen? Don\u2019t blame economists for stupid political decisions!<\/p>\n

\u00a0\u00a0<\/p>\n

5.\u00a0\u00a0 Not each and every country can have a surplus in the current account.<\/em><\/strong><\/p>\n

What bothers me particularly,\u00a0 is the quite common attitude that (almost all) countries should achieve positive balances in the current account. This is, of course, complete rubbish. Instead: What countries should avoid is the exuberance in current account deficits and probably also in surpluses. Persisting big deficits create – sooner or later\u00a0 – an unfavorable dependence on international lenders and possibly a harming financial crisis. This conclusion can also be applied to EMU-member countries which currently can be watched.<\/p>\n

Countries with permanent major surpluses, on the other hand, tend to come into a situation with uncomfortable inflows of foreign money and a strengthening currency, and – at the end of the day – an unmanageable increase of the money supply, and – in the worst case \u2013 damaging inflationary pressure. Emerging countries can have particular difficulties to handle such difficulties. China is most probably already in such a situation, at least partly (which would support my previous conclusion that also China itself would benefit from a stronger renminbi).<\/p>\n

We have currently a very unusual situation in the global economy. Some large countries in the developed world are close to deflation, and a number of important emerging countries tend to have unnecessary inflationary pressure because they receive so much speculative money from abroad. A realistic,\u00a0 more market-oriented equilibrium on exchange rate markets among mainly emerging economies would decrease deflationary and inflationary pressure in developed and develeoping economies. As we all know, high inflation is the worst enemy to a fairer distribution of income in emerging economies.\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n

\u00a0<\/p>\n

6.\u00a0 \u00a0Consequently \u2013 not all countries can have the same exchange rate policy.<\/em><\/strong><\/p>\n

Getting through this \u201cmini lecture\u201d of international economics, leads us easily to the conclusion that not all currencies simultaneously can move in the same direction (except the euro, where all EMU countries should have convergent economic trends (scientifically proved by professor Mundall). Competitive depreciations\/devaluations would take too many countries on the same boat\u00a0 and lead them to the\u00a0 wrong destination.\u00a0\u00a0<\/p>\n

\u00a0<\/p>\n

7.\u00a0\u00a0 It\u2019s China and the U.S. we should talk about \u2013 and certainly not Germany\u2019s surplus<\/em><\/strong><\/p>\n

Recently, I read some articles in the international and Swedish press, figuring out that Germany is the main contributor to the ongoing global inbalance. I first thought that this was some kind of economic joke. But the intention of this hypothesis was serious; the arguments, on the other hand, were both wrong and disqualifying.<\/p>\n

Sure, there is this ongoing macroeconomic divergence between Germany plus its stability-oriented E(M)U allies and some E(M)U members in Southern\/Western Europe that have an irresponsible affection to poor public finance. Can the critics of Germany really be taken seriously when they suggest that the weakest countries in the group after all their mistakes should be allowed to determine the course of economic policy in Euroland? All this would \u2013 nota bene – happen within<\/em> an existing currency union, leading to a further weakening of the euro. Can anyone tell me who would like such a development? Certainly not the Chinese!<\/p>\n

No, there cannot be a change of focus. American deficits are the main issue, combined with China\u2019s too short-sighted exchange rate considerations.\u00a0\u00a0\u00a0\u00a0<\/p>\n

\u00a0<\/p>\n

8.\u00a0\u00a0 Stability begins at home \u2013 homework much better than accusations<\/em><\/strong><\/p>\n

Exchange rate movements are reflecting economic distinctions and data, market psychology,\u00a0 and sometimes interest rate diffenrentials and specific technical conditions between two countries. Often, exchange rates are floating. Sometimes, they are managed by the public administration. Normally, floating exchange rates are better than fixed ones \u2013 because they offer more flexixibility and better reflect reality.<\/p>\n

Both floating and fixed exchange rates should \u201cwork\u201d under domestic conditions that confirm or improve macroeconomic stability. This should be the \u201cleitmotiv\u201d no 1.\u00a0 Complaints and accusations against foreign interests should not belong to the tools of successful policy makers.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n

\u00a0<\/p>\n

9.\u00a0 <\/strong>\u00a0Exchange rate policy is a national matter\u00a0 –\u00a0 but there is also global responsibility!\u00a0 <\/em><\/strong><\/p>\n

I have never accepted the hard, very unpsychological pressure from Capital Hill on China. Even if China has been too passive in its exchange policy during the past few years, one should never forget that major exchange rate policy decisions are made domestically (apart from \u201cEuroland\u201d). In other words, discussions about a country\u2019s exchange rate policy should happen without official foreign pressure. I\u2019ve never understood why the U.S. has challenged China so much on this issue during the years (and recently also Europe). Instead, China should be regularly reminded of its increasing global responsibility. Global growth conditions are increasingly depending on developments in China. And vice versa: China can definitely grow better when (the major) developed countries are in a good shape.<\/p>\n

\u00a0\u00a0<\/p>\n

10.\u00a0\u00a0 Developed countries and emerging (developing) countries have to co-operate much\u00a0<\/em><\/strong>more\u00a0 \u2026 because trade restrictions or protectionism would be stupid options!<\/em><\/strong><\/p>\n

\u00a0<\/em><\/strong><\/p>\n

This brief summary and analysis of a complicated global economic issue clarifies quite nicely that emerging markets already today are deeply involved in the global economy. This mutual dependence will increase much further in the future. Increasing mutual dependence urges for increasing mutual understanding and co-operation. But I doubt whether G20 is the right institution for a starting point that never has existed in the past. A kind of new creation\/organization would probably be a better option.<\/p>\n

Anyway, just to recall it once more:
\n<\/em>Increasing protectionism would be the most stupid answer to the currently\u00a0 increasing tensions between developed and developing countries on our common globe! <\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Speech at the annual conference \u201cBaltic Sea Region and China Day\u201d\u00a0 at the Linnaeus School of Business and Economics, Kalmar, October 18, 2010 \u00a0 1.\u00a0\u00a0 Emerging markets play an increasingly important role in the global economy. The past decade has shown a clearly visible and active \u201centry\u201d of (many) emerging markets into the global economy. 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