Global imbalancesand exchange rates
Jomo Kwame Sundaram
26 January 2010
2
Global imbalances grow
United States
Oil exporters
Euro Area
Japan
China
Other Asia
Other industrialised
Central and Eastern
Europe
Latin America
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
USD bn
.
3
World trade collapse10.9
7.79.2
6.6
2.4
-11.1
4.1
-12
-8
-4
0
4
8
12
2004 2005 2006 2007 2008 2009 2010
Ann
ual p
erce
ntag
e ch
ange
0.5
South exports fall more
(volume index, 1998 = 100)
100
120
140
160
180
200
220
240
260
280
2006M
1
2006M
3
2006M
5
2006M
7
2006M
9
2006M
11
2007M
1
2007M
3
2007M
5
2007M
7
2007M
9
2007M
11
2008M
1
2008M
3
2008M
5
2008M
7
2008M
9
2008M
11
2009M
1
World trade
Developing and other non-OECD country exports
OECD country exports
Source: CPB
Mineral prices fell more
6
Imbalances narrow
-800
-600
-400
-200
0
200
400
600
2004 2005 2006 2007 2008 2009
Billi
on U
S$
United States
Japan
European Union
Developingcountries (exclChina) and EiT
China
7
ST real interest rates
Short-term real interest rates of major economies (%)
- 2
- 1
0
1
2
3
4
2000
M1
2000
M7
2001
M1
2001
M7
2002
M1
2002
M7
2003
M1
2003
M7
2004
M1
2004
M7
2005
M1
2005
M7
2006
M1
2006
M7
2007
M1
2007
M7
2008
M1
2008
M7
Japan U. S. Euro Area
Negative
Rates
8
US Fed LT ratesYields of U.S. T-Bonds and Corporate Bonds 1978 2007%( - )
02468
101214161820
1/ 31/ 1978 6/ 30/ 1982 11/ 30/ 1986 4/ 30/ 1991 9/ 30/ 1995 2/ 29/ 2000 7/ 31/ 2004
BAA corporate bond AAA corproate bond 10- year T- bond
persistenly falling long-term rates
9
Easy liquidityMeasurement of Tradi ti onal Li qui di ty
I ndi cator i n Maj or Economi esas a percentage of total GDP of U. S. , J apan and Euro Area)(
02468
1012
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1(
%)
Base Money Reserve+ Reserve Base Money
Net transfer of financial resources from South to North
Source: UN World Economic Situation and Prospects 2008 (forthcoming)
-1000
-800
-600
-400
-200
0
200
Bill
ions
of U
S do
llars
Developing economies Africa Eastern and Southern Asia Western Asia Latin America
11
Net capital importersCapital Importers
U. K.9%
I tal y3%
Turkey 3%
Greece3%Others
20%
U. S.50%
Spai n9%
Aust ral i a3%
Capital inflows contract
0
250
500
750
2005 2006 2007 2008 2009*
$ B
illio
ns
Source: IFF *Projection
Bretton Woods vs Keynes• Dollar-gold parity ($35/oz.)• Permanent US current account deficit possible• Seigneurage income• Vietnam Run on Eurodollars 1971• End of BW system • ‘Non-system’: IMF Interim Committee• Rise of Japan Plaza 2 endaka• Drucker: X border flows; K acct liberalization • Rise of China exchange rates, SWF
EA miracle + X rates• EP con EP: ISI + EOI; scale economies• Undervalued X rates since postwar
Japan• SEA mid-80s devaluations + endaka• Unlike NEA, SEA FDI-dependent• Finance dominant, oppose $
appreciation post-1995 end of endaka 1997-98 crisis
China boom + X rates• 1994 RMB ‘devaluation’• Contract manufacturing: learning by doing• End of TVEs boom scale economies• Productivity gains + Lewisian L market
consumer price deflation + high growth• China super-competitive• Big overall trade surplus
reserves accumulation from mid-2000s• $3trn USD assets, including >$1trn US T bonds• China cannot afford massive $ depreciation• Japanese endaka end of Japanese miracle
Self-protection
• 1990s’ LA, EA crises accumulate reserves
- no lender of last resort - onerous IMF conditionalities• No insurance element
17
Crisis + reservesFinancial positions stronger than during
Asian + LA crises (more foreign reserves, ‘better’ fiscal balances)
But reserves rapidly evaporated with export collapse; fiscal space also diminished
• IMF late ‘09 paper (Blanchard, et al.):Reserve accumulation did not help in
crisis
18
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