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Concensus-building needed at G20
By Sun Lijian |
November 11, 2010, Thursday
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THE G20 summit opening today in Seoul, South Korea, will be the first time this meeting is hosted by an Asian country and a non-G8 member.
This summit comes at an opportune time for the consensus-building between emerging economies and Western nations on how to ride out the financial crisis.
Since tensions persist over the trade imbalance between surplus countries, notably China, and deficit countries, like America - and are likely to escalate into finger pointing or protectionism - I list several issues that world leaders should be able to discuss in a calm and positive atmosphere.
First, the meaning of global imbalance. If the imbalance today is the natural result of globalized trade conducted on the basis of individual nations' comparative advantage, why blame the once-in-a-century crisis on a few countries like China?
Some countries are going through industrialization and urbanization. It's normal that their citizens currently don't have enough purchasing power to narrow the trade surplus their nations run. But the surplus will shrink when their income catches up and they no longer have an incentive to save heavily.
Of course, we need good mechanisms to nudge well-to-do yet consumption-shy people into buying more, and dissuade cash-poor people from spending beyond their means. At any rate, as long as excess liquidity does not exceed alarming proportions, there seems to be little cause for concern about trade deficit.
That said, why is so much money flooding back into the US and inflating bubbles?
The reasons are twofold:
One is the US hasn't leveraged its advantage in technological innovation and initiated a new round of growth to absorb global liquidity. The other is the Wall Street, intoxicated on its strength in financial innovation, ignored moral hazards and peddled the sugarcoated illusion that everyone can afford a high-living lifestyle.
The resulting bubbles led to an unprecedented crisis of creditworthiness that drained global lending. Therefore, the culprit of the crisis, I think, should be reckless over-spending.
In this sense, attempts at correcting the imbalance, rather than exercising stricter oversight over financial derivatives, are likely to plunge us back into a world plagued by even louder clamor for protectionism.
Even if countries running current account surpluses are pressured into taking measures to narrow the imbalance, bitter memories will soon fade as hard lessons about financial derivatives are forgotten.
Specter of inflation
Second, can the US get its bruised economy back on its feet by unilaterally revising its monetary policy? If it can, why are countries around the world exhibiting serious misgivings about this possibility? Because when the US kept its interest rate at almost zero (consider also the Fed's purchase of US$600 billion in Treasury bonds), global capital began pulling out of dollar and euro assets and flowing to the commodities market.
It also gravitated toward emerging economies with high savings rates and robust growth, raising the specter of inflation in these countries and forcing their currencies to appreciate. Before their economies can be retooled, they have had to start a round of interest rate hikes and strengthen capital control. This issue deserves the utmost attention in Seoul.
Of course, we cannot bar the US from joining others in announcing interest rate cuts, which remains its sovereign right, to resolve deflation. But the US certainly needs to be warned that quantitative easing will not achieve its anticipated result of restoring domestic price levels.
Quite the opposite. It will only spell further trouble for emerging economies: Inflation and asset bubbles will undermine their new purchasing power gained through structural overhaul. Also at stake will be the benefit of a weak dollar for US exports.
A lax US monetary policy is poised to trigger competition devaluation that brings miseries for all, including the US itself, and weakens the economic pillars for crisis management.
Third and last, reform of the international monetary system must proceed gradually. It cannot be achieved overnight. Elevating the yuan's global status is an arduous task.
Although fraying confidence in the dollar is reflected by, say, China's dwindling holdings of US bonds and the exodus of capital out of America, no currency can as yet replace the dollar. Therefore, one critical consensus in Seoul should be to preserve the dollar's domination while also underscoring the perils of whimsical US quantitative easing.
To sum up, every participant at the upcoming summit should be cautious of the scenario in which the reserve currency holder wields its currency supremacy in service of its own interests but at the expense of others'. A bigger say for emerging markets such as China in the IMF and World Bank will enable them to better check US' monetary mischief.
I'm confident that an ideal consensus can be built at the summit on stabilizing and rebuilding the international monetary system. Sidelining international institutions, manipulating currency hegemony and ganging up on the yuan's exchange rate, however, will fuel uncertainty that clouds the world economic outlook.
(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)
This summit comes at an opportune time for the consensus-building between emerging economies and Western nations on how to ride out the financial crisis.
Since tensions persist over the trade imbalance between surplus countries, notably China, and deficit countries, like America - and are likely to escalate into finger pointing or protectionism - I list several issues that world leaders should be able to discuss in a calm and positive atmosphere.
First, the meaning of global imbalance. If the imbalance today is the natural result of globalized trade conducted on the basis of individual nations' comparative advantage, why blame the once-in-a-century crisis on a few countries like China?
Some countries are going through industrialization and urbanization. It's normal that their citizens currently don't have enough purchasing power to narrow the trade surplus their nations run. But the surplus will shrink when their income catches up and they no longer have an incentive to save heavily.
Of course, we need good mechanisms to nudge well-to-do yet consumption-shy people into buying more, and dissuade cash-poor people from spending beyond their means. At any rate, as long as excess liquidity does not exceed alarming proportions, there seems to be little cause for concern about trade deficit.
That said, why is so much money flooding back into the US and inflating bubbles?
The reasons are twofold:
One is the US hasn't leveraged its advantage in technological innovation and initiated a new round of growth to absorb global liquidity. The other is the Wall Street, intoxicated on its strength in financial innovation, ignored moral hazards and peddled the sugarcoated illusion that everyone can afford a high-living lifestyle.
The resulting bubbles led to an unprecedented crisis of creditworthiness that drained global lending. Therefore, the culprit of the crisis, I think, should be reckless over-spending.
In this sense, attempts at correcting the imbalance, rather than exercising stricter oversight over financial derivatives, are likely to plunge us back into a world plagued by even louder clamor for protectionism.
Even if countries running current account surpluses are pressured into taking measures to narrow the imbalance, bitter memories will soon fade as hard lessons about financial derivatives are forgotten.
Specter of inflation
Second, can the US get its bruised economy back on its feet by unilaterally revising its monetary policy? If it can, why are countries around the world exhibiting serious misgivings about this possibility? Because when the US kept its interest rate at almost zero (consider also the Fed's purchase of US$600 billion in Treasury bonds), global capital began pulling out of dollar and euro assets and flowing to the commodities market.
It also gravitated toward emerging economies with high savings rates and robust growth, raising the specter of inflation in these countries and forcing their currencies to appreciate. Before their economies can be retooled, they have had to start a round of interest rate hikes and strengthen capital control. This issue deserves the utmost attention in Seoul.
Of course, we cannot bar the US from joining others in announcing interest rate cuts, which remains its sovereign right, to resolve deflation. But the US certainly needs to be warned that quantitative easing will not achieve its anticipated result of restoring domestic price levels.
Quite the opposite. It will only spell further trouble for emerging economies: Inflation and asset bubbles will undermine their new purchasing power gained through structural overhaul. Also at stake will be the benefit of a weak dollar for US exports.
A lax US monetary policy is poised to trigger competition devaluation that brings miseries for all, including the US itself, and weakens the economic pillars for crisis management.
Third and last, reform of the international monetary system must proceed gradually. It cannot be achieved overnight. Elevating the yuan's global status is an arduous task.
Although fraying confidence in the dollar is reflected by, say, China's dwindling holdings of US bonds and the exodus of capital out of America, no currency can as yet replace the dollar. Therefore, one critical consensus in Seoul should be to preserve the dollar's domination while also underscoring the perils of whimsical US quantitative easing.
To sum up, every participant at the upcoming summit should be cautious of the scenario in which the reserve currency holder wields its currency supremacy in service of its own interests but at the expense of others'. A bigger say for emerging markets such as China in the IMF and World Bank will enable them to better check US' monetary mischief.
I'm confident that an ideal consensus can be built at the summit on stabilizing and rebuilding the international monetary system. Sidelining international institutions, manipulating currency hegemony and ganging up on the yuan's exchange rate, however, will fuel uncertainty that clouds the world economic outlook.
(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)
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