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Global Imbalances – Adjustments by Surplus/Deficit Countries

Dr Michael Lim Mah HuiMay 23, 2011South Centre

Geneva

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Three Structural Imbalances to Global Financial Crisis Current Account Imbalance Imbalance between financial sector and

real economy – financialization of economy Income and Wealth Imbalance

Thesis Current account imbalance is only a

manifestation of more serious structural imbalances

These are sectoral imbalance btw finance and real economy, and income and wealth inequality

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Bernanke and Savings Glut Bernanke blames current account surplus

countries for excess savings > lower interest rates > financing deficits and debt of US

Disingenuous to blame surplus countries and not deficit countries

A country cant run surplus unless other countries run deficit

Question is what cause surplus & deficit4

Surplus = Savings > InvestmentsDeficit = Investments > Savings China accused of pursuing weak exchange

rate policy to boost exports; US guilty of pursuing loose monetary policy that encourage excessive borrowings & consumption

Important question is what cause some countries to have excess savings over investments and others excess investments over savings

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U.S. – Inequality, Under-consumption and Financial Crisis Wage stagnation & growing inequality >

under-consumption by majority Under-consumption by majority and excess

savings by minority – 2 sides of same coin Under-consumption resolved by over-

consumption thru rising household debt Excess savings recycled thru financial

system to finance HH debt > debt bubble

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CEO’s Pay, Corp Profits, S&P 500 Prodn Workers Pay, Fed Min wage

1990-2005Minm wage minus 9%

Prodn WorkersPay + 4%

Corp Profits + 107%

S&P 500 +141%

CEO’s Pay+300%

Wages lagged behind productivity

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U.S. inequality and two bubbles

Excess savings also > asset bubble as risk appetite rises

Both eventually imploded > financial crisis

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Inequality Preceded Great Depression and GFC

China – Inequality, Under-consumption & CA Surplus Inequality also > underconsumption Share of GDP to labor fell from 57% to

37% over last 20 years Share of personal consumption to GDP fell

from 55% to 35% over same period High savings rate of 50% due to

precautionary savings and high corporate savings and investments for export > current account surplus

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Decline in Private Consumption in China

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Inequality, Under-consumption and Current Account Imbalances Both in China and U.S. inequality > under

consumption In U.S. under-consumption “solved” by debt

aided by over-leveraged & exotic financial system where savings recycled to household debt

In China – excess savings channeled to investments for exports; bank lending to 18% of bank loans

Policy Implications and Lessons Global current account imbalance related

to income imbalance & sectoral imbalance For surplus countries, need to reduce

dependence on exports in favor of domestic consumption

Rebalancing requires reducing inequality Wages must rise in tandem with

productivity increases Growth must be with employment creation

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Policy Implications For deficit countries like US, also need to

have wages rise to strengthen household balance sheet, and to reduce debt

Reduce financialization and speculation For surplus countries, rechannel excess

savings from investments in US debt or from exotic financial instruments to regional and domestic investments.

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Policy Implications SWF instead of investing in speculative

finance & adding to fin fragility; rechannel funds for intra-regional development

Concept of SARR – socially accept rate of return

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THANK YOU

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Globalization = Increasing world integration thru trade, capital, labor, information flows Globalization uneven and asymmetric High growth but increasing inequality Fuelled by deregulation and liberalization Frequency of financial crisis increased after

liberalization -1970-2007–127 financial crises

High correlation btw inequality and financial crisis

Banking Crises 1880 - 2010 Note few banking crises 1940s -1970s

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Inequality & Financial Crisis Key to understanding long term structural

causes of Global Financial Crisis is to examine the link between:

growth, debt, inequality, financialization.

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After post WW2 growth, U.S. real GDP growth on decline fr 4.4% to 2.6% (1960-2006)

Chart 2: Avg Real GDP growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1960-69 1970-79 1980-89 1990-99 2000-06

Year

Per C

ent G

DP G

row

th

Avg Real GDP growthl

1960-69 - 4.4%

1970-79 – 3.3%

1980-89 – 3.1%

1990-99 – 3.1%

2000-06 – 2.6%

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Debt-driven Economy, 1960-2007Chart 3 : U.S. GDP & Debt by Sector

1960-2007

-

10,000

20,000

30,000

40,000

50,000

60,000

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2007

Year

US$

bill

ions

GDP

Total Debt

Financial Debt

Non-FinancialCorporateHousehold Debt

Government Debt

GDP rose - 27x

Total Debt - 64x

Financial -490x

Household- 64x

Non Financial Corp – 53x

Govt- 24x

Income and Wealth Inequality in U.S. Worsened after 1970s 1970-2006, real wages of workers

stagnated, while that of CEOs spiraled Share of GDP going to capital increasing

and to labor decreasing Gini index rose fr 0.35 to 0.46 – worse than

many third world countries Top 1% took 25% of total income Top 1% took 33% of total wealth

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Greenspan is puzzled “We know in an accounting sense what is

cause it (this divergence btw productivity and wages)…but we don’t know in an economic sense….”

He worries that if wages for average US workers don’t start to rise more quickly, political support for free markets may be undermined.

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Many causes for inequality Education, skills, technology, trade Loss of bargaining power – Reagan broke

national accord btw labor and capital Global labor arbitrage Neo-liberal state policies favor capital Capital share of GDP rose with tax cuts in

dividends, capital gains, estate duties, corporate earnings

Stephen Roach of Morgan Stanley “ As the pendulum of economic power has

swung from labor to capital in the developed world, there is now a clear and growing risk that the pendulum of political power could swing from capital back to labor” (The Next Asia, 2009:91)

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Marx, Morgan Stanley & Global Labor Arbitrage Globalization didn’t confer equitable

benefits Contest btw returns to capital and labor

pendulum swung in favor of capital China, India, former USSR entrance into

global labor market – 1.5 billion addition weakened labor bargaining power

Japan, Canada & 12 European c’tries – labor’s GDP share fell fr 56% to 53.7% btw 2001 & 2006

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China – Higher Inequality Amidst Growth Boom Wages of Chinese workers lagged behind –

productivity grew 20%, wages 12% (2000-04) In 2002 –it was 57cents, 3% of avg US hourly pay Large pool of migrant workers fr rural sector Share of GDP to labor – drop fr 57% to 37%

(1978-2005) Gini almost doubled fr 0.32 to 0.50 (1978-2006) Premier Wen – China’s economy “unstable,

unbalanced, uncoordinated, unsustainable” Wage situation beginning to reverse

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Marx - Contest btw Capital & Labor Capitalism’s basic contradiction – contest

btw labor and capital for economic pie – transformed over time

Capital’s strategies to enhance profits - increase capital intensity - part time, temporary, contractual labor - labor flexibility, jobless recovery - leveraged buy-out

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Inequality and Under-consumption When wages stagnate or kept low > structural

tendency to under-consumption (lack of effective demand) > excess capacity or low production > drag on profit > interruption in the production and accumulation process

Inequality impacts 2 ways – under-consumption on one hand excess savings on other hand Under-consumption and Excess Savings are two

sides of same coin

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Overconsumption and Debt Bubble Under-consumption is “resolved” through debt >

over-consumption Wages stagnated but personal consumption rose

fr 60% GDP to 72% (1960s to 2007) National savings rate declined by 10% Household debt rose 64x to 100% of GDP Financial innovations fuelled debt bubble – credit

card, home equity low, negative amortization, securitization

Net equity extraction fr homes rose to 9% of disposable income

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Excess Savings and Asset Bubble Tiny minority with excess savings and liquidity Savings recycled to household loans Not content with fixed deposits High risk appetite Placed in hands of financiers who churn out

derivatives and leveraged instruments Ponzi financing – lending based not on cash flow

but on rising asset prices and taking on more debt Inevitable crash of both asset bubble and debt

bubble

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Financialization of Economy Basic dynamics of market economy not

changed Forms & specifics have changed Fr competitive capital to monopoly capital

to finance capital US, btw 1960-2006, financial sector 14% of GDP to 20% (twice as large as next FIRE sector- 30% of total corporate profit

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Financial fragility and instability major cause of economic crisis Major economic crises caused by fragility,

instability and implosion of financial sector Asset bubble rather than wage and consumer

price inflation causing crisis Central bankers have been remiss and kept eyes

on wrong ball Also misguided in belief in efficient market

hypothesis that markets price assets efficiently and are self-regulating

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China Equation – Inequality, Under-consumption & Export Surplus Bernanke – blame Asia for savings gluts and

contributing to global imbalances Disingenuous to blame current account surplus

country and not deficit country US only country with ability to run huge CA deficit

for long period because of international curr status

China accused of managing weak yuan to boost exports, US guilty of loose monetary policy that encourage overspending

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U.S. Current Account Balance

U.S. Current Account Balance

(1,000)(800)(600)(400)(200)

-200

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Year

Curr

ent

Acco

unt

Bala

nce

$ Bi

llion

U.S.

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China – Current Account Surplus = Savings Investment Gap More important question is what cause a country

to have more savings than investment and v.v China’s savings over 50%; Investments 40% Private consumption fell from over 70% to 35%

(1960s to 2007) Why high savings?

- precautionary savings – many SOE workers thrown out of work, social services no longer free

- corporate savings – SOEs not taxed, don’t pay out dividends, reinvest into export production

Tale of Two Gluts – Savings Glut and Debt & Overconsumption Glut China current account surplus rose fr

$12bn 1990 to $426bn in 2008 Foreign reserves rose fr $30bn in 1990 $3

trillion in 2011. Under-consumption and excess savings in

poor country funding excess consumption and debt bubble in the U.S.

SWF investments in speculative finance capital adds to financial instability

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China’s Current Acct Surplus, FX Reserves, U.S. Current Acct Deficit

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Conclusions and Policy Implications “There can be no dispute that the current

crisis is due to a systemic, policy-driven environment of financialization and speculation originating in the North, often foisted upon reluctant developing countries through misguided advice and aid conditionality. The crisis must be resolved through intervention at those levels.” (UNCTAD)

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Conclusions Globalization driven by financial and

speculative capital has distorted development in real economy

Two major imbalances – imbalance btw finance and real economy

Inequality is worsening This in turn driven by basic fundamentals of

contest btw capital and labor

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Conclusions For now, pendulum has swung in favor of

capital, aided by neo-liberal state policies Inequality has resulted in under-

consumption and excess savings whose dynamics are played out in global imbalances and financial crises

If history is any guide, adjustment process without change in policy direction will not resolve the problems

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Conclusions Inequality a structural problem that requires

policy shift fr market fundamentalism to policy of inclusiveness – raise wages concomitant with productivity increases

Present strategy of reviving growth by cutting labor costs only leads to jobless recovery

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Conclusions Without improvement in employment,

wages, reduction of inequality, strengthened household balance sheet, growth is not sustainable.

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Implications for Emerging Economies Growth must be not be driven by

financialization and speculation Growth must be more balanced and

inclusive Wages must rise with productivity

increases if want to reduce export dependence and promote domestic consumption

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Conclusions Encourage more debate, dialogue, new

ideas and cooperation among EMCs Formulate new agenda for different type of

globalization

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Some specifics Presently only 10% of total FDI flows is btw

South-South countries Rather than invest in speculative capital,

recycle huge surplus of EMCs within region Introduce socially acceptable rate of return

rather than maximizing shareholders value Depend more on domestic and intra-

regional markets – reduce inequality,

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Conclusions

Increase regional cooperation in trade, investments, exchange rate coordination

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IMF Working paper 10/268

Michael Kumhof and Romain Ranciere

Inequality, Leverage and Crises

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THANK YOU

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