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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