Thu Nov 24th, 2005 at 01:42:46 PM EST
Migeru asked the following question on another thread, "WChurchill, what do you have to say to the IMF's warnings about the imbalances in the US economy, and its global consequences?" It led me to some research, some good articles, one in particular, and a long response that I thought might be worth a diary.
So, Migeru, your note prompted me to Google this subject and the first item on the search was a great talk,
The Global Economic Outlook and Risks from Global Imbalances
Remarks by Rodrigo de Rato
Managing Director of the International Monetary Fund
At the Spain-U.S. Chamber of Commerce
September 30, 2005
Migeru, since he is an IMF spokesman, and the title of the article is so close to your question, I'm assuming his positions are what you are addressing but perhaps you could link over to it and make sure.
I'm a little surprised to find that I agree with basically everything he says. First, he is quite positive on the overall global outlook,
The global economy has been strong over the past couple of years. Growth in 2004 was the highest in three decades, with world output increasing by over 5 percent. We also expect growth to continue at a good pace in 2005 and 2006, despite a number of recent shocks, including higher oil prices and two hurricanes in the United States. Even with an expected dip in U.S. growth in the fourth quarter, we expect global real GDP growth to be over 4 percent in 2005 and 2006.
Yet he identifies a number of risks for the world economy:
The outlook then is generally good. However, there are risks, and some of the most serious of these come from global imbalances. Put simply, the world needs to move away from a pattern of growth where investment in most of Asia is too low, and high consumption in the U.S. is financed by rapidly increasing debt, and where growth of domestic demand in Europe and Japan is too weak.
He then goes on to address each of these risks in more detail, the first being the budget deficits in the US:
As so often in the recent past, the United States economy has been one of the main engines driving global growth. But the vulnerabilities of the U.S. economy are increasing. The persistent and large U.S. external current account deficit has caused U.S. net external liabilities rise to unprecedented levels--that is, as foreigners own more and more U.S. assets--relative to the size of the economy. In the face of this, we have to ask when the appetite of the private sector for U.S. debt will weaken. If this happens, it could be accompanied by an abrupt increase in interest rates, a cooling of housing and other asset markets, and a sharp slowdown in demand by U.S. households. The best way the U.S, can reduce its external current account deficit is to reduce its budget deficit. Reducing the budget deficit is in any case important given the impending pressure on entitlement programs from the retirement of the baby boom generation.
There is no question that the budget deficits are very concerning. They must be fixed, and the question is will current economic policies address the issue, and will the politicians have the political will to control spending. I'm somewhat hopeful that current growth will drive increasing revenue. I'm also somewhat hopeful that the spending on Iraq will be decreasing beginning in the second half of '06. those are two very important factors moving IMHO in the right direction. I also agree that tax simplification would be a plus to the economy, but am concerned that the political will to do that is not there. And politicians always have trouble controlling overall domestic spending. But overall, I think the deficits will start to fall, and investors around the world will continue to favor the US economy as the most stable and consistently growing, and will therefore continue to invest,eg buy dollars. My biggest concern is that we are not addressing the social security issue that he refers to, and I'm afraid the politicians will toss it around as a political football, and not get anything done. So I'm concerned in the next decade for US investments, and if nothing changes, will dramatically change my positions--but that's a long time away, and things could change.
But he also makes points on other areas that he feels should be addressed to correct global imbalances:
But it is not only the U.S. which needs to take action to reduce global imbalances. Europe and emerging Asia can help by taking measures that will increase domestic demand in their economies:
In Europe, governments need to articulate comprehensive, growth-oriented strategies that address both unemployment and aging, mainly through reducing the rigidities prevailing in labor, product, and service markets. They should also extend the Single Market to the provision of services, including financial services.
In emerging Asia, more exchange rate flexibility is needed. China and Malaysia have made some welcome changes to their exchange rate regimes lately, and I hope that the authorities will use the flexibility afforded by their new arrangements, and that other countries in Asia which have been managing their exchange rates more flexibly will continue to do so. In addition, Asian countries should pursue structural reforms--including to encourage higher investment in some countries and better investment in others.
And, do I hear European and American farm subsidies being addressed in what follows?
Let me conclude by saying a few words about another issue--trade. There are a set of meetings coming up on trade in December--the meetings of the World Trade Organization in Hong Kong--that are very important for the world economy. Why do these meetings matter? Because free trade is essential to maintain strong and sustained global growth, because these meetings offer the best chance of significant progress on the Doha Round of discussions on trade liberalization, and because there are rising protectionist sentiments in a number of countries, which must be resisted. Leadership is needed from the large countries, which have much to gain from these negotiations in terms of the opening up of markets, and which have an opportunity to help developing countries while making goods less expensive for their own consumers. Developing countries also have a lot to gain from undertaking ambitious trade liberalization, not only because of the opportunity to improve their access to industrial country markets but because greater openness to trade can lead to stronger institutions and better growth prospects. Governments must grasp this opportunity.
I think his view on the global economy is very much right on, and in addition identifies programs in all parts of the world that could bolster growth, and increase economic well being around the world. But then again, my glass tends to always be half full, and never half empty. Maybe he has the same glass.