Download Asia and the Emerging Global Economic System

Asia and the Emerging Global
Economic System
Joseph E. Stiglitz
Bretton Woods
April 10, 2011
Changing Global Economic Landscape
• Unprecedented growth in Asia
– Rapid convergence
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China already 2nd largest economy
On the way to being largest economy
Already largest source of savings
“Correcting” a two century long aberration
– Economic model markedly different from American
style capitalism (especially in East Asia)
• Larger role for government
• More government controls
• Especially in financial markets
Asian Economic Model Has Worked
• Not only to promote unprecedented growth
• But also for stability
– Avoided the excesses of the US
– And even to manage the instability foisted on
them
• Combination of their success and their economic role (in
trade, finance, reserves) implies Asia should/will have a larger
role in setting the rules
– Differences in interests, economic circumstances, ideology should
imply a difference in rules
• Before the crisis, Asian countries were put under pressure to
adopt “unfettered” financial markets (fully flexible exchange
rates—except in East Crisis, when it was recognized that
would be destabilizing)
– Financial and capital market liberalization
• 1997 attempt to change charter of IMF
– Sometimes embedded in trade treaties
After the Crisis
• Recognized that excessive deregulation was
responsible for the crisis
– And financial and capital market liberalization may
have contributed to the rapid spread of crisis
around the world
• Countries that had maintained regulations
(including on cross-border capital flows) fared
better
– But US Treasury does not seem to have fully
learned the lesson
New Balance of Global Economic
Power
• Rules governing global economic system have largely been
written by advanced industrial countries, for advanced
industrial countries—or for special interests within those
countries
– Based on “free market” ideology
– But justified in terms of “economic principles”
• Similarly, for international institutions governing globalization
– Marked by flaw governance
• Question is: Will emerging markets be able, willing to rewrite
these rules? To reflect:
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Their countries’ interests
Broader interests within their society
To promote global stability and growth
Including development of the poorest countries
A New Global Order—
Reflecting Lessons of Past and
New Balance of Power
• A global reserve system
• A global monetary policy
• A global regulatory system
Global Reserve System
• Dependence of global system on the currency
of a single country in the multi-polar world of
the twenty first century is a historical
anachronism
– Especially given problems of economic
management in the US
– Dollar is not a good store of value
Dollar Reserve System Is Unstable,
Deflationary, and Inequitable
– New version of Triffin paradox
– Economic circumstances in reserve currency
country may differ from those of others—conflicts
of interests in “supply” of reserves
– Money that is put aside in reserves is money not
spent—contributing to lack of global aggregate
demand
– Developing countries lend money to reserve
country (countries) at low interest rates and
borrow at high interest rates
Reform Good Even for US
• Though it has advantage of being able to
borrow at low interest rate
• Accumulations of reserves mean US is
exporting T-bills rather than automobiles (i.e.
gives rise to trade deficit)
• In past, contractionary effects could be offset
by government spending
• More difficult now
New Global Order
• Still, US has resisted change
• But with China holding almost $3 trillion in
reserves, China’s voice (and that of other
holders of reserves) should be more important
• China knows that it is earning negative return
on dollar holdings
– And will experience large capital losses as it
revalues
Reforms
• Long term: Annual emissions of a new global
reserve currency
• Short term: Annual emissions of SDR’s,
combined with reforms in SDR system to make
SDR’s more usable
Global Monetary System
• Financial and capital market integration
changes way national monetary policies work
– Without regulatory or other barriers, increase in
liquidity in one part of world seeks highest return
in world—no reason for it to stimulate domestic
economy
• Especially when credit channel (banking system) is
clogged
• Except through competitive devaluation
– “Portfolio effect” from increase in relative supply of “dollars”
Intellectual Incoherence?
• QE II was announced as a temporary purchase
of long-term government bonds—raising
prices and lowering long-term interest rates
– But if “adding” demand raises prices (from what
they otherwise would have been), then later
subtraction of demand will return them to
previous level
– But anticipating this, buyers will not be willing to
pay higher price
– Suggesting at most a limited effect
Intellectual and Policy Incoherence?
• If it is permissible for one Central Bank to add
dollars, why should it not be permissible for
another Central Bank to subtract dollars
– Which is what they have been doing through
exchange rate interventions
• More generally, other governments attempt to
limit potential impacts by imposing
constraints on the free flow of capital
A New Global Regulatory Regime
• Without global regulation, there is a risk of
regulatory arbitrage, circumvention
• But likelihood of an effective global regime is
limited
• Each country has a responsibility to protect its
citizens and economy
– Adopting regulatory regime appropriate for their
circumstances
– Recognizing the large role that special interests (especially
finance) has played in setting national rules in the West
and international rules
Cross Border Capital Flows
• A critical part of the regulatory regime (largely
ignored in G20 discussions) concerns cross-border
capital flows
– Short term flows major source of volatility
• Flows often pro-cyclical
• Economic theory (taking into account information imperfections
and/or life cycle effects) explains why that should be expected
– With little (possibly adverse) effect on real growth
– A variety of effective capital account management
techniques
Recent IMF Report Represents Major
Policy Shift
• Recognizes role of capital flows in
creating/enhancing volatility
– Evident in the post-crisis period
• Recognizes that some nations resorted to capital
controls with some success
Recent IMF Report Represents
Major Policy Shift
• But didn’t go far enough
– Recommended that they be used only as a last resort, as
temporary measures, and that they be non-discriminatory
– But capital account management techniques can enhance
scope for domestic policy, discourage destabilizing shortterm capital flows
– There are differences between domestic and foreign flows
(based on information asymmetries, preferences, etc.)
• Though with globalization, some of these differences diminishing
– A global regulatory system (controlling outflows and
inflows, reducing scope for regulatory arbitrage,
circumvention) would be desirable
• Worse, some trade agreements may inhibit ability to adopt
appropriate regulatory system
Financial Market Liberalization
• This too may have contributed to volatility
• Without offsetting benefits in terms of economic
growth
– International financial institutions especially less
interested in lending to domestic SME’s
• Results not surprising—given information asymmetries
• Long-time source of concern—reluctance in US to have national
banks
– Hamid Rashid, “Credit to Private Sector, Interest Spread and Volatility
in Credit-flows: Do Bank Ownership and Deposits Matter?” working
paper, 2011
– Detragiache, Tressel and Gupta, 2006, “Foreign Banks in Poor
Countries,” IMF Working Paper, WP/06/18
Global Imbalances
• US tried to shift blame for crisis to Asia—“savings
glut”
– Real failure was the failure of financial markets to manage
risk and allocate capital to address large investment needs
• Retrofitting the global economy to face global warming
• Development needs (e.g. infrastructure)
• Asia should not be encouraged to imitate America’s profligate
consumption pattern
– Though China needs a change in its “supply driven” economic model
• Real challenge is how to recycle savings in a more productive
way than has been used in the past
– Necessitates creating a risk mitigation facilities
Concluding Remarks
• New global order provides new opportunity to
design a new global financial and monetary
system
– Old system hasn’t worked well
• Problems manifest in crisis
• Globalization has made matters worse
– Principles underlying it based on flawed theories
• Though may have served special interests well
– Asia should work to help create this new system
Concluding Remarks
– But in the meantime, it should resist allure of
“financialization”
• China attracted by the prestige of having its currency becoming
used internationally
– Will inevitably happen as China becomes largest trading economy
– Does not require full liberalization of financial and capital markets
– Internationalization of currency is less important for its economy
than developing good financial markets domestically—e.g. to provide
credit to SME’s
• Notion that once its capital and financial markets have become
more developed it should fully liberalize is wrong
– Unfettered financial markets have never worked well
– And the most recent crisis has provided further evidence