Rebalancing growth

by Jérémie Cohen-Setton on 25th September 2009

What’s at stake: On Thursday evening and Friday, heads of government from countries belonging to the G-20 met in Pittsburgh and reached agreement on a US led proposal for a new framework for tackling global economic imbalances. The goal was to achieve both a basic agreement on what needs to be done to produce more balanced global growth and on a process for ensuring that countries deliver on their commitments. The ideas are not new, and there is no enforcement mechanism to penalise countries if they stick to their old habits. But for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

Brad Setser, who is now director of International Economics at the White House’s National Economic Council, outlines the US administration’s view signalling that the United States will not continue to be the world's consumer and importer of last resort. As the U.S. starts to act more responsibility, it will borrow less and spend a bit less on the rest of the world’s goods. That means borrowing by U.S. households cannot be the main source of global demand growth in the future and that the world will need to rebalance the global pattern of growth in demand, with a shift from domestic to foreign demand in the United States and a reverse shift from foreign to domestic demand in other parts of the world.

Menzie Chinn says that it is easy for the US to put global imbalances at the top of its policy agenda, given that the US consumer is now rebalancing by force. Although it is hard to see any means of credibly precommiting to implement policies that would enhance rebalancing, many of the forces at play – deleveraging, higher household saving – might very well accomplish a lot of what did not occur in the past.

Simon Johnson says the US pursuit of a rebalancing agenda at the upcoming G20 meeting is something that sounds nice, but that to which no parties, particularly China and the US, can make a credible commitment.  It is pointless rhetoric because such an approach has been tried before, most recently in the Multilateral Consultation, run by the IMF, but achieved little results. This approach will always be fruitless unless and until you can put pressure on surplus countries to appreciate their exchange rates. The call to “rebalance” global growth is appealing to the G20 leaders because it involves no immediate action and no changes in policy – other than in the “medium run”. 

C. Fred Bergsten and Arvind Subramanian say that the US strategy is not consistent with strategies elsewhere. To the extent that the US strategy is credible, America’s trading partners will not be able to rely on export-led growth and will have to find ways to expand domestic demand on a lasting and substantial basis as America cannot resolve global imbalances on its own.

Carlo Bastasin says that pressure on Germany might bring negligible results and even be counterproductive.  For one thing, even if Germany were to cut its global trade surplus to zero, the effect on the American trade deficit would be marginal — about 0.2 percent of the US GDP, whereas at its peak the US current account deficit was nearly 7 percent of its GDP. Instead of pressuring Germany directly, the United States should ask the eurozone members to coordinate their economic planning more deeply in order to avoid a recession-driven adjustment in Europe and to find a common way to stimulate the growth of the euro area. The obvious problem of coordination is a political one. But America has the right to call for a responsible Europe.

Markus Jäger does the math and says that it looks impossible for China to offset the expected decline in US growth in the near term. This would require China to add 4-5 percentage points to its growth rate during 2008-10. Historically, the Chinese economy has moved much less in line with global growth than other economies, and China’s contribution to pre-crisis global growth was already substantially larger than that of the US. So although China is making a significant contribution to global growth, it is not going to be “driving” growth in the developed economies. Nor are indeed the BRICs.

Michael Pettis says that Beijing’s massive stimulus will probably prevent the necessary adjustment toward faster consumption growth from taking place in the near future. Instead of reversing long-standing policies aimed at promoting and subsidizing domestic investment and manufacturing that have been the main reason for shifting income from households to producers, Beijing forced through a large increase in investment. China will find it difficult to generate the kind of consumption growth that will take up some of the American slack, and we may be locked into a period during which the world adjusts by growing more slowly.

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