September 3, 2006 09:00 AM/ GUARDIAN [U.K.]
WHEN WORLD FINANCIAL leaders meet in Singapore this month for the
joint World Bank/International Monetary Fund meetings, they must
confront one singularly important question. Is there any way to coax
the IMF's largest members, especially the United States and China, to
help diffuse the risks posed by the world's massive trade imbalances?
This year, the US will borrow roughly $800 billion to finance its
trade deficit. Incredibly, the US is now soaking up roughly two-thirds
of all global net saving, a situation without historical precedent.
While this borrowing binge might end smoothly, as the US Federal
Reserve chairman, Ben Bernanke, has speculated, most world financial
leaders are rightly worried about a more precipitous realignment that
would likely set off a massive dollar depreciation and possibly much
worse. Indeed, if policymakers continue to sit on their hands, it is
not hard to imagine a sharp global slowdown or even a devastating
Although Bernanke is right to view a soft landing as the most likely
outcome [yeah, right], common sense would suggest agreeing on some
prophylactic measures, even if this means that the US, China, and
other large contributors to the global imbalances have to swallow some
bitter medicine. Unfortunately, getting politicians in the big
countries to focus on anything but their own domestic imperatives is
far from easy.
Though the comparison is unfair, it is hard not to recall the old quip
about the IMF's relative, the United Nations: "When there is a dispute
between two small nations, the UN steps in and the dispute disappears.
When there is a dispute between a small nation and a large nation, the
UN steps in and the small nation disappears. When there is a dispute
between two large nations, the UN disappears." [cute, but all too
Fortunately, the IMF is not yet in hiding, even if some big players
really don't like what it has to say. The IMF's head, the Spaniard
Rodrigo Rato, rightly insists that China, the US, Japan, Europe, and
the major oil exporters (now the world's biggest source of new
capital) all take concrete steps towards alleviating the risk of a
Though the exact details remain to be decided, such steps might
include more exchange-rate flexibility in China, and perhaps a promise
from the US to show greater commitment to fiscal restraint. [wasn't it
a lack of _private sector_ restraint that was the problem in the
1990s, Ken?] Oil exporters could, in turn, promise to increase
domestic consumption expenditure, which would boost imports.
Likewise, post-deflation Japan could promise never again to resort to
massive intervention to stop its currency from appreciating. Europe,
for its part, could agree not to shoot its recovery in the foot with
ill-timed new taxes such as those that Germany is currently
Will the IMF be successful in brokering a deal? The recent
catastrophic collapse of global trade talks is not an encouraging
harbinger. Europe, Japan, and (to a much lesser extent) the US, were
simply unwilling to face down their small but influential farm
lobbies. The tragic result is that some of the world's poorest
countries cannot export their agricultural goods, one of the few areas
where they might realistically compete with the likes of China and
Fortunately for Rato, addressing the global imbalances can be a
win-win situation. The same proposed policies for closing global trade
imbalances also, by and large, help address each country's domestic
For example, China needs a stronger exchange rate to help curb manic
investment in its export sector, and thereby reduce the odds of a
1990's style collapse. As for the US, a sharp hike in energy taxes on
gasoline and other fossil fuels would not only help improve the
government's balance sheet, but it would also be a way to start
addressing global warming. [do the Bushies think this? do they even
care?] What better way for new US treasury secretary Hank Paulson, a
card-carrying environmentalist, to make a dramatic entrance onto the
world policy stage?
Similarly, the technocrats at the Bank of Japan surely realize that
they could manage the economy far more effectively if they swore off
anachronistic exchange-rate intervention techniques and switched
whole-heartedly to modern interest-rate targeting rules such as those
used by the US Federal Reserve and the European Central Bank.
With Europe in a cyclical upswing, tax revenues should start rising
even without higher tax rates, so why risk strangling the continent's
nascent recovery in the cradle? Saudi Arabia, with its burgeoning oil
revenues, could use a big deal to reinforce the country's image as a
major anchor of global financial stability.
If today's epic US borrowing does end in tears, and if world leaders
fail to help the IMF get the job done, history will not treat them
kindly. Instead, they will be blamed for not seeing an impending
catastrophe that was staring them in the face. Let's hope that on this
occasion in international diplomacy, the only thing that disappears
are the massive global trade imbalances, and not the leaders and
institutions that are supposed to deal with them.
Kenneth Rogoff is professor of economics and public policy at Harvard
University, and was formerly chief economist at the IMF.
His work for CiF is copyright Project Syndicate, 2006.