Reducing Risks From Global Imbalances Committee for Economic Development
2000 L Street N.W., Suite 700 Washington, D.C. 20036 202-296-5860 Main Number 202-223-0776 Fax 1-800-676-7353
www.ced.org A Statement by the Research and Policy Committee of the Committee for Economic Development Reducing Risks From Global Imbalances
A Statement by the Research and Policy Committee of the Committee for Economic Development Reducing Risks from Global Imbalances
Includes bibliographic references
ISBN: 0-87186-185-2
First printing in bound-book form: 2007
Printed in the United States of America
COMMITTEE FOR ECONOMIC DEVELOPMENT
2000 L Street, N.W., Suite 700
Washington, D.C., 20036
202-296-5860
www.ced.org Contents
Purpose of Th is Statement...... xi Executive Summary ...... 1 I. Introduction...... 3 II. “International Imbalances” and Th eir Recent Rapid Growth...... 5 What Are “International Imbalances?” ...... 5 Why Should We Care About International Imbalances?...... 5 Recent Trends in International Imbalances ...... 6 Th e U.S. Current Account ...... 6 Current Accounts Abroad ...... 8 Th e U.S. Capital Account...... 8 Th e U.S. Net International Investment Position (NIIP)...... 10 U.S. Liabilities, International Portfolios, and International Reserves ...... 13 III. Th e Sources of Large International Imbalances ...... 15 Th e International “Mismatch” Between Desired Saving and Investment ...... 15 Th e Decline in U.S. Saving...... 15 Th e Emergence of Saving-Investment Gaps Abroad ...... 16 Th e Strong Demand for Dollar Assets ...... 18 Globalization and Portfolio Diversifi cation ...... 18 Th e Dollar as International Money and the Principal Reserve Currency ...... 18 Th e U.S. Economy as a Magnet for Foreign Capital ...... 19 Relatively Rapid U.S. Economic Growth ...... 21 Th e Recent Rise in Energy Prices ...... 21 Export-Promotion Policies and Exchange Rate Intervention ...... 22 IV. Risks Created by Continued Large Imbalances ...... 25 Even Sustainable Imbalances May Produce Serious Problems ...... 25 Protectionism...... 25 Intergenerational Equity: Borrowing from the Future...... 27
iii Large Imbalances Are Unsustainable in the Long Term...... 27 Adjustment and the Reduction of Imbalances...... 28 Th e Idealized Adjustment Mechanism...... 28 Impediments to Smooth Adjustment...... 29 Th e Costs of Disorderly Adjustment ...... 31 V. Facilitating Adjustment: CED’s Policy Recommendations...... 33 Th e General Policy Framework: Th ree Principles...... 33 All Economies Should Contribute to Adjustment ...... 33 Changes in Both Total Spending and Relative Prices Are Required ...... 34 A Multilateral Cooperative Approach Is More Likely to Be Successful...... 34 Policies of the United States...... 34 First, What Not to Do: Protectionism...... 35 Increase National Saving ...... 35 Depreciation of the Dollar ...... 37 Policies in Other Countries ...... 37 Europe...... 38 Japan ...... 38 China...... 39 Petroleum Exporters ...... 40 Other Surplus Countries ...... 41 Other Measures to Reduce Risk ...... 42 Multilateral Consultations and a More Proactive IMF ...... 42 VI. Conclusion...... 45 Memoranda of Comment, Reservation or Dissent...... 46 Endnotes...... 47
iv Figures
Figure 1. Current Account Balances of Selected Countries and Regions...... 5
Figure 2. U.S. Balances on Current Account, Trade, Income, and Unilateral ...... 7
Figure 3. Major Net Exporters and Importers of Capital in 2006 ...... 9
Figure 4. Current Account Balances of Selected Countries and Regions, 1992-2006 ...... 10
Figure 5. U.S. Gross Capital Outfl ows and Private and Offi cial Infl ows, 1982-2006 ...... 11
Figure 6. U.S. Assets, Liabilities, and Net International Investment Position, 1982-2006 ...... 11
Figure 7. Rates of Return on U.S. Assets Abroad and Foreign Assets in the United States, 1983-2006 ...... 12
Figure 8. Rates of Return on U.S. Direct Investment Abroad and Foreign Direct Investment in the United States, 1983-2006...... 13
Figure 9. Composition of U.S. Gross Liabilities, 1982-2006...... 14
Figure 10. Selected Countries with Large Reserve Holdings, 1997-2006 ...... 14
Figure 11. U.S. Net Domestic Investment, and Net National, Corporate, Personal, and Government Saving, 1960-2006 ...... 16
Figure 12. Gross Saving and Investment in Japan, Germany, and the United States, 1980-2006...... 17
Figure 13. Corporate Stock Purchases: U.S. Outfl ows, Infl ows, and Diff erence, 1982-2006 ...... 20
Figure 14. Foreign Direct Investment: U.S. Outfl ows, Infl ows, and Diff erence, 1960-2006 ...... 20
Figure 15. U.S. Current Account Balance and Infl ation-Adjusted Value of the Dollar, 1975-2006...... 28
v CED Research and Policy Committee
Chairmen KATHLEEN COOPER CONO R. FUSCO Dean, College of Business Administration Managing Partner - Strategic Relationships PATRICK W. GROSS University of North Texas Grant Th ornton Chairman Th e Lovell Group W. BOWMAN CUTTER GERALD GREENWALD Managing Director Chairman WILLIAM W. LEWIS Warburg Pincus LLC Greenbriar Equity Group Director Emeritus McKinsey Global Institute KENNETH W. DAM BARBARA B. GROGAN McKinsey & Company, Inc. Max Pam Professor Emeritus of American Founder and Foreign Law and Senior Lecturer, Western Industrial Contractors University of Chicago Law School RICHARD W. HANSELMAN Members Th e University of Chicago Former Chairman IAN ARNOF RONALD R. DAVENPORT Health Net Inc. Chairman Chairman of the Board Arnof Family Foundation Sheridan Broadcasting Corporation RODERICK M. HILLS Chairman ALAN BELZER RICHARD H. DAVIS Hills Stern & Morley LLP President & Chief Operating Offi cer Partner (Retired) Davis Manafort, Inc. EDWARD A. KANGAS Allied Signal Chairman & Chief Executive Offi cer, RICHARD J. DAVIS Retired LEE C. BOLLINGER Senior Partner Deloitte & Touche President Weil, Gotshal & Manges LLP Columbia University JOSEPH E. KASPUTYS WILLIAM DONALDSON Chairman, President & Chief Executive ROY J. BOSTOCK Chairman Offi cer Chairman Donaldson Enterprises Global Insight, Inc. Sealedge Investments, LLC FRANK P. DOYLE CHARLES E.M. KOLB JOHN BRADEMAS Executive Vice President (Retired) President President Emeritus General Electric Company Committee for Economic Development New York University W. D. EBERLE BRUCE K. MACLAURY BETH BROOKE Chairman President Emeritus Global Vice Chair, Strategy, Manchester Associates, Ltd. Th e Brookings Institution Communications and Regulatory Aff airs Ernst & Young LLP ALLEN FAGIN WILLIAM J. MCDONOUGH Chairman Vice Chairman and Special Advisor to the DONALD R. CALDWELL Proskauer Rose LLP Chairman Chairman & Chief Executive Offi cer Merrill Lynch & Co., Inc. Cross Atlantic Capital Partners MATTHEW FINK President (Retired) LENNY MENDONCA DAVID A. CAPUTO Investment Company Institute Chairman President McKinsey Global Institute Pace University EDMUND B. FITZGERALD McKinsey & Company, Inc. Managing Director GERHARD CASPER Woodmont Associates ALFRED T. MOCKETT President Emeritus Chairman & CEO Stanford University HARRY FREEMAN Motive, Inc. Chairman MICHAEL CHESSER Th e Mark Twain Institute NICHOLAS G. MOORE Chairman, President & CEO Senior Counsel and Director Great Plains Energy Services PATRICK FORD Bechtel Group, Inc. President & CEO, U.S. CAROLYN CHIN Burson-Marsteller DONNA S. MOREA Chairman & Chief Executive Offi cer President, U.S. Operations and India Cebiz CGI vi CED Research and Policy Committee
M. MICHEL ORBAN JAMES Q. RIORDAN SARAH G. SMITH Partner Chairman Chief Accounting Offi cer RRE Ventures Quentin Partners Co. Goldman Sachs Group Inc.
STEFFEN E. PALKO DANIEL ROSE MATTHEW J. STOVER Vice Chairman & President (Retired) Chairman Chairman XTO Energy Inc. Rose Associates, Inc. LKM Ventures, LLC
CAROL J. PARRY LANDON H. ROWLAND VAUGHN O. VENNERBERG President Chairman Senior Vice President and Chief of Staff Corporate Social Responsibility EverGlades Financial XTO Energy Inc. Associates GEORGE E. RUPP JOSH S. WESTON PETER G. PETERSON President Honorary Chairman Senior Chairman International Rescue Committee Automatic Data Processing, Inc. Th e Blackstone Group JOHN C. SICILIANO JOHN P. WHITE NED REGAN Partner Lecturer in Public Policy University Professor Grail Partners LLC Harvard University Th e City University of New York
vii CED International Financial Imbalances Subcommittee
Co-Chairs VAN E. JOLISSAINT Corporate Economist JOSEPH KASPUTYS DaimlerChrysler Corporation Advisors Chairman, President & Chief Executive Offi cer BRUCE K. MACLAURY PROFESSOR RICHARD N. Global Insight, Inc. President Emeritus COOPER Th e Brookings Institution Maurits C. Boas Professor of International WILLIAM J. MCDONOUGH Economics Vice Chairman and Special Advisor to the LENNY MENDONCA Harvard University Chairman Chairman Merrill Lynch & Co., Inc. McKinsey Global Institute PROFESSOR JEFFREY FRANKEL McKinsey & Company, Inc. James W. Harpel Professor of Capital Formation and Growth ALFRED MOCKETT Kennedy School of Government Trustees Chairman & CEO Harvard University Motive, Inc. COUNTESS MARIA BEATRICE ARCO EDWIN M. TRUMAN Chair MUSTAFA MOHATAREM Senior Fellow American Asset Corporation Chief Economist Peterson Institute for International General Motors Corporation Economics KATHLEEN COOPER Dean, College of Business Administration YANCY MOLNAR University of North Texas Senior Manager, International Government Aff airs Project Director KENNETH W. DAM DaimlerChrysler Corporation Max Pam Professor Emeritus of American VAN DOORN OOMS and Foreign Law and Senior Lecturer TODD PETZEL Senior Fellow University of Chicago Law School Managing Director and Committee for Economic Development Chief Investment Offi cer W. D. EBERLE Azimuth Trust Management, LLC Chairman Manchester Associates, Ltd. DANIEL ROSE Research Associate Chairman MATTHEW SCHURIN DIANA FARRELL Rose Associates, Inc. Director Committee for Economic Development McKinsey Global Institute JOHN SICILIANO McKinsey & Company, Inc. Partner Grail Partners LLC EDMUND B. FITZGERALD Managing Director PAULA STERN Woodmont Associates Chairwoman Th e Stern Group, Inc. P. BRETT HAMMOND Senior Managing Director and FRANK VOGL Chief Investment Strategist President TIAA CREF Vogl Communications HOLLIS HART Director, International Operations Citigroup Inc.
viii ix Responsibility For CED Statements On National Policy
Th e Committee for Economic Development is an proposals; its purpose is to urge careful consideration independent research and policy organization of over of the objectives set forth in this statement and of the 200 business leaders and educators. CED is non-profi t, best means of accomplishing those objectives. non-partisan, and non-political. Its purpose is to pro- Each statement is preceded by extensive discussions, pose policies that bring about steady economic growth meetings, and exchange of memoranda. Th e research at high employment and reasonably stable prices, is undertaken by a subcommittee, assisted by advisors increased productivity and living standards, greater chosen for their competence in the fi eld under study. and more equal opportunity for every citizen, and an improved quality of life for all. Th e full Research and Policy Committee participates in the drafting of recommendations. Likewise, the All CED policy recommendations must have the trustees on the drafting subcommittee vote to approve approval of trustees on the Research and Policy or disapprove a policy statement, and they share with Committee. Th is committee is directed under the the Research and Policy Committee the privilege of bylaws, which emphasize that “all research is to be thor- submitting individual comments for publication. oughly objective in character, and the approach in each instance is to be from the standpoint of the general Th e recommendations presented herein are those of the welfare and not from that of any special political or trustee members of the Research and Policy Committee economic group.” Th e committee is aided by a Research and the responsible subcommittee. Th ey are not necessarily Advisory Board of leading social scientists and by a endorsed by other trustees or by non-trustee subcommittee small permanent professional staff . members, advisors, contributors, staff members, or others associated with CED. Th e Research and Policy Committee does not attempt to pass judgment on any pending specifi c legislative
x Purpose of This Statement
For more than a decade, both economists and observers should want to take in its own interest and that often of the fi nancial markets have become increasingly con- serve other important economic objectives. Th e rec- cerned at the growing and persistent trade imbalances ommendations also include ideas for an international in the world economy. In something of a reversal of its process to facilitate such cooperative adjustment. prior role, the United States, the world’s richest nation, has become an international borrower, running large Acknowledgements trade defi cits and accumulating a substantial net nega- tive international asset balance. Th e U.S. trade defi cits We would like to thank the dedicated group of CED have reached rates that analysts in the past might have Trustees, non-Trustee members, and advisers who characterized as unsustainable. comprised CED’s Subcommittee on International Financial Imbalances. Many factors play a role in the growth and continua- tion of these imbalances, but none of those factors is Special thanks are due to the Subcommittee co-chairs, clearly the sole or even the primary cause, or subject to Joseph E. Kasputys, Chairman, President and CEO easy remedy. Furthermore, the potential ill eff ects of of Global Insight, Inc.; and William J. McDonough, persistent imbalances – protectionism, transfers from Vice Chairman and Special Advisor to the Chairman, future generations of Americans to today’s generation, Merrill Lynch & Co., Inc., for their guidance and lead- and fi nancial instability – are all troubling. ership in drafting the report. Richard N. Cooper and Jeff rey Frankel of Harvard University, and Edwin M. Th e concerned members of this CED subcommittee Truman of the Peterson Institute, provided thoughtful – the business, academic, and policy leaders listed on advice to the subcommittee. We are also indebted to page viii – began meeting in the fall of 2006 to con- Van Doorn Ooms, CED Senior Fellow, who directed sider these global fi nancial imbalances. Th ey debated the project, and Joe Minarik, CED’s Senior Vice the sustainability of large and continuing U.S. current President and Director of Research. Th anks are also account defi cits, and the root causes and long-term eco- due to Matthew Schurin for able research assistance. nomic consequences of today’s global fi nancial imbal- ances. Th ere was a real concern among the group that Patrick W. Gross, Co-Chair the public debate might devolve to counterproductive Research and Policy Committee policies, including protectionist steps, to address this Chairman issue. Although many CED Trustees believed that the Th e Lovell Group imbalances could be smoothly resolved through market William W. Lewis, Co-Chair forces alone, there emerged a consensus that it would Research and Policy Committee be wise to “buy insurance” by adopting policies that Director Emeritus would reduce the risks of a disorderly adjustment. In McKinsey Global Institute the tradition of CED, the subcommittee recommends McKinsey & Company, Inc. a set of practical, actionable policy steps for all major contributors to the imbalances – steps that each nation
xi
Reducing Risks from Global Imbalances
Executive Summary
In Reducing Risks from Global Imbalances, CED traces Q Protectionist pressures are mounting in the the evolution of the current large global trade and United States in reaction to the trade defi cit fi nancial imbalances, examines their sources, and makes and, in particular, the large bilateral defi cit with recommendations that, if adopted, will help ensure China. continued growth in the global economy. Q Th e continuing growth of net debt implies additional transfers from younger or future Findings generations of Americans to adults living • Since 1991 the global economy has become in- today, which CED believes to be unwise and creasingly “imbalanced,” as the trade defi cit in the inequitable. United States and trade surpluses in many foreign Q If investors and governments lose confi dence countries have grown rapidly. In 2005 and 2006 in the ability of the United States to fi nance the U.S. current account defi cit (which includes continuing defi cits at acceptable rates of return, international investment income fl ows and transfer a sharp drop in the dollar resulting in fi nancial payments as well as trade in goods and services) and economic disruption is possible. reached an unprecedented 6.1 percent of GDP. • Th e most prudent response to these risks is to “buy • Th e counterpart of these U.S. defi cits has been insurance” in the form of precautionary policies large current account surpluses in the oil-exporting to facilitate adjustment. Th ese policies are gener- countries, Japan, China, and certain other Asian ally those that countries should take in their own and European economies, which have accumulated self-interest, but that may sometimes be politically extremely large private and public holdings of dol- diffi cult. lar assets. As a consequence, U.S. net international debt rose to 16 percent of GDP in 2006. Recommendations • Th ese global imbalances have resulted from several • As a general matter, all economies should contrib- factors, including declining saving in the United ute to global adjustment, which will require both States and high saving in the surplus countries; changes in relative prices (exchange rates) and a an increase in the demand for dollar assets due to rebalancing of global demand. A multilateral coop- globalization; the recent rise in energy prices; rela- erative approach to adjustment is most likely to be tively rapid economic growth in the United States; successful in securing these global adjustments in and exchange rate intervention by China and other demand and exchange rates and the political “buy- countries pursuing export-led growth. in” needed to implement them. • Market-driven changes in exchange rates and the • Th e United States, as the preeminent defi cit coun- structure of global demand are likely eventually try, must avoid a protectionist response. Instead, to produce an orderly adjustment of these global it should increase national saving by eliminating imbalances if there are no shocks to the system. the “on-budget” fi scal defi cit within fi ve years. Th is Such an adjustment process appears already to fi scal consolidation will require comprehensive have begun. However, the process is likely to be expenditure reductions as well as increased reve- slow, and the continuation of large imbalances nues, which might best be pursued through CED’s poses several risks: recommended tax reforms or energy taxes. Private
1 saving also should be increased through tax reform should continue to gradually liberalize its capital and targeted saving initiatives such as the adoption account and eventually move to a largely market- of “automatic” 401(k) plans by employers. determined exchange rate. • Europe should pursue policies that continue to • Th e petroleum exporters should continue to strengthen domestic demand, including structural increase public and private investment programs to reforms of product and labor market policies and raise domestic demand. Gulf Cooperation Council supportive monetary policy. Authorities should countries should consider following Kuwait’s ex- refrain from intervention to prevent further ap- ample in moving from a rigid dollar peg to a more preciation of the euro against the dollar. diversifi ed currency basket. • Japan also should pursue structural reforms and a • Smaller surplus countries also have a role to careful balancing of fi scal and monetary normal- play. Some have accumulated very large exchange ization that will support growth. Japan should reserves, and in the aggregate they can make a continue to refrain from intervention or public signifi cant contribution to adjustment. Th ey statements that impede the yen appreciation that is should resist the temptation to be “free riders” as needed for global adjustment. larger countries adjust. Instead, they should allow exchange rate adjustment and expand domestic • China should expand public consumption in demand as their individual circumstances permit. health care, education, public pensions, and other programs. Financial reforms to improve • Th e International Monetary Fund (IMF) can and the intermediation of private saving would raise should be more proactive in catalyzing govern- private consumption and improve the effi ciency of ments to consult on and implement adjustment private investment. Th ere should be a signifi cant policies. Th e multilateral consultations organized near-term appreciation of the renminbi against by the IMF in 2006-2007 should be institutional- the dollar, in the range of perhaps 10 percent, with ized in an international consultative group to be future appreciation in the range of 5-7 percent an- organized as circumstances require. nually for several years. In the longer term, China
2 I. Introduction
Th e U.S. trade and current account defi cits, after rising Th e possibly protracted timeline of market adjustment since 1991 to levels previously thought unsustainable, poses another risk. Forces for both trade and fi nancial may have stabilized in late 2006 and early 2007. It is protectionism are growing, under the political pressures too early to say whether they will now fall signifi cantly. of continuing large bilateral defi cits with China; this Certainly, some important features of international danger aff ects other advanced countries as well as the economic adjustment have emerged that might facili- United States. Furthermore, as the U.S. external debt tate a drop in the U.S. current account defi cit and in grows, resources continue to be “borrowed” from future its counterparts, the large current account surpluses generations to benefi t today’s consumers – which we in other countries: Th e dollar has fallen against the believe to be fi scally imprudent. A protracted period euro and some other currencies since early 2002; of adjustment, with continued large external defi cits economic growth has slowed in the United States and and rising external debt, also raises the danger that strengthened in Europe and Japan; China, India and some shock to the system, or myopic investor expecta- other Asian economies are booming; oil prices have tions, will precipitate a break in confi dence that could stabilized, and the oil exporters are beginning to work produce disorderly exchange rate changes and possibly off their large petro-surpluses with major import- economic disruption aff ecting both the United States increasing investment projects. and other countries. Should we therefore conclude that an orderly market- For these reasons, even if an orderly market-driven driven unwinding of these imbalances is inevitable, and adjustment may be the most likely outcome, we believe that “benign neglect” is the appropriate policy? We the prudent course of action is to hedge against such believe not, after analyzing the sources of the imbal- risks by “buying some insurance” in the form of precau- ances and the risks they pose for the U.S. and global tionary policies to prepare for and facilitate adjustment. economies. After examining the process of adjustment, It is strongly in the self-interest of the United States, we acknowledge that market forces acting on global as well as other countries, to do so. While policy demand and exchange rates may well prove suffi cient actions need to be taken by the United States and for smooth and orderly adjustment. But we also fi nd other countries as well, it is essential that the United substantial risks for both the United States and other States exercise strong leadership in both the domestic countries. and international dimensions of policy. Domestically, the United States must take long overdue action to One risk arises because not all the conditions for reduce the federal budget defi cit – fi rst, as a matter of market adjustment are in place. No signifi cant policy simple self-interest; second, as part of a multilateral changes have yet been enacted to reduce the U.S. fi scal eff ort to facilitate international adjustment; and fi nally, defi cit, which we believe is an important source of the because the credibility of U.S. international leadership U.S. external imbalance. Th is poses an infl ationary requires that it fi rst put its own fi scal house in order. danger, and a problem for monetary policy, if the dollar Internationally, the United States must lead simply be- continues to fall. Similarly, although the euro has ap- cause no major multilateral eff orts can succeed without preciated, market exchange rate adjustment has been the United States, and (as we argue in this statement) impeded in China and some other Asian economies, the chances of success are much higher if governments where current account defi cits and reserve holdings work together rather than separately. from currency intervention continue to rise sharply.
3 Th e policy statement concludes with recommendations and politically. Our recommendations should rather be for actions – by the United States and other systemi- seen as directional objectives, likely to be implemented cally important countries, such as China, Japan, and the over a period of several years, with some participants Euro Area – that would be most helpful in facilitating more constrained than others by domestic consider- adjustment. Th e proposed actions would help rebal- ations in their policy contributions. But we neverthe- ance global demand and make exchange rates more less believe that such an ongoing process would im- responsive to market forces. Th ese are generally actions prove on current arrangements by making it clear that that these countries should take in their own self- adjustment is a collective enterprise, and by eff ectively interest, but that in some cases may be more palatable rewarding governments that are seen to participate in in a multilateral framework. We also off er suggestions the program and contribute to international stability. for extending into an ongoing process the multilateral Such a multilateral process will not replace bilateral consultations on adjustment that were convened and discussions and negotiations of policy diff erences, catalyzed by the International Monetary Fund (IMF) which may be necessary for both substantive and politi- in 2006-2007. cal reasons. But it may reduce some of the political diffi culties and tensions characteristic of bilateral nego- Finally, we emphasize that these recommendations tiations, and the associated accusations, pleas, threats, are not off ered as rigid, hard-wired actions to be and denials that often surround disagreements between implemented in exquisitely coordinated simultaneity countries on economic policies. by many countries as a comprehensive program. Th at would be quite unrealistic – technically, economically,
4 II. “International Imbalances” and Their Recent Rapid Growth
What Are “International Imbalances?” international income and transfer payments) must be fi nanced by selling assets abroad. Such sales and pur- Th e term “international imbalances” most commonly chases of assets over time change the net international refers to the diff erence between the historically large investment (“balance sheet”) positions of both debtors U.S. international trade defi cit (more precisely, the and creditors. Persistent, large current account defi cits current account defi cit, which includes payments for and surpluses tend to produce large diff erences be- international investment income and transfer payments tween countries in these net investment positions, and as well as trade in goods and services), and the cor- the term “international imbalances” is also sometimes respondingly large trade and current account surpluses used to refer to these balance sheet diff erences and the of many of this nation’s trading partners. (Globally, composition of assets and liabilities that underlie them. of course, the sum of all trade (and current account) balances must net to zero, absent measurement errors, Why Should We Care About International which can be substantial.1) Figure 1 shows the large Imbalances? growth in major current account imbalances since 1990. Th e term “imbalances” may carry a negative con- notation, because it seems to imply that “balance” Th e U.S. trade defi cit eff ectively represents the diff er- should be restored among national trade and current ence between the total expenditures on and produc- accounts and creditor/debtor positions. In general, tion of goods and services, a diff erence that (net of
Figure 1. Current Account Balances of Selected Countries and Regions (Surplus (+) or Deficit (-), Percent of World GDP)
1.0 0.82
0.48 0.50 0.5 0.38 0.30 0.35 0.18 0.20 0.19 0.12 0.07 0.05 0.06 0.0
-0.13 -0.10
-0.35 -0.5
-1.0
-1.31 -1.5
-1.78 -2.0 United States* Fuel Exporters** Newly Industrialized China*** Germany Japan Asian Economies Source: International Monetary Fund 1990 2000 2006 *Data do not reflect June 2006 current account revisions **First observation is 1992 ***2006 is an IMF projection
5 this is not the case, and this policy statement uses the in policy that reduce these risks. As discussed in more term in a descriptive rather than this normative sense. detail below, the large imbalances create at least three Historically, trade imbalances have been the mecha- principal risks: nism by which creditor countries have lent resources • Protectionism. We fear that continuing large to borrowing countries. Th is is generally appropriate trade defi cits, and in particular the very large U.S. and desirable, since the returns to capital are presump- bilateral defi cit with China, may aid the eff orts of tively higher in the borrowing countries, so that both domestic industries in seeking government protec- borrowers and lenders benefi t. Th e United States ran tion from import competition. Th is could halt, or trade and current account defi cits for many years when even reverse, the progress towards the more free it borrowed the capital from Europe to fi nance its early and open international markets that have benefi ted development, and many other developing economies United States and the postwar world. have borrowed in similar fashion.2 As the global economy grows, such resource transfers, and indeed • Financial or Economic Instability. Th e continued capital movements in general, increase the effi ciency rapid accumulation of foreign private and public of resource use worldwide and raise global living holdings of dollar assets could lead to a collapse of standards. confi dence in the dollar if this accumulation were suddenly perceived to be unsustainable. As noted In fact, the recent unprecedented growth in interna- below, various shocks to the system might produce tional imbalances has proven very attractive for both such a change in expectations about the value of the major lenders and borrowers involved. Th e imbal- the dollar. A sharp fall in the demand for dollar ances have allowed traditional export-oriented econo- assets could disrupt fi nancial markets and possibly mies, such as Japan and Germany, joined recently by aff ect output and employment in the United States China and others, to have very large export surpluses to or elsewhere. stimulate growth and employment. At the same time, they have permitted capital importers – preeminently • Borrowing From the Future. Th e rise in U.S. net the United States – to continually spend more than international debt has principally fi nanced an they produce, borrowing the additional goods and increase in consumption, which eff ectively will be services from abroad. It has been a mutually benefi cial, paid for by future generations of Americans who even “co-dependent” arrangement. As former Federal will have to service that debt. We believe this is Reserve Chairman Paul Volcker has said with refer- inequitable and problematic because of the likely ence to fi nancing the large U.S. borrowing, “Th ere is no costs associated with an older population, includ- sense of strain. It’s all quite comfortable for us.”3 Not ing higher health care costs, and the costs of deal- surprisingly, there consequently has been little desire ing with climate change and other environmental by either individuals or governments to take actions to problems. reduce the imbalances, especially since doing so (as we note below) would sometimes entail painful economic Recent Trends in International Imbalances adjustments.4 Th e U.S. Current Account We argue in this policy statement that these imbal- ances have now become so large that they begin to Figure 2 shows the U.S. current account balance from pose risks to the economic stability and growth of 1960-2006, as well as its components: the trade, in- the United States and other countries. Th erefore, the come, and current transfer accounts.i In the 1950s and process of adjustment should be facilitated by changes 1960s, the dollar was fi xed to gold, which the United
i Th e defi cit on unilateral transfers, which has generally run about 0.5-0.8 percent of GDP, consists primarily of private remittances and transfers and government grants. Private remittances have become increasingly important as a result of continued immigration and the rise of the foreign-born propor- tion of the U.S. population.
6 Figure 2. U.S. Balances on Current Account, Trade, Income, and Unilateral Current Transfers, 1960-2006* (Surplus (+) or Deficit (-), Percent of GDP) 2
1 Income
0
-1 Unilateral Transfers Trade -2
-3
Current Account -4
-5
-6
-7 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Source: Bureau of Economic Analysis *Statistical discrepency not included
States held as reserves; and most currencies were fi xed severe anti-infl ationary monetary restraint produced a in relation to the dollar, although these rates were large drop in national saving and a sharp appreciation occasionally changed if believed to be in “fundamental of the dollar. However, a relative stabilization of the disequilibrium.” Th e U.S. trade and current account fi scal position, the easing of monetary policy, and an balances were consistently positive, and a large surplus internationally coordinated intervention combined to on income refl ected the U.S. position as the world’s bring the dollar back down in 1985 and swing the trade major creditor nation. However, in the late 1960s, the and current accounts back towards balance. (Indeed, U.S. trade surplus fell towards zero as trade competi- the large transfers to the United States from allies to tion from Japan and Europe increased. As foreign fi nance the Gulf War brought the current account into dollar claims increased, the capacity of the United surplus temporarily in 1991.) States to cover those claims with a roughly fi xed supply Since 1991, as Figure 2 shows, the U.S. current account of gold reserves came into question, and in 1971-1973 and trade balances have been in virtually unremitting the fi xed rate system broke down. It was replaced with decline, the former reaching about 6.1 percent of GDP the current system of fl oating rates among major cur- in 2005 and 2006. Current account defi cits of this rencies, with minor currencies sometimes fl oating but size are nearly twice the earlier record of 3.4 percent often fi xed or closely managed in relation to a major of GDP reached in 1987, and far above the levels once currency, most commonly the dollar. thought to be “sustainable” in the near term in the Th e trade and current accounts moved briefl y into conventional economic wisdom.5 It is striking that the surplus in 1975 with the devaluation of the dollar and current account defi cit has now grown to about half of a severe recession in 1974-1975. Th is was followed, goods and services exports. however, by a very sharp deterioration of the trade Th e fall in the trade balance, as Figure 2 shows, has and current accounts in the mid-1980s, as the U.S. accounted for the entire decline in the current account macroeconomic policy mix of large fi scal defi cits and balance. Th is decline in the trade balance, apart from
7 the recent impact of higher oil prices, has been due all other countries together for less than 15 percent. primarily to a slowdown in export growth, especially af- Capital exports are less concentrated by country, but ter 1994, rather than (as commonly believed) a fl ood of a small group of surplus countries – China, Japan, imports from China or elsewhere. U.S. non-petroleum Germany, and the oil and gas exporters – nevertheless imports grew at about 8 percent per year both dur- account for about two-thirds of global capital exports.ii ing 1984-1994 and from 1994-2006. Non-petroleum As Figure 4 indicates, Japan has run chronic current exports, on the other hand, grew at 9.2 percent per account surpluses for many years – the last recorded year during 1984-1994, but at only 6.1 percent during defi cit was in 1980 – and eff ectively has provided the 1994-2006. Th is slowdown in export growth was very counterpart to the U.S. defi cits. However, as the U.S. broadly based and not confi ned to particular products defi cit has grown in recent years, large surpluses have or importing countries. Th e reason for the slowdown also emerged in Germany (which also ran surpluses is something of a puzzle, but it appears to be related to in the late 1980s), China, the newly industrialized a continuing appreciation of the dollar and perhaps an Asian economies, and especially, with the recent rise in increased sensitivity of exports to relative prices as the energy prices, the oil and gas exporters in the Middle pace of globalization accelerated in the last decade.6 East, Russia, and elsewhere. As seen in Figure 1, these recently burgeoning surpluses, along with that of Japan, Th e net sales of U.S. assets abroad to fi nance these now total roughly 2.15 percent of world GDP, fully ac- trade and current account defi cits resulted in a decline counting for the equivalent U.S. current account defi cit in the (negative) U.S. net investment position, which of about 1.8 percent. in turn gave rise to a smaller surplus on investment in- come. Th e possible explanations of this unprecedented While a larger number of developing countries import decline and its implications are discussed below, where rather than export capital, a striking recent develop- we also examine the modest improvement in the trade ment in the global pattern of capital fl ows is the shift of balance in 2006-2007 and the apparent stabilization many newly industrialized and emerging market econo- and possible improvement in the current account mies from their traditional role as importers of capital balance. to that of capital exporters, usually with large current account surpluses. China, whose current account sur- Current Accounts Abroad plus has grown over the last decade from less than $10 Th e U.S. current account defi cit and associated net billion to about $238.5 billion, or 9 percent of GDP in capital imports have their counterparts, of course, in 2006, is the most striking example; but large current net current account surpluses and capital exports in account surpluses have also characterized Hong Kong, the rest of the world. Figures 3 and 4 show the esti- Malaysia, Taiwan, and Singapore during recent years, mated national composition of global current account and other countries have seen their current account defi cits and surpluses in 2006, and the recent evolution defi cits fall. Conversely, not only the United States, but of the current account surpluses of the major surplus also the United Kingdom and some major European countries or groups of countries juxtaposed against the countries such as France, Italy, and Spain, now import growing U.S. defi cit. more capital than they export.7 As shown in Figure 3, the United States in 2006 Th e U.S. Capital Accountiii accounted for an extraordinary 60.5 percent of the Th e large expansion of international trade in goods world’s net capital imports. Seven relatively advanced and services in the last several decades has been accom- economies each accounted for some 2-8 percent (and panied by an even more rapid and dramatic growth of in the aggregate about one-fourth) of the total, and
ii While Germany and the Benelux countries have recently run large surpluses, the euro area as a whole ran a small current account defi cit in 2006, with Spain and Portugal having large defi cits. Because of the single currency, a common monetary policy, and constraints on national fi scal policies introduced by the Stability and Growth Pact, individual euro-area countries are circumscribed in the policies available to address external imbalances, as we discuss below.
iii In accordance with common usage, we use the traditional “capital account” to refer to what BEA now terms the “fi nancial account.” Th e new “capital account” refers to the accounting of a set of relatively insignifi cant capital transfer items.
8 Figure 3. Major Net Exporters and Importers of Capital in 2006*
Countries That Export Capital
Sweden, 4.8% Singapore, 2.6% Kuwait, 3.0% Netherlands, 3.4%
Norway, 4.0% Other Countries,** 26.7%
Switzerland, 5.0%
Saudi Arabia, 6.8%
Russia, 6.8%
China, 17.1%
Germany, 22.3%
Japan, 12.2%
Countries That Import Capital
Turkey, 2.2% Greece, 2.1% Australia, 2.9% Italy, 2.9% France, 3.3%
United Kingdom, 4.8%
Spain, 7.6%
United States,*** 60.5%
Other Countries,** 13.1%
Source: International Monetary Fund, updated version of figure 1 in the appendix of the April, 2007 IMF Global Financial Stability Report *The amount of capital that a country exports (imports) is equal to its current account surplus (deficit) in U.S. dollars **"Other Countries" are those with a share of the global surplus or deficit of less than 2 percent ***Observation does not reflect June 2006 current account revisions
9 Figure 4. Current Account Balances of Selected Countries and Regions, 1992-2006 (Surplus (+) or Deficit (-), Percent of World GDP)
1.0 Fuel Exporters*
Japan China* 0.5
Germany
0.0
-0.5
-1.0
United States** -1.5
-2.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: International Monetary Fund *2006 is an IMF projection **Data do not reflect June 2006 current account revisions
cross-border trade in assets.8 Global economic growth, with the latter divided between offi cial and private the reduction of national barriers, large declines in the infl ows.10 Th e increase was especially large after 1991, costs of transactions and communications, and innova- albeit interrupted by the 1998 Asian crisis, the end of tion have facilitated international specialization in the the dot-com bubble, and the subsequent brief recession trade of physical and fi nancial assets just as they have in 2001. Both infl ows and outfl ows of private capital in trade of goods and services. Th is capital mobility have been large and rapidly growing, refl ecting the glo- appears to have been enhanced by a reduction in the balization of asset trade discussed above. As Figure 5 “home bias” which links national investment to saving, indicates, net private capital infl ows, at least as offi cially prompting the international diversifi cation of invest- recorded, fi nanced most of the growing current account ment portfolios.9 Increased capital mobility has not defi cit until about 2002; but since 2003, recorded come without costs, such as the fi nancial instability and offi cial purchases of dollar assets have increased sub- economic hardship experienced in the Asian crisis of stantially. In addition, a proportion of the massive the late 1990s. And foreign investments are sometimes asset accumulations of the monetary authorities and undertaken to avoid tariff s, taxes, or regulations, there- sovereign wealth funds of the oil exporters shows up by raising private, but not necessarily social, returns. as private capital infl ows into the United States after Nevertheless, we believe that cross-border investments intermediation directly by private agents or indirectly have generally benefi ted society, as capital sought its by the capital markets in third countries. highest returns, resources were transferred from lend- Th e U.S. Net International Investment Position ers to borrowers, assisted by fi nancial intermediation, (NIIP) and portfolio diversifi cation spread and reduced risk. As a result of this rapid growth in capital fl ows, the Figure 5 shows the increases (relative to GDP) in U.S. stock of both assets and liabilities rose rapidly in rela- capital outfl ows (net asset purchases, which are virtu- tion to GDP, as shown in Figure 6, which refl ects both ally all private) and infl ows (net asset sales) since 1982, these capital fl ows and changes in asset valuations. Th e
10 Figure 5. U.S. Gross Capital Outflows and Private and Official Inflows, 1982-2006 (Inflows (+) and Outflows (-), Current Account Deficit (+), Percent of GDP)
20
15
10
5
0
-5
-10 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Capital Outflows Private Inflows Official Inflows Net Private Inflow Current Account
Source: Bureau of Economic Analysis
Figure 6. U.S. Assets, Liabilities, and Net International Investment Position, 1982-2006* (Assets (+) and Liabilities (-), Percent of GDP) 140
120
Liabilities 100
80
Assets 60
40
20
0
-20 Net International Investment Position -40 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Bureau of Economic Analysis *Direct investment at market value
11 diff erence between these gross asset and liability posi- investment equities that produced higher earnings tions is the U.S. net international investment position than fi xed-income securities. However, the income (NIIP). Because the U.S. current account defi cit has returns have also tended to be larger on U.S. assets as a counterpart a corresponding net sale of assets, the than liabilities within asset classes, and consistently NIIP in principle must equal the cumulative total of its so for foreign direct investment (FDI).12 Figure 7 current account defi cits adjusted for valuation changes. shows the persistent diff erential between income (In practice, the recorded assets and liabilities are on all U.S. assets and liabilities, which averaged subject to signifi cant measurement errors.) As Figure 6 1.2 percentage points during 1983-2006; Figure 8 shows, the persistent U.S. current account defi cits since shows this diff erential for FDI only. the early 1980s have produced a substantial decline 2. Valuation changes have substantially raised the in the NIIP, which declined from a creditor position value of U.S. assets relative to liabilities. Th ese of $236 billion (+7.2 percent of GDP) in 1982 to a “capital gains” (broadly defi ned) resulted from price debtor position of $-2.140 trillion (-16.0 percent of changes (which again principally benefi ted equity GDP) in 2006. investments), exchange rate changes (whereby the Although U.S. net external debt has increased greatly depreciation of the dollar increases the dollar value since 1980, its rise has been greatly moderated because of U.S.-owned assets abroad), and a broad set of the total returns to the United States on its assets held “other changes” in valuation.13 abroad have been systematically larger than the total As a result of this diff erence in total returns, the large returns paid to foreigners on U.S. liabilities.11 Two shift of the United States from net creditor to net factors account for this: debtor status was much smaller than might have been 1. Th e income on U.S. assets held abroad consistently expected from the cumulative eff ect of the defi cits on has exceeded that on its foreign liabilities. Th is trade and transfers. Th us, while the defi cit on trade is partly because a larger proportion of assets and transfers during 1983-2006 totaled $6.6 trillion, than liabilities has been in portfolio and direct the decline in the NIIP was only $2.4 trillion. Of the
Figure 7. Rates of Return on U.S. Assets Abroad and Foreign Assets in the United States, 1983-2006*
12%
10%
U.S. Assets Abroad 8%
6%
Foreign Assets in the United States 4%
2%
0% 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: Bureau of Economic Analysis *Direct investment at market value. Rates of return are equal to the income receipts (payments) on U.S.-owned assets abroad (foreign-owned assets in the United States) divided by the average of beginning-of-year and end-of-year values for total assets
12 Figure 8. Rates of Return on U.S. Direct Investment Abroad and Foreign Direct Investment in the United States, 1983-2006*
14%
12%
U.S. Direct Investment Abroad 10%
8%
6%
Foreign Direct Investment in the 4% United States
2%
0%
-2% 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: Bureau of Economic Analysis *Direct investment at market value. Rates of return are equal to direct investment receipts (payments) divided by the average of beginning-of-year and end-of-year values for direct investment abroad (in the United States)
$4.2 trillion diff erence, the favorable income diff erential roughly 40 percent of global gross holdings of foreign accounted for $0.6 trillion, while valuation changes assets.14 As Figure 9 shows, from the perspective of accounted for a full $3.6 trillion. Th ese diff erential U.S. international liabilities, this is refl ected in the large returns that attenuate the decline of the U.S. NIIP absolute and relative increase in portfolio assets (U.S. help to increase the sustainability of large U.S. current Treasury securities and other bonds and corporate account defi cits, which we examine below. stocks), which increased from 16 percent to 36 percent of total liabilities during 1982-2006. U.S. Liabilities, International Portfolios, and International Reserves During the last decade, foreign offi cial holdings of dol- lar reserves have consistently been less than 20 percent As U.S. international indebtedness has increased, of of total U.S. international liabilities – a smaller propor- course, the asset holdings and net investment posi- tion than the 20-30 percent characteristic of the 1980s tions of countries with current account surpluses have and early 1990s. However, the proportion has risen tended to increase. As we shall see below, two issues since 2000; and just as private dollar asset holdings that are of considerable importance in examining the have exploded in the past decade, U.S. offi cial dollar lia- sustainability of international imbalances are the role of bilities have become very large. (See Figure 9.) Foreign the dollar in international portfolios and the position of exchange reserves are also held in a few other major offi cial international dollar reserves in the international currencies, and Figure 10 shows the dramatic growth liabilities of the United States. Th e integration of capi- in the recorded foreign exchange reserve holdings of se- tal markets has led to considerable portfolio diversifi ca- lected large reserve holders over the last decade. Figure tion internationally. Th e United States, by virtue of 10 also shows year-end 2006 reserves, which are very both its size and the relative depth of its capital mar- large by historical standards as percentages of annual kets, is by far the largest producer of fi nancial assets. A imports of goods and services for these countries. recent estimate suggests that U.S. liabilities comprise
13 Figure 9. Composition of U.S. Gross Liabilities, 1982-2006 ($ Trillions)
18
16 Official
14 Currency
12 FDI*
10 Non-bank Liabilities
8 Bank Liabilities 6 Stocks
4 Bonds
2
Treasuries 0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Bureau of Economic Analysis *Direct investment at market value
Figure 10. Selected Countries with Large Reserve Holdings, 1999-2006* ($ Billions) 1200 China 124.3%
1000 Japan 131.4%
800
Fuel Exporters 110.3%
600
400 Taiwan 132.4%
200 Korea 59.5%
0 1999 2000 2001 2002 2003 2004 2005 2006 Source: International Monetary Fund, U.S. Bureau of the Census *Boxes give the 2006 ratio of reserves to imports of goods and services. Korea and Japan reflect IMF projections
14 III. The Sources of Large International Imbalances
Th e large international imbalances in trade and cur- The International “Mismatch” Between rent accounts, and the associated capital movements, Desired Saving and Investment are the result of the interplay of myriad economic variables – such as incomes, prices, interest rates, and Any country’s current account balance must equal the exchange rates – that aff ect economic behavior in the diff erence between its national saving and investment, global economy. Th ese variables are mutually and measured after the fact, as an arithmetic matter of simultaneously determined, while changing through national income accounting. In this tautological sense, time. As a result, it is diffi cult to identify simple causal all current account imbalances can be “accounted for” by relationships that defi nitively locate the “sources” of the corresponding saving-investment imbalances; any fac- imbalances, and a number of diff erent explanations tor that changes the current account must also induce have been off ered to account for them. While these a corresponding change in saving and/or investment. explanations are often presented as competitive, in fact Th e international economy is a “general equilibrium” they are not mutually exclusive and often complement system in which “everything aff ects everything else.” one another. For instance, other things being equal, Nevertheless, there are fundamental factors such as the both a reduction in U.S. net saving and an increase in desire to save by households and national fi scal policies the desire of foreigners to hold dollar assets will tend to that directly aff ect trends in national saving and invest- raise the value of the dollar, although through diff erent ment and contribute powerfully to these “mismatches.” mechanisms. Th e Decline in U.S. Saving Th ese explanations highlight diff erent changes in the As shown in Figure 11, U.S. net domestic saving has global economy that appear to us as quite plausible declined from over 10 percent of GDP in the 1960s to causal factors in the growth of the imbalances.15 Five 0 to 2 percent in the last several years.iv Th is drop in such factors seem to be particularly important: domestic saving was driven principally by a steady de- 1. A global “mismatch” between the United States cline in personal saving (mitigated by strong corporate and certain major surplus countries in their desired saving) and a rise in dissaving by the federal govern- saving and investment; ment, as the federal budget moved into chronic defi cit, apart from a brief period of surpluses in 1998-2001. 2. A strong demand for dollar assets in foreign private Personal consumption expenditures (as conventionally and offi cial portfolios; defi ned) have risen steadily from 63 percent of GDP in 1960 to 70 percent in 2006, with a corresponding 3. Until very recently, rapid economic growth (fueled decline in net personal saving from an average of 6 by domestic demand) in the United States relative percent in the 1960s to its current negative value. Th is to growth in other advanced economies; long-term downward trend of personal saving was 4. Th e recent increase in energy prices; and compounded by the rapid increase in personal wealth associated fi rst with the stock market boom of the late 5. Exchange rate intervention by a number of coun- 1990s, and subsequently with the run-up in housing tries to prevent appreciation against the dollar and values. Th e recent end of the housing boom presum- promote export growth. ably will mitigate some of this most recent household saving decline, as households increase savings to off set
iv Net, rather than gross, saving and investment is the appropriate concept in this context, because the foreign saving obtained from abroad supplements net domestic saving in fi nancing net investment. Th e total domestic saving-investment balance is the same whether gross or net of depreciation.
15 Figure 11. U.S. Net Domestic Investment, and Net National, Corporate, Personal, and Government Saving, 1960-2006* (Percent of GDP) 14
12
10 Investment
8 Personal Saving 6
National Saving 4 Corporate Saving
2
0
-2
Government Saving -4
-6 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Source: Bureau of Economic Analysis *Statistical discrepency not included
declining home values – unless a rising stock market some other advanced economies, such as Japan, saving off sets the loss of housing wealth. rates have also fallen, but investment rates generally fell as much or more. Because net domestic investment has fl uctuated within a range of about 6-12 percent of GDP, with a much Th is shortfall in U.S. saving is thus an important part milder downward trend, there has emerged a persistent of the story of the emergence of large current account long-term gap between U.S. domestic investment and imbalances. However, this cannot be the whole story, saving – equivalent to the gap between domestic expen- because a growing gap between U.S. desired investment ditures and production.v Th is gap has been fi lled by and saving, other things equal, would raise long-term importing resources from abroad, and selling assets to interest rates. A remarkable feature of the last few pay for them. To be sure, this evolution of the invest- years is that long-term interest rates have remained low. ment-saving gap has had several stages. Generally dur- Th is strongly suggests a rising supply of desired saving ing the 1970s and 1980s, and more recently after 2001, (relative to investment) abroad. the rise in the current account defi cit was sometimes Th e Emergence of Saving-Investment Gaps Abroad simplistically attributed to the large federal budget defi cits that depressed national saving (the “twin defi - A number of factors have contributed to the emergence cits” view). However, during the 1990s boom, when of a large gap between saving and investment for some investment was very strong, the current account defi cit of the major exporters of capital. Th is gap has been continued to grow in spite of federal budget surpluses famously called a “savings glut,” which perhaps describes and higher national saving. Th e diff erence between total China, whose very high gross investment rate of 44 investment and saving is the critical variable, but the percent is nevertheless overshadowed by an extraor- longer-term trends in the United States certainly call dinary 51 percent gross saving rate.17 However, in a attention to the importance of the fall in saving.16 In number of advanced and emerging market economies,
v Th e current account balance, which refl ects this resource gap, also refl ects a sometimes sizable and highly variable statistical discrepancy related to the mismeasurement of saving and/or investment.
16 the gap might better be characterized as a slump in foreign alternatives.19 A number of smaller European investment. Global investment, especially if the United countries that share some of these same characteris- States is excluded, has shown a downward trend over tics, such as Switzerland, the Netherlands, Belgium, thirty years.18 But in any case, as noted above, it is Finland, and Sweden, are also running very large cur- the diff erence between saving and investment that is rent account surpluses relative to GDP (while the euro relevant for the emergence of large imbalances. area as a whole is in approximate saving-investment and current account balance). Among the large industrial countries, Japan and Germany stand out with respect to a gross saving- Many newly industrialized and emerging market econo- investment gap. (See Figure 12.) Both these large mies, with the notable exception of China (discussed economies have experienced weak economic growth below), have also experienced a decline in national in- in the recent past; the prolonged stagnation of the vestment rates during the last decade. Th e investment Japanese economy during the 1990s was especially decline may in part refl ect caution and increased risk severe. Notwithstanding recent modest increases in aversion in reaction to the fi nancial and economic crises growth, investment rates have declined signifi cantly of the late 1990s, and a recognition that some invest- in both countries in response to both long periods of ments made during the preceding boom and surge of weak growth and population aging, which has reduced capital imports were ill conceived. At the same time, the relative number of younger people and thereby rapid output growth and higher public saving have the demand for investment to equip new workers and tended to support overall saving rates, which generally provide for additional housing and schools. More gen- fell less than investment, or recovered more.20 erally, older, aging societies such as Japan and Germany Precautionary motives related to public saving and may fi nd more attractive investment opportunities protection against sudden capital outfl ows such as for their savings abroad than at home, especially if those of the late 1990s also have contributed to the their economies are less fl exible and dynamic than the
Figure 12. Gross Saving and Investment in Japan, Germany, and the United States, 1980-2006 (Percent of Own GDP)
40
Japan Saving 35
Japan Investment 30
Germany Saving
25 Germany Investment
20 U.S. Investment
15
U.S. Saving
10
5
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: International Monetary Fund
17 recent exceptionally large accumulation of offi cial this diversifi cation as a process of fi nancial intermedia- foreign exchange reserves. Th e newly industrialized tion, whereby foreign investors acquire lower-risk U.S. Asian countries have consistently run high saving rates assets, and U.S. investors make more-risky (and higher- and current account surpluses associated with export- yielding) investments abroad.24 led growth, often facilitated by managed exchange At the same time that foreign investors diversify into rates. Taken as a group, the emerging Asian economies dollar assets, of course, U.S. investors diversify out of other than China and India averaged current account dollar assets. However, because private saving relative defi cits of 11 percent of exports during the 1988-1997 to total income is substantially higher abroad than in decade, but in the last decade have moved into current the United States, the portfolio allocation of a signifi - account surplus, accompanied by large accumulations cant proportion of new global saving in proportion to of reserves.21 national economic size increases the net demand for dollar assets. And, because the proportion of new for- The Strong Demand for Dollar Assets eign saving so allocated to U.S. assets is larger than the Analysts focusing on diff erences between savings and proportion of U.S. saving fl owing abroad, net demand investment have tended to emphasize the “resource gap” is further increased.25 In the future, a reduction in between total expenditures and output, which shows legal, institutional, and “cultural” constraints on capital up as the trade defi cit. However, independent trends in outfl ows and diversifi cation may reduce home bias capital fl ows, and in particular a rising net demand for abroad, but the development of foreign capital markets dollar assets, have contributed to the rising imbalances. may also reduce home bias in the United States, so Here the mechanism is more indirect; capital infl ows the future net impact on dollar asset demand appears most immediately raise the value of the dollar and dol- uncertain. lar assets, setting in motion changes in wealth, incomes, Th e Dollar as International Money and the Principal interest rates, relative prices, and expenditures that in- Reserve Currency crease the U.S. trade and current account defi cits. Th is explanation complements and overlaps the view that Domestic money serves as a unit of account, a medium focuses on excess savings abroad, since such savings of exchange, a source of liquidity, and a (sometimes) need to be invested somewhere. But why especially or safe store of value. Th e same is true of international disproportionately in the United States? money, for which the U.S. dollar is the premier curren- cy serving these functions in both private and offi cial Th ere are several apparent sources of the strong de- portfolios. mand for dollar assets: As international transactions in goods, services, and as- Globalization and Portfolio Diversifi cation sets have rapidly expanded, the need for private dollar As noted above, as the integration of national capital balances to fi nance those transactions has increased, markets has accelerated over the last several decades, because a large proportion of international transac- asset trade has grown substantially faster than trade in tions is invoiced in dollars. Because the U.S. economy goods and services, which in turn has outpaced growth is so large and institutionally developed, its broad and in global output.22 An integral part of this growth in deep fi nancial markets off er low transaction costs that asset trade has been a reduction in the “home bias” that enhance liquidity. Similarly, as foreign savings have has historically channeled a country’s saving into invest- grown, the need for safe assets in which to store their ments in the same country and currency.23 Th is reduc- value, away from prospective political or economic tion in home bias implies that private foreign investors turbulence, has grown for both private savers and will diversify their portfolios, shifting their demand at the central banks and governments that hold offi cial the margin from “home assets” to those denominated reserves. Low infl ation and strong property rights have in dollars and other currencies. Such diversifi cation helped make the dollar a relatively safe store of value, presumably would reduce a portfolio’s perceived risk by and U.S. Treasury securities are especially important more than the shift from familiar home assets would in providing liquidity and safety to private investors as increase it. Indeed, it may be useful to view some of well as to central banks and government entities hold- ing offi cial reserves.
18 Offi cial dollar reserves also function as a means of equity remain far above their pre-1997 levels. (See temporarily fi nancing adverse shifts in the trade balance Figures 13 and 14.) or capital outfl ows and thereby moderating the negative Th ere is therefore little doubt that the attractions of the impact of such changes on a domestic economy. As dollar and the U.S. economy for foreign investors have noted above, the offi cial reserves of many developing played an important role in the growth of the U.S. cur- economies have grown extremely rapidly in the past rent account defi cit. Nevertheless, as with the interna- few years. Th eir accumulation arguably has been a tional mismatches in desired saving and investment, it precautionary measure to reduce the risk of a repetition seems unlikely that this is the whole story. of the severe economic shocks some developing nations experienced in the late 1990s in response to capital First, a signifi cant proportion of recorded private fl ight and exchange rate volatility.26 Some argue that capital infl ows may refl ect to some degree the ac- this reserve accumulation has been larger than precau- tions of foreign offi cial institutions rather than purely tion and prudence might require, although this claim autonomous private investment decisions. Th is hap- is controversial.27 In any case, the growth of offi cial pens directly when purchases of dollar assets in U.S. dollar reserves and other dollar liabilities has exploded custodial accounts are made by foreign banks or other recently also as a result of the increase in energy prices private agents acting under the instruction of central and very active exchange rate intervention by China banks or national investment authorities. An indirect, and other export-driven economies, as discussed below. but important, mechanism is the “recycling” of offi cial foreign saving indirectly into dollar assets through Th e U.S. Economy as a Magnet for Foreign Capital the international capital markets. For instance, the Quite apart from the roles of the dollar as international acquisition by foreign authorities of bank deposits or money and a vehicle for portfolio diversifi cation, the other assets (whether in dollars or other currencies) in large and dynamic U.S. economy, and the assets that a third country may give rise to portfolio adjustments are claims upon it, undoubtedly off er major attractions that create an outfl ow of private capital from that coun- to foreign investors.28 Th e World Economic Forum try into the United States. A recent study, noting that has consistently given the United States high rankings the increase in net fi nancial infl ows into the United with regard to its “business climate.”29 As Japanese auto States since 2002 has closely mirrored the net outfl ows makers discovered many years ago, the openness of the from oil exporters, concludes that “most petrodollar U.S. economy, the large size of its product markets, its investments are fi nding their way to the United States, innovative culture, the fl exibility of its labor markets, indirectly if not directly.”30 Th is is, to be sure, private and the strength of its legal and fi nancial institutions foreign capital fl owing into the United States, but create a premier location for foreign direct investment foreign offi cial asset accumulation is closely related to (FDI). FDI in the United States has been rising, both such capital movements. absolutely and relative to GDP, for three decades – Second, while very large net infl ows of portfolio capital with an especially large surge during the strong eco- into bonds, and especially U.S. Treasury securities, nomic growth of the 1990s. surely refl ect the comparative advantage of the United In recent years, U.S. technological innovation and States and the dollar in providing a safe and liquid productivity growth generally have been stronger than repository for saving, the case regarding equity capital those in other advanced economies and have attracted is less compelling. Flows of private equity capital into foreign capital as well as FDI to U.S. portfolio equities. the United States have been matched by equity capital A dramatic increase in such investment occurred in the exports, sometimes as components of the same transac- late 1990s, with a massive infl ow of capital seeking high tion, notably in international mergers and acquisitions. returns from the technology boom; this contributed to Over the last two decades of very rapidly increasing, both the stock market boom and a sharp appreciation but volatile, equity investments, U.S. exports of port- of the dollar. Although these infl ows, of course, fell off folio equity have generally exceeded imports (except sharply in 2001-2003 after the boom collapsed, FDI during the dot-com boom), while FDI has gone infl ows have partially recovered and infl ows of portfolio abroad and entered the United States in roughly equal
19 Figure 13. Corporate Stock Purchases: U.S. Outflows, Inflows, and Difference, 1982-2006 (Percent of GDP) 2.5
Inflows 2.0
1.5
1.0 Net
0.5
0.0
-0.5
Outflows -1.0
-1.5 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Bureau of Economic Analysis
Figure 14. Foreign Direct Investment: U.S. Outflows, Inflows, and Difference, 1960-2006* (Percent of GDP) 4
Inflows
3
2
1
0
Difference
-1
-2
Outflows -3 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Source: Bureau of Economic Analysis *Direct investment at market value
20 amounts. Whatever magnet draws equity capital across this is certainly not a simple relationship, because the U.S. border appears to pull strongly in both direc- economic growth is also associated with – and may tions. Th e reported earnings on this U.S. equity abroad in fact be driven by – an expansion of export capacity (both portfolio and especially FDI) have consistently that improves the trade balance, and is also associated exceeded the corresponding earnings on foreign equity with higher saving.34 Th us, many rapidly growing in the United States during the last decade of rapidly Asian economies, following export-led policies, have rising current account defi cits, although this earnings run chronic trade and current account surpluses. diff erential may to some degree refl ect tax consider- Furthermore, recent research suggests that, as a long- ations and accounting practices that transfer reported term matter over the past 25 years, the U.S. trade profi ts to foreign subsidiaries abroad.vi defi cit’s growth can be attributed almost entirely to a continuing appreciation of the dollar, and relative eco- Th e rise in the U.S. current account defi cit might nomic growth rates have not played a signifi cant role.35 reasonably have been associated with capital imports Th e confl icting empirical evidence presents a puzzle, that fi nanced the rise in the U.S. investment rate during although some of the apparent confl ict may result from the technology boom of the 1990s, but it has continued diff ering short-term and long-term eff ects. It is prob- in spite of relatively weak investment during the last ably fair to say that both the exchange rate and (at least six years.31 While private capital infl ows continue, for in the short to medium term) relative growth rates have the last fi ve years the United States has been able to sell played a signifi cant role. these private assets to most of the developed world only at progressively lower prices (exchange rates). And as The Recent Rise in Energy Prices the IMF has recently noted, the composition of U.S. capital infl ows has been shifting from equity to debt, A very large source of the recent sharp rise in inter- and within debt away from U.S. Treasury securities to national imbalances has been the rise in energy prices riskier forms of debt.32 and the enormous trade and current account surpluses All of these considerations are hard to reconcile with of major energy exporters, and, of course, the dete- the view that an extremely large global advantage to rioration of the balances of energy importers. (Th e investing in the United States relative to other coun- Chinese 2006 current account surplus of 9 percent tries is the predominant factor driving the U.S. current of GDP might have been signifi cantly larger without account defi cit. the oil price increase, which was caused in part by surging Chinese energy demand.36) Oil prices more than doubled from 2002-2006, and the oil revenues of Relatively Rapid U.S. Economic Growth fuel exporters more than tripled.37 In response, their After 1991, when the sharp decline in the current imports rose by only about one-third to one-half of the account began, the United States grew faster than increase in oil exports, so that their current account the average of other advanced economies until 2006. surpluses rose from $62 billion in 2002 to $396 billion, Rapid U.S. growth tended to expand the trade defi cit or almost one percent of world GDP, in 2006. Th ese directly, by increasing the demand for imports, and 2006 surpluses were about 1.7 times that of China, and probably also contributed to the infl ow of capital 1.25 times those of Japan and Germany combined.38 described above. Th ere is some empirical support for Arithmetically, the rise in oil prices accounts directly an association between economic growth and trade and for roughly 40 percent of the rise in the U.S. current current account defi cits, and this may be intensifi ed account defi cit from 2001 to 2006.39 However, both for the United States because U.S. imports appear to goods and capital markets have also responded to respond to domestic growth more strongly than U.S. higher energy prices and increased saving by the oil exports respond to growth abroad.33 Again, however, exporters, with indirect eff ects on the U.S. current this explanation seems more persuasive for the boom- account. On the one hand, the increased saving by the ing 1990s than for the current decade. In any case, oil exporters depresses global demand and economic
vi Earnings, of course, are not total returns, and attempts to account for capital gains and other “valuation” eff ects makes the matter more complicated.
21 activity. Th is has slowed the U.S. economy, moderating political unrest.41 Whatever the case, China’s poli- import demand and (oil prices aside) the deterioration cies have produced impressive results for many years. of the trade balance. However, the higher saving also China has averaged 9.7 percent annual growth over has given rise to capital exports by the oil exporters the last two decades, and raised real per capita income that have increased liquidity and reduced interest rates at an astounding 8.6 percent annual rate, according worldwide. Th is external fi nancing supported invest- to IMF data.42 Th e domestic investment rate (unlike ment and raised asset prices, notably for housing. In that in other Asian countries) has risen rapidly, to the United States, the wealth eff ect of the housing about 44 percent of GDP in 2006, but the saving rate boom appears to have increased consumption and, has risen even faster, to about 51 percent. As a result, presumably, imports and the trade defi cit. the current account surplus increased by 2006 to 9.1 percent of GDP, and reserves to over $1 trillion, about In the 1970s, the supply-side oil shocks, combined with 40 percent of GDP and 114 percent of exports.43 a drop in productivity growth in the industrial coun- tries, helped to produce not only large international In the U.S. political arena, the rising U.S. trade and imbalances, but also stagfl ation; prices rose sharply, current account defi cits have been viewed principally creating a major drop in global demand. Th e recent oil as the result of foreign exchange rate intervention to price increase, however, has been primarily demand- prevent or limit the appreciation of other currencies driven, and global demand has continued to grow (depreciation of the dollar), especially by China, and by rapidly. In addition, although the oil exporters have smaller Asian economies such as Hong Kong, Taiwan, not increased imports more rapidly than in the 1970s, Malaysia, and Singapore that also link their currencies the globalization of capital markets has facilitated an closely to the dollar. (Japan also actively intervened to effi cient recycling of their saving to the oil importers, depreciate the yen prior to March 2004.) However, a where higher asset prices and lower interest rates have fi xed renminbi-dollar rate considerably antedates the supported demand. Th e global eff ect has therefore dramatic surge in the Chinese trade surplus, which been a large increase in international imbalances, but began only in 2004; and China also grew rapidly, without the global recession that characterized the with a fl ourishing export sector, before the surge. Th e 1970s. Th e prospects are for a continued need for fi xed-rate policy may originally have been adopted to such recycling; oil prices have remained high, and anchor and stabilize the renminbi; China’s restraint in most analysts expect a signifi cant portion of the recent not devaluing during the 1998 Asian crisis was widely increases to be relatively permanent.40 As discussed welcomed as a contribution to international stability. below, some oil producers are undertaking large invest- However, more recently, with rapid productivity growth ment programs, which should assist a gradual adjust- and low infl ation in China, and the depreciation of the ment to higher energy prices that will help reduce the dollar against the euro since 2002, the renminbi has imbalances. come to be undervalued in eff ective terms, as evidenced in part by the rapid rise in the trade and current ac- Export-Promotion Policies and Exchange count surpluses and offi cial reserves. Th e weak ren- Rate Intervention minbi has stimulated exports, suppressed imports, and attracted FDI as part of the export-oriented growth During nearly 30 years of economic liberalization and strategy. integration into the global economy, China has strongly and consistently promoted exports. Th e appeal of Some who focus on exchange rate intervention and export-oriented FDI may stem from the transfer of export-driven growth, especially in China, as a source technological and organizational learning (external to of the U.S. current account defi cit tend to view the the fi rm). Some argue that, in China’s case, export pro- situation as one of “codependency” between China motion is necessary for the very rapid growth required and the United States. In this view, China secures the to absorb more than 200 million additional underem- large consumer market and export-related FDI neces- ployed rural workers into the non-agricultural labor sary for growth, while the United States is enabled force, and that the government’s unattractive alternative to spend more than it produces by borrowing the is higher unemployment and a greater risk of social and resources to allow spending to exceed output. While
22 this oversimplifi ed model does not do justice to the of China (and other processing-oriented developing complexity of U.S.-Chinese economic relationships and economies) to global exports. Th e outsourcing of exaggerates the likely stability of the current structure certain production activities from some FDI exporters, of Chinese trade and investment, it does remind us that such as the United States, may have the eff ect of reduc- producers, consumers, and policymakers all adapt to ing conventionally measured current account balances economic incentives and new structures as they de- in those countries and raising them in FDI importers. velop, which may then become diffi cult to change.44 One study has estimated that about one-third of the 2002 U.S. trade defi cit could be accounted for by the However, it is important to remember that the renmin- “foreign affi liate trade defi cit” – the diff erence between bi exchange rate is only one of a number of factors that imports from U.S. affi liates abroad and exports of have contributed to the large Chinese trade surplus and foreign affi liates in the United States. A conceptually rapid reserve accumulation. China’s extraordinarily somewhat diff erent “ownership-based” trade defi cit for high saving rate, noted above, is related both to a weak 2005 is about 17½ percent smaller than the conven- social safety net, which fosters high precautionary tional measure.47 A second important implication of saving, and an underdeveloped fi nancial system, which the processing trade is that the large import content lacks the capacity for intermediation needed to fi nance of exports makes the Chinese trade surplus less re- higher consumption. Government policies with respect sponsive to changes in the exchange rate. Th is fact, to taxes and subsidies, the allocation of investment, and combined with the alternative sources of similar goods access to foreign exchange under capital controls all in other developing countries and the low price respon- have strongly encouraged exports. siveness of U.S. imports of labor-intensive goods, for One particularly important element in Chinese ex- which domestic substitutes are limited, suggests that port growth has been the interaction between global appreciation of the renminbi is far from a panacea for production networks and FDI-favoring policies that the large U.S. current account defi cit. until recently had stringent requirements for export Finally, the rapid increases in the trade surplus and production. A remarkable feature of globalization in FDI at the same time have led to the extraordinary rise recent years has been the increasingly fi ne division of in China’s foreign exchange reserves, which refl ect not labor and activities within (and between) multina- only the large current account surplus, but a consistent tional fi rms, and those fi rms’ geographical relocation of capital account surplus over the past two decades.48 activities to achieve production effi ciencies, rather than In eff ect, the reserve accumulation has provided the to enhance market entry – resulting in a rapid growth intermediation of domestic saving for both domestic of intra-fi rm trade.45 In many developing economies, investment and future consumption that is otherwise this meant undertaking processing and assembly of diffi cult to achieve with a relatively underdeveloped imported raw materials and components, in China’s fi nancial system such as China’s. case extensively for export. Although there have been strong economic forces underlying the growth of these Other Asian economies, often competitors with China production networks, China’s vigorous promotion of in their export markets, have also tended to manage FDI through tax, regulatory, and other instruments – their exchange rates to promote export growth, al- in part by competitive and self-interested local govern- though (except for Hong Kong) with more fl exibility ments and state-owned enterprises – has led to an than China. Th e “newly industrialized economies” enormous expansion of this processing activity. Th e (Hong Kong, Korea, Taiwan, and Singapore) ran cur- processing trade, which now accounts for about 55 rent account surpluses for many years, but after 1997 percent of China’s total exports and about 65 percent these surpluses rose sharply (although Korea’s shrank of its exports to the United States, is conducted largely dramatically during 2005-2006 after the won was al- by foreign enterprises.46 lowed to appreciate). Since the crises of the late 1990s, which to a greater or lesser degree involved all these Th is processing-trade structure has several important countries, their average investment rate has fallen from implications. One is that the import content of ex- 30-35 percent of GDP to about 25 percent, whereas ports is very high, and Chinese value-added low, so their savings rates have fallen much less. Other that conventional measures overstate the contribution
23 emerging Asian economies, such as the “ASEAN-4” Th ere are, therefore, a number of factors that have con- (Malaysia, Indonesia, Th ailand, and the Philippines), verged to produce the current large international imbal- several of which experienced severe balance of pay- ances. But are these imbalances benign or dangerous? ments crises and economic disruption in the late 1990s, It is our view that these imbalances are not sustainable have also seen sharply lower investment rates; prior to and create signifi cant risks. Because they are not sus- 1998 they consistently imported capital (in the aggre- tainable, adjustments to reduce them are inevitable and, gate), but since then have run signifi cant, albeit declin- in fact, have already begun. Th e challenge to govern- ing, current account surpluses.49 For the emerging ments is to implement policies that will facilitate those Asian economies apart from China and India, reserves adjustments and thereby reduce the risks that would have more than doubled in the post-1997 period. be posed by the continuation and growth of such large imbalances.
24 IV. Risks Created by Continued Large Imbalances
International imbalances in general, and the large U.S. Even Sustainable Imbalances May Produce current account defi cit in particular, are often argued to Serious Problems be problematic because, if they prove to be unsustain- able, the adjustment process that reduces them may Although we do not believe that imbalances of the cur- prove disruptive to fi nancial markets and to both the rent size are sustainable, some of the risks associated nations involved and the global economy at large.50 with them would exist even if (or, perhaps, especially However, judging when the U.S. current account defi cit if ) they proved to be sustainable for a long period of will become unsustainable has not been a very success- time. We discuss two of these risks fi rst, and then turn ful enterprise in recent years, as analyses that suggested to the questions of sustainability and adjustment and immediate dangers from large U.S. current account the risks associated with them. defi cits have proved to be too pessimistic. Protectionism Th e defi cit has risen for more than 15 years, since Economists are fond of pointing out that the principles about 1991, although it appears to have stabilized in of international specialization, that make possible late 2006 and early 2007, when the trade defi cit de- the economic benefi ts of trade in goods, services, and clined as a result of falling oil prices and an apparent assets, imply that overall balances with the rest of the modest improvement in the non-petroleum trade defi - world, and not bilateral balances with particular coun- cit. It is at present uncertain whether this constitutes tries, should command attention, because large bilateral a turning point for the defi cit, or merely a pause in its imbalances are often necessary and appropriate. Th is, climb. During the 1990s, the rising defi cit produced unfortunately, is certainly not the public’s view, nor the little concern, because it seemed clearly a response to picture presented in the headlines or often debated strong private capital infl ows associated with rising in the Congress. When U.S. imports and trade and business investment, rising public and national saving, current account defi cits grow rapidly, especially when and an enhanced capacity to service a larger foreign associated with job displacement and outsourcing, the debt. However, the defi cit continued to rise during the cry goes up to fi nd “who’s responsible.” period of recession and recovery, with weaker non- residential investment and declining national saving During the 1980s and 1990s, attention focused on in 2001-2006. Th is triggered a new set of warnings the large U.S.-Japan trade defi cit, which peaked at 1.2 that the trend is unsustainable, and/or that dangerous percent of U.S. GDP in 1986. Th is led to domestic thresholds for the size of the defi cit or net foreign debt pressures and legislation for trade protection and are being passed.51 Yet the rise of the defi cit to 6.1 continuing international tension and pressures on the percent of GDP in 2005 and 2006 had no clear nega- Japanese for exchange rate appreciation and other mea- tive eff ects on the fi nancial markets or the real economy. sures to reduce exports to the United States. Similarly, Indeed, in view of the decline in global investment, with the even larger growth in the overall trade defi cit large U.S. defi cits driven by powerful private consump- and imports in the last decade, the spotlight has turned tion growth have been a major force supporting the on the U.S.-China bilateral trade defi cit, which has global economy over the past decade. grown extraordinarily rapidly from 0.8 percent of U.S. GDP in 2000 to 1.7 percent in 2006. Th e result again Should we therefore conclude that large current ac- has been pressure for protectionist legislation and count defi cits pose no risk and should be treated with high-level diplomatic eff orts by the administration to “benign neglect” by policymakers? We believe not, for persuade the Chinese to revalue the renminbi.52 the following reasons:
25 We fear the large bilateral U.S. trade defi cits with large penalties on companies committing minor infrac- China are increasing the dangers of protectionist tions of investment agreements; twenty bills soon were actions by Congress, which may not approve bilateral introduced in Congress restricting foreign investment. trade agreements recently negotiated with Korea Th is created uncertainty that had the potential to and several Latin American countries, or renew the discourage legitimate foreign investment, and cause President’s trade promotion authority, which expired other countries to restrict U.S. investment abroad.55 June 30, 2007.53 Th is authority will be critical for As a result, Congress and the President have recently successful completion of the precarious Doha Round enacted the Foreign Investment and National Security multilateral trade negotiations and for maintaining Act of 2007, which establishes CFIUS by statute and U.S. leadership for any subsequent trade liberalization codifi es procedures to safeguard national security while eff orts.54 As we enter the Presidential political cam- maintaining a relatively open investment climate.56 paign and approach the 2008 Congressional campaigns, Although the new legislation attempts to balance the the dangers of commitments to protectionist policies competing claims of national security and openness to increase, and enormous long-term damage can be done investment, there nevertheless remains some danger in if candidates succumb to the temptation to advance the current climate that national security may become protectionist policies as a response to the U.S. trade an excuse for protectionist actions. defi cit. Th is issue may become more problematic, and less As foreign direct investment and other cross-border clearly a simple matter of protectionism, if U.S. or trade in assets have grown rapidly, the dangers of other private business assets become owned to any fi nancial protectionism also have grown. Historically, signifi cant degree by foreign governments or quasi- the fl ow of direct investment, and in large part that offi cial investment authorities. Foreign exchange of fi nancial capital, have been from advanced to less- reserves invested in U.S. Treasury securities or agency developed economies, and the protectionist issues have assets earn low rates of return. As the growth of revolved around the rules governing acquisitions and foreign offi cial exchange reserves recently has acceler- equity investments in the developing world. However, ated, more governments have created, or are exploring with the emergence of large current account, and the creation of, public investment institutions to invest sometimes capital account, surpluses and fi nancial in higher earning securities, including equities, in the holdings in emerging market economies, and with the United States, Europe, and elsewhere. Singapore and a rapid development of fi nancial and managerial exper- number of Middle Eastern and other oil exporters have tise in those economies, the possibilities and incentives operated such investment authorities for some time, for a reverse fl ow of equity capital into the “advanced” but foreign government holdings of this type may soon countries have increased. become more common and much larger. China is now creating such an authority, to which it may dedicate Th ere will likely be domestic resistance to this change $200 billion of its reserves, and Japan is reported to in economic roles, just as there was resistance several be considering one.57 Information on many of these decades ago to Japanese acquisition of U.S. properties, funds is closely guarded, but a recent estimate puts the auto plants, and other assets. Th is resistance has often total at about $2.5 trillion – almost half as large as the involved national security concerns, real or imagined. $5.1 trillion global offi cial reserves at the end of 2006.58 Th e Committee on Foreign Investment in the United Even if such foreign investments involve only relatively States (CFIUS) is an intra-agency federal panel that small ownership shares of individual companies, and reviews foreign acquisition of U.S. assets with regard are passive and highly diversifi ed, they may present to national security, and implements the authority political, and possibly substantive, diffi culties. Th e of the President to suspend or prohibit transactions U.S. Treasury has begun to suggest that it is concerned that threaten to impair U.S. national security. After about both foreign public ownership of private fi rms September 11, 2001, CFIUS scrutiny and denials and the possibility that such funds will reduce the unsurprisingly increased. However, after the Dubai incentive for their national owners to change exchange Ports World controversy of early 2006, CFIUS, under rate policies. Furthermore, the new CFIUS procedures political pressure, apparently made the approval process require a full-scale investigation of proposed foreign more onerous and threatened to impose extremely
26 government-controlled transactions, although this period of time. But even large defi cits that are stable requirement can we waived by the Secretary of the in relation to GDP have worrisome implications. For Treasury if he fi nds that that national security is not instance, were the current account defi cit simply to threatened. Resistance in Europe to such acquisitions continue at 6 percent of GDP, with 5 percent nominal also appears to be growing.59 As one analyst recently GDP growth, the negative NIIP might eventually has noted, “when governments own companies, that stabilize at 60-120 percent of GDP (depending on the creates the potential for geopolitical mischief.”60 size of valuation changes) and at about half that within a decade.62 Although some countries, such as Australia, Intergenerational Equity: Borrowing from the New Zealand, Spain, Greece, and Portugal have ap- Future proached such high levels of net international debt to Current account defi cits and international borrowing GDP without negative consequences, none are large eff ectively transfer resources from future generations economies where cross-border asset holdings of this to those alive today. If those resources are transferred magnitude could have large international eff ects. into higher current productive investment – as was With such an increase in net indebtedness, about 40 arguably the case in the late 1990s – future genera- to 80 percent of the U.S. capital stock eventually might tions may benefi t. However, because consumption has be foreign owned.63 Notwithstanding the fact that steadily increased as a share of GDP during the period U.S. ownership of foreign capital also would greatly of rising current account defi cits, it is diffi cult to argue increase, the recent political resistance to foreign own- that the principal eff ect of increased foreign borrowing ership of U.S. assets in the Unocal and Dubai Ports over this period has been to increase domestic invest- World cases, and earlier in large Japanese acquisitions ment. Instead, the United States in eff ect has been during the 1980s, suggests that such ownership would transferring goods and services from future generations present political problems. Such problems might be to current consumers.61 exacerbated if such foreign ownership involved govern- It can be argued, of course, that such an intergenera- ments, as noted above. tional transfer is equitable and appropriate, since future However, even such a large sustained current account generations are likely to be wealthier than the current defi cit would not accommodate a large sustainable generation, at least in part as a result of the latter’s trade defi cit. Because the increasingly negative net for- actions. Nevertheless, in view of the oncoming rise in eign investment position would continually reduce the the elderly dependency burden, and associated mount- balance on capital income, the trade defi cit would have ing tax burdens to fi nance sharply rising public health to fall, and eventually move into surplus to fi nance an and pension costs, we are not persuaded that “bor- ever-larger income defi cit if the current account defi cit rowing against the future,” as the United States is now were not increasing. doing, is good public policy. We also believe that the risks of much higher social costs likely to face future Such considerations indicate that the current account generations associated with, for instance, international defi cit eventually must fall substantially. As noted terrorism, rapidly changing geopolitical conditions, above, the impact of large trade and transfer defi cits on and climate change, make it unwise to shift economic the U.S. net foreign debt has been greatly reduced – by burdens to the future. a remarkable 64 percent during 1983-2006 – by the higher rates of return (broadly defi ned to include valu- Large Imbalances Are Unsustainable in the ation changes) on U.S. foreign assets compared with its Long Term liabilities. An IMF analysis shows that in 2001-2006, this return diff erential more than off set the enormous While there are no widely accepted estimates of a increase in net foreign debt of 28.2 percent of GDP political or economic limit to the size of the U.S. cur- that would have resulted from the U.S. trade defi cit rent account defi cits or net international debt, the sheer taken alone. Australia and Spain, which were not arithmetic of debt dynamics when current account blessed with such diff erential returns, saw their trade defi cits are large is troubling. Clearly, current account defi cits fully refl ected in sharply rising net external defi cits cannot grow faster than GDP over an extended debt. As the IMF points out, it would be unrealistic
27 to expect the U.S. return diff erential to remain large Adjustment and the Reduction of enough to obviate the need for reduction in the current Imbalances account defi cit.64 Th e Idealized Adjustment Mechanism How far the current account defi cit would have to fall to be sustainable in the medium term is diffi cult to If large imbalances must eventually fall, through what determine, because this depends on many factors – in- process of economic adjustment will this happen? cluding the growth rate of the economy, rates of return Ideally, adjustment would take place in a smooth and on cross-border asset holdings, and especially the gradual manner in which the large saving-investment growth of demand for dollar assets. However, several “mismatches” described above were reduced by an analysts, including those at the IMF, have estimated incremental shift of global demand from defi cit coun- that a current account defi cit of very roughly 3 percent tries to surplus countries. Th is demand shift would be of GDP would be sustainable, requiring a reduction of facilitated by changes in relative prices, largely through about half from its current level of about 6 percent of real exchange rate adjustments. (Figure 15 shows how GDP.65 Indeed, given the attractiveness of the United the U.S. trade defi cit has responded to changes in the States for both portfolio and direct investment, it real exchange rate during the last several decades.) could be diffi cult to reduce the current account defi cit In the United States, as the growth of domestic de- much further. It follows from the discussion above, mand slowed, national saving would rise, bringing however, that a reduction of the current account defi cit overall spending growth more in line with that of by 3 percent of GDP would require a substantially output. In the ideal case, actual output and employ- larger reduction in the trade defi cit, because the growth ment would not be signifi cantly reduced; the demand of U.S. external debt will cause the defi cit on capital for and production of exports and import substitutes income to grow. would rise, in response to exchange rate and price adjustments, as those for non-tradable goods fell. In
Figure 15. U.S. Current Account Balance and Inflation-Adjusted Value of the Dollar, 1975-2006 (Trade-Weighted Basis)
125 2
120 1
115 0 Current Account Balance
110 -1
105 -2
100 -3
95 -4
Lagged Inflation-Adjusted 90 Dollar Exchange Rate* -5 Current Account Balance (Percent of GDP) Account Balance (Percent Current
85 -6 Inflation-Adjusted Value of the Dollar (Index, 2000 = (Index, 100) of the Dollar Inflation-Adjusted Value
80 -7 1975 1979 1983 1987 1991 1995 1999 2003 Sources: Bureau of Economic Analysis and the Federal Reserve Board *Price-adjusted broad dollar index. Averages of monthly data. Exchange rate is lagged two years
28 general, in economies with current account surpluses, and the imbalances will fall. Th is may be the most the reverse adjustments would take place. National likely path for adjustment, and former Federal Reserve saving would fall as domestic demand grew faster than Chairman Alan Greenspan and others have projected output; in response to relative price changes, demand such a benign outcome.68 would shift away from exports and import-substitutes Indeed, some important components of this market- towards imports and non-tradable goods and services. driven adjustment process are underway. By July 2007 Th e overall eff ect would be to increase net exports and the dollar had fallen by about 18 percent from its the current account balance in the United States, and peak of early 2002; and by late 2006 and early 2007 to reduce net exports and the current account balances the trade balance in non-petroleum goods was falling, in surplus countries. after an expected lag. By May 2007 the monthly trade For this smooth adjustment to take place, both the defi cit had fallen by $7.6 billion from its August 2006 changes in domestic demand and the relative price peak of $67.6 billion, although about 40 percent of the adjustments are necessary – a point often missing in improvement in the goods balance was in the petro- popular discussion.66 A reduction in U.S. total spend- leum category. Total spending growth in the United ing large enough to reduce substantially the current States has slowed with the end of the housing boom. account defi cit without the price adjustments needed to Private saving should begin to rise with the fl attening shift demand to exports and import-substitutes would of housing values; and the public saving outlook has involve a severe recession. (For instance, without price improved with stronger state and local economies and adjustments, a fall in GDP of roughly 11 percent and unexpectedly strong federal revenues. In the meantime, rise in unemployment of about 4.5 percentage points growth in Europe and Japan has been strengthening would be required to reduce imports and the trade and that in China remains very strong, albeit driven by defi cit by 3 percent of GDP.)67 Similarly, in the surplus surging exports. Large investment projects are moving countries, higher total expenditures alone, without the forward in the oil exporting countries, as they adjust to price adjustments needed to shift demand to imports, the recent surge in export earnings and reserves. would produce infl ationary pressures, unless the Looking further ahead, we might expect to see some economy were already operating below capacity. In a diminution of private saving in Europe, Japan, and similar manner, exchange rate and relative price adjust- China as those societies age, and a reduction in sav- ments alone, without the shifts in demand, also would ing and restoration of stronger investment in other be problematic. Th e depreciation of the dollar in itself developing Asian economies as precautionary saving would be infl ationary in the United States, shifting and reserve accumulation moderate, and memories of demand from imports to domestic sectors; a reduction the 1998 crisis recede. As the accumulation of large in spending would thus be needed to “make room” for dollar reserves increases infl ationary pressures and this shift in demand and prevent infl ation. Similarly, in problems of monetary management in China, further the surplus countries, an appreciation of the currency gradual appreciation of the renminbi and liberalization in itself would be defl ationary, shifting demand from of the capital account are likely, and the development domestic sectors to imports; an increase in spending of fi nancial markets and institutions will also boost would then be required to sustain output. consumption.69 Is smooth market-driven adjustment that roughly Impediments to Smooth Adjustment follows this ideal model likely? Market participants presumably do not expect large imbalances and the Unfortunately, in spite of these encouraging signs, the rapid accumulation of dollar liabilities to be sustained further progress and successful completion of this indefi nitely, and will come to expect adjustment, market-driven adjustment process faces some major including further depreciation of the dollar, higher obstacles. saving in the United States, and strengthening demand abroad. If those expectations are realized, and the As noted above, adjustment is likely to be smooth – dollar falls as anticipated, with no major unfavorable i.e. dollar depreciation will proceed in a gradual and economic or policy shocks, asset prices and interest orderly process – if investors’ expectations are aligned rates will incorporate and validate those expectations, with the changes that will in fact be required to reduce
29 the imbalances. Although this is quite likely if poli- reserves, measured in local or non-dollar currencies, cies are well managed and there are no shocks to the that they would incur through a large dollar deprecia- system, it is by no means foreordained. In particular, if tion. If they see an eventual large depreciation of the large current account defi cits continue over an extended dollar as inevitable, the possibility that some would period of time, investors may become myopic, heav- follow private investors in reducing dollar holdings in ily discounting the need for a future large deprecia- their portfolios, if only by slowing the rate of accumu- tion that may become even larger as the imbalances lation, cannot be dismissed.74 Even if offi cial reserve continue. In these circumstances, when a large fall in holders do not attempt to diversify out of dollars, the the dollar begins, it may turn into a “dollar plunge” as fear among private investors that they may do so can investors are “surprised” by the market.70 add to uncertainty and increase volatility in the ex- change markets.75 It appears unlikely that market forces will rebalance global demand and the saving-investment mismatches A second critical impediment to adjustment may be the anytime soon. Th e April 2007 IMF baseline projec- unwillingness, or incapacity, of policymakers to imple- tion for 2007-2012 (assuming no additional eff ective ment policies to facilitate it, such as public expenditure exchange rate adjustment) shows the U.S. current reductions or tax increases in the United States or account defi cit continuing for fi ve years at more than exchange rate appreciation to increase imports and 1.5 percent of world GDP, with correspondingly large consumption in China. Such policy paralysis not only surpluses continuing in Japan, China, and elsewhere allows the problem to grow as net debtor and credi- in Asia; the oil exporters’ surpluses adjust downward tor positions increase, but may also erode confi dence slightly but remain very large.71 Even when assuming among private investors that policy changes and correc- substantial eff ective exchange rate adjustment (includ- tion will be forthcoming. It is not surprising that poli- ing that for China, where it is produced by infl ation), cymakers are less than eager to undertake such changes, a 2006 IMF “no policy change” projection shows the because adjustment is likely to impose some painful U.S. current account defi cit falling only very slowly to costs, at least in the short run.76 Americans, long ac- about 4 percent of U.S. GDP in 2015. In this scenario, customed to spending more than they produce collec- U.S. net foreign liabilities rise to 55 percent of GDP, tively, would increase their spending less (privately and trending toward 85 percent in the long run, while the publicly), and on average experience a lower growth dollar share of foreign portfolios increases. Th e IMF in living standards, even if their incomes did not fall. warns that this approximate tripling of U.S. net foreign Reducing the trade and current account defi cits by 3 liabilities relative to GDP without foreign investors percent of GDP, or about $420 billion, would involve demanding a large risk premium in higher interest rates a reduction in domestic purchases of roughly $1,400 may be unrealistic. Th e analysis of incongruent expec- per capita (at any given exchange rate) – and a further tations noted above also suggests that the low real rates loss of purchasing power of perhaps $700 to $1,100 of return that foreigners receive on dollar assets imply a per capita as a result of the higher import prices from potential for disorderly adjustment.72 a 20-30 percent nominal eff ective dollar depreciation.77 In the surplus countries, although expenditures and It is unclear what role offi cial dollar holdings might consumption per capita would increase, other aspects play under these circumstances. Th ere generally has of the adjustment could be diffi cult. Th e reduction in been large inertia in offi cial reserve holdings, and the saving in high-saving societies such as China would go dollar’s position as a reserve currency has remained against long-ingrained patterns of behavior, and reallo- relatively stable, in spite of the gradual emergence of cating demand and output from the export to domestic the euro as a credible alternative.73 It is probably un- sectors in export-oriented economies like China, Japan, likely that foreign monetary authorities would initiate and Germany might prove unwelcome and diffi cult.78 large and abrupt dollar sales, and in response to a fl ight from the dollar by private investors, they might in fact Policymakers may also be reluctant to act because of increase their reserve holdings to stabilize the dollar. the real-world diffi culties of reallocating resources However, offi cial holders of dollars, although certainly and demand internally. China, as a premier example, having diff erent objectives than private investors, may has developed an export-oriented economic growth be politically sensitive to the drop in the value of their strategy that has created unprecedented increases in
30 output and living standards. Nevertheless, excessive demand, but this eff ect is likely to occur only after a and ineffi cient investment, rising income disparities, lag of more than a year. Th e danger is that the sharp and other problems led the Chinese leadership in 2004 reduction of capital infl ows, and possibly action by to announce a new policy direction that would shift the Federal Reserve to forestall infl ation originating from investment and exports towards consumption-led in higher import prices, would raise interest rates and growth. However, few of the policy changes required more immediately reduce demand in housing, consum- for this change appear to have been implemented. er durables, and other sensitive sectors. In spite of the Modifying the existing structure, even if necessary and fl exibility and resilience of the U.S. economy, this could in China’s interest in the longer term, is apparently produce a recession, especially if overlaid on existing proving very diffi cult for risk-averse policymakers con- weakness in the housing sector. cerned with the dangers of social unrest – particularly History does not provide reliable guidance on this as the growth in industrial employment has recently question. Th e experiences of other economies (and slowed.79 Similar considerations, in less dramatic form, especially developing countries) may not provide strong apply to other Asian developing economies and some evidence because (unlike the United States) they often advanced countries such as Japan and Germany. Even have had to borrow in foreign currency, so that the in a highly fl exible economy such as the United States, domestic currency value of liabilities has been increased large and potentially disruptive changes in the exchange by depreciation.81 Nevertheless, a recent study of the rate and relative prices may be required for internal experience with current account reversals in relatively adjustment.80 large countries found large impacts on real output, Finally, even if policymakers are prepared to act, an with per capita growth declining by about 2-4 percent adjustment without signifi cant economic dislocations in the fi rst year and remaining under trend even three requires roughly compensating changes in saving years later.82 It also appears that the reversals of larger and investment patterns between defi cit and surplus defi cits, and defi cits fi nancing consumption – both economies that produce a shift, but not an overall characteristics of the current United States situation – reduction, in global demand. For example, an increase are associated with larger depreciations, longer adjust- in public saving in the United States would likely ment periods, and slower growth.83 reduce output and employment (both in the United Th e history of adjustments by the United States is States and abroad) if not accompanied by a reduction limited and mixed. Th e large dollar overvaluation of in saving and increase in domestic demand abroad. In the mid-1980s, and the current account defi cits that practice, policy coordination of this kind faces formi- reached 3.4 percent of GDP in 1987, gave rise to dable obstacles. It implies a measure of agreement on ominous warnings of their economic dangers.84 Yet policy actions that may not exist, as well as a facility those imbalances were reversed by policy adjustments for fi ne-tuning and timely actions that governments in the G-7 countries, and a sharp drop in the dollar may not possess. In addition, the appropriate policies facilitated by coordinated currency intervention, with- for reducing external imbalances may confl ict with the out a U.S. recession.85 On the other hand, the United pursuit of other goals. For example, fi scal expansion States experience with sharp dollar depreciation after in Japan and Germany confronts the realities of large the collapse of the Bretton Woods system in 1971- fi scal defi cits and the need for fi scal consolidation, and 1973 was much more painful, although it is diffi cult to euro area fi scal policies generally are constrained by the disentangle the eff ects of that adjustment from those of Stability and Growth Pact. We examine the implica- the “oil shock” and the policies responding to it. In any tions of these problems of policy coordination in our event, the accompanying fl ight from the dollar probably discussion of policy recommendations in Part V, below. contributed signifi cantly to the sharp rise in nominal Th e Costs of Disorderly Adjustment interest rates and infl ation, and the deep 1974-1975 recession that followed.86 What would be the impact on the U.S. economy of an abrupt decline in the demand for dollars, and a sharp Economic model simulations suggest that adjustment drop in the exchange rate? Th e eff ects are extremely triggered by a reduction in the desire to hold dollar uncertain. Depreciation in itself would increase total assets could have large repercussions on the U.S. and
31 global economies. In an IMF “disruptive adjustment We believe this evidence suggests that disorderly ad- scenario,” such a decline in the appetite for dollars justment, while at present unlikely, presents risks that produces abrupt exchange rate changes, higher infl a- are too large to ignore. It also indicates that measures tion and interest rates worldwide, and sharp reductions to facilitate orderly adjustment, by rebalancing global (roughly 3 percentage points) in economic growth in demand and encouraging exchange rate fl exibility, can the United States and emerging Asia, including China. be useful and should be pursued. Furthermore, we Th e IMF notes that these outcomes could be much note that the magnitude of potential exchange rate worse if the abrupt exchange rate adjustments disrupt- changes and of unfavorable impacts on output, em- ed fi nancial markets.87 In the event of such disruption, ployment, infl ation, and fi nancial markets is likely to the now very large international markets for derivatives, be greater as the size of the imbalance grows. In this and other instruments of intermediation, could be context, the ease with which the U.S. current account stabilizing or destabilizing, but add another element of defi cit has been fi nanced poses a dilemma. As two uncertainty and risk.88 astute observers have graphically put it, the “adjustment will be sharper the longer is the initial rope that global Th e IMF recently conducted a systematic study of 42 capital markets off er the United States.”90 We confront reversals of large and sustained current account defi cits a diffi cult trade-off : It is desirable that adjustment be in advanced countries during 1960-2006. Th e costs gradual to diminish the costs it imposes, but the longer of adjustment, in terms of the impact on economic adjustment is postponed, the greater these costs are growth, unemployed capacity, and investment varied likely to be. Th is implies that delay in adjustment is un- widely. At one end of the spectrum, a quarter of the desirable, and therefore that policies to facilitate adjustment episodes involved substantial growth slowdowns, which should be undertaken promptly – the subject to which we averaged 3.5 percent per year, and a strong decline in now turn. investment rates. On the other end, a quarter of the reversals were expansionary, with increases in annual output growth averaging about 0.75 percent and with sustained investment rates. Importantly, these more successful expansionary reversals tended to occur when relatively large real exchange rate depreciation was combined with substantial fi scal consolidation that raised saving and thereby allowed investment to be sustained.89
32 V. Facilitating Adjustment: CED’s Policy Recommendations
In Part IV we outlined the dangers of protection- • A multilateral cooperative approach is more likely ism and fi nancial and economic instability associated to be successful. with large and growing international imbalances. We All Economies Should Contribute to Adjustment acknowledged that markets eventually respond and ad- just to such imbalances and, indeed, that some positive International economic and fi nancial stability is a movement in the adjustment process has already taken public good, benefi ting all countries that participate in place. We noted, however, that many of the major the international system. It is therefore reasonable to structural sources of the imbalances, and the associated expect that all countries pay some regard to the eff ects risks, persist; and while the system may adjust under of their policies on other countries and on the system “benign neglect” without signifi cant policy interven- as a whole. (Th is principle, of course, is codifi ed in, for tions, the prudent course is to “buy some insurance” by instance, the rules of the World Trade Organization implementing policies that will reduce those risks. and the Articles of Agreement of the International Monetary Fund.) Such responsibilities are especially We also found that there is great uncertainty both important for large economies such as the United about the level of imbalances (and the U.S. current ac- States, Japan, the European Union, and China, whose count defi cit) that is sustainable, and about the size of actions have major systemic implications. However, as the macroeconomic policy and exchange rate changes, we note below, the actions of many smaller economies, and the time frame, needed to reach such a level. We taken in the aggregate, can have an important impact, believe that it will be useful to aim for the “soft target” so their policies also should contribute to adjustment. of a U.S. current account defi cit of about 3 percent of GDP within a few years, which is a level at which U.S. Policy adjustments also should be broadly shared external debt might stabilize as a percentage of GDP because the international economy is a closed system. in the medium term.vii However, our most important A reduction in the U.S. current account defi cit, or a re- objective should not be eventually to reach a “magic duction in the Chinese current account surplus, implies number,” but to implement soon policy changes that an equivalent change in current account balances in will reduce imbalances and create confi dence that other countries. It is incorrect to point (as some do) to orderly adjustment is proceeding. In this section we a single country’s large surplus or defi cit as being “the” outline in general terms the policy changes that we source of the problem, or of the solution. believe will facilitate such an adjustment to a world of smaller and less rapidly growing imbalances. Finally, although policy measures to reduce imbalances, by reducing the risk of disorderly adjustment that could aff ect many countries, are likely to benefi t most The General Policy Framework: Three or all countries, they also entail costs, as noted in Part Principles IV. Th ey are therefore more likely to be acceptable, CED believes that three basic principles are essential to and implemented, if adjustment is broadly shared. We an eff ective policy framework: recognize, however, that compelling domestic problems, or other constraints on policy, may limit the contribu- • All economies should contribute to adjustment; tions to adjustment that some countries can make. • Changes in both total spending and relative prices are required; and
vii Th e level at which the current account defi cit stabilizes depends critically upon the rate of increase in the defi cit on income payments and the reduction in the trade defi cit, which would have to decline enough to allow the former to be fi nanced.
33 Changes in Both Total Spending And Relative Prices inferior to those that would result from actions taken Are Required collectively by several countries. Fiscal tightening in the United States may reduce output and employment “Finger-pointing” at a particular country as the source both domestically and globally unless accompanied by of the imbalances often is associated with a view that an expansion of demand abroad with complementary only inappropriate macroeconomic policies, or, alterna- exchange rate adjustments. Th e Japanese, Chinese, tively, only inappropriate exchange rates, are responsi- and many Europeans worry that currency appreciation ble. Some Europeans would blame the problem simply and U.S. fi scal tightening will weaken export demand, on U.S. fi scal defi cits or (alternatively) an undervalued with unfavorable domestic repercussions. Some of yen; some U.S. policy makers claim that Chinese ex- these problems, of course, will require compensatory change rate policy is the sole culprit; while the Chinese domestic policy actions, but some can be ameliorated authorities have sometimes pointed to U.S. spending, by actions taken abroad. In the absence of actions by arguing that exchange rates do not matter. others, there may be less incentive for countries to act We believe that, in practice as in theory, changes in themselves. both domestic demand, which directly aff ect the In most instances, the policy changes needed for saving-investment balance, and in relative prices, adjustment are those that countries should undertake principally through real exchange rate changes, will be in their own self-interest, at least in the longer term. required for orderly adjustment. As noted in Part IV, However, these policies may also be politically diffi cult, in the absence of a rebalancing of domestic demand, as witnessed by the diffi culty in reducing the U.S. fi scal often assisted by macroeconomic policies, exchange rate defi cit or modestly appreciating the renminbi. Just as adjustments will have to be larger, and are more likely WTO rules protect to a degree liberal trade arrange- to “overshoot,” raising the risk of fi nancial and economic ments from protectionist pressures, a multilateral disruption. Similarly, shifts in domestic demand with- framework may facilitate adjustment policies, both out changes in exchange rates and relative prices are by creating a sense of shared burden and by off ering a likely to reduce output and employment or, conversely, protective rationale to political leaders. create infl ationary pressures. We consider below the most suitable approach to mul- An eff ective program for international adjustment will tilateral coordination. As a foundation, we fi rst present therefore involve many countries in both policy changes our recommendations on the actions by the United that aff ect domestic demand and policy- or market- States and other countries that would be most helpful driven exchange rate adjustments. In very broad, in facilitating adjustment. However, it is important to general terms, countries with persistent, structural note here that we do not regard these recommenda- (i.e. non-cyclical) defi cits – preeminently the United tions as a rigid, hard-wired, comprehensive program to States – should reduce the growth of overall spending be implemented with exquisitely coordinated simulta- relative to output, while allowing eff ective exchange rate neity by many countries. Th at would be quite unreal- depreciation. By the same token, those with structural istic – technically, economically, and politically. Our surpluses should attempt to increase the growth of recommendations should rather be seen as directional demand relative to that of output, while allowing ex- objectives, likely to be implemented over a period of change rates to appreciate. As noted, the circumstances several years, with some participants more constrained of individual countries may constrain the extent and in their contributions than others. timing of these policy adjustments, but we urge that policymakers not allow such circumstances to become Policies in the United States rationalizations for inaction on adjustment. A Multilateral Cooperative Approach Is More Likely With its extremely large current account defi cit, the to Be Successful United States is central to international adjustment. Th e United States should lead by example with its International adjustment presents a collective action own policies to facilitate adjustment while actively problem. A single country, taking adjustment actions encouraging and supporting adjustment policies by alone, may produce economic results signifi cantly others. It is very important that this leadership be
34 exercised in multilateral coordination eff orts as well as CED therefore strongly urges the Congress, the admin- in domestic policies. We believe the U.S. adjustment istration, and all political candidates to resist pressures policies outlined below, as part of a larger global adjust- to embrace policies of trade and fi nancial protection- ment over several years, could reduce the U.S. current ism. In particular: account defi cit to the approximately 3 percent of GDP • Congress should restore the President’s expired that could be sustained in the medium term without Trade Promotion Authority, which is essential for signifi cant risks. completion of the much-endangered Doha Round First, What Not to Do: Protectionism of multilateral negotiations, and for any future progress in trade liberalization; Often when the United States has experienced large trade defi cits, and especially large bilateral defi cits, • Th e administration should work vigorously to some elements of the public and Congress have called complete the Doha Round, and Congress should for tariff s or other barriers to reduce imports, especially approve the bilateral trade agreements with Korea when domestic employment has seemed adversely and various Latin American countries that are now aff ected or threatened. In this trade cycle, the admin- pending; istration has recently imposed new restrictions by • Th e administration and Congress should employ changing the rules governing countervailing duties on the new CFIUS procedures carefully and use them imports from “non-market” economies (preeminently to prohibit or reduce foreign investment in the China). Such protectionist barriers are unlikely to be United States only when such use is clearly war- eff ective in reducing the trade defi cit, especially when ranted by national security requirements.91 levied against a single country that has third-country competitors. More importantly, such measures would Increase National Saving* reduce the large benefi ts that Americans have gained from liberal trade and investment policies and risk A reduction of the U.S. current account defi cit to provoking retaliatory measures that could halt progress roughly 3 percent of GDP must involve an ex post re- towards further liberalization or even escalate into a duction of total spending relative to output (increase in spiral of no-win trade confl ict. national saving) of this amount. Th e current slowdown in the economy following the collapse of the housing As noted in Part III, as foreign direct investment and boom is producing slower growth in both spending and other cross-border trade in assets have grown, the dan- output, and this slowdown should lead to a reduction gers of fi nancial protectionism have increased. Th ere in imports. However, reduction of the trade defi cit are three strong reasons for the United States to resist through recession, which would be both costly and fi nancial protectionism. First, like trade protection, it temporary, is obviously not the answer. Th e United harms effi cient international resource allocation and, States needs domestic policies to raise national sav- in general, reduces welfare in both the United States ing – the indispensable U.S. obligation in multilateral and the capital exporter. Second, the United States adjustment – combined with the further depreciation of will depend upon imports of capital to assist a smooth the dollar and strong demand growth abroad that will adjustment process as the current account defi cit falls; support U.S. output and employment. impediments to capital infl ows could impair that pro- cess and, in any case, would raise the cost of borrowing If the United States does not take measures to increase abroad. Finally, over the longer term, the consump- national saving, adjustment may take place through tion needs of older populations in the United States dollar depreciation alone, which would create infl ation- and other advanced countries may require very large ary pressures. Th is would probably force the Federal resource transfers (capital imports) from younger, more Reserve to raise interest rates, which would “crowd rapidly growing, higher-saving countries. Th is presum- out” productive investment. Th is is not an attractive ably will involve the large-scale foreign acquisition of solution and would likely be unsustainable, requiring many kinds of U.S. assets; the United States will need eventual policy adjustments to raise national saving – to adjust to these economic and demographic facts of that should have been made earlier with deliberation. life. * See Memorandum, page 46.
35 CED believes, as we have argued previously, that the Th ere are strong arguments in principle for preferring most reliable policy for increasing national saving is a spending reductions to tax increases in reducing the reduction in the federal budget defi cit.92 Although the fi scal defi cit. However, in practice, given the very large near-term U.S. fi scal outlook has improved recently due increases in spending projected under current policies, to unexpectedly rapid revenue growth, budget projec- it is most unlikely that spending reductions alone can tions based on a continuation of current policies, plus reach these fi scal objectives. A signifi cant increase in an extension of tax cuts scheduled to expire and in- revenues is thus likely to be necessary, although the dexation of the alternative minimum tax, show unifi ed United States must not allow tax increases to become budget defi cits of about 1.5-2 percent of GDP in 2012 its “fi rst resort.” rising to about 2.5 percent of GDP in 2017, followed On tax policy, the United States should fi rst do no by a far more rapid rise in the subsequent decade. harm and not enact legislation that actually reduces net Th ese unifi ed defi cits, however, include the social secu- revenues. CED reaffi rms its view that any reduction in rity “surplus,” which peaks in about 2017 and declines revenues below those provided in current law, such as sharply thereafter, thereby masking the true long-term reform of the Alternative Minimum Tax or extension fi scal outlook. Excluding social security, projected “on- of the 2001-2004 tax cuts, should be “paid for” with budget” defi cits rise to about 3-3.5 percent of GDP in other revenue increases. In this context, we welcome 2012 and about 3.5-4 percent of GDP in 2017.93 We Congress’s reinstatement of the so-called “PAYGO” recommend that these on-budget defi cits be eliminated provisions in its budget procedures.viii With respect to within fi ve years. International imbalances aside, this additional revenue sources, there are several options is necessary on domestic grounds to prepare fi scally for that merit attention: the impending extreme pressures that will arise from increases in health-care costs and population aging, • Th e current income tax system is complex, inef- which are projected to raise Social Security, Medicare, fi cient, and inequitable. CED has proposed a tax and Medicaid expenditures from 7.8 percent of GDP reform agenda that would improve the income tax currently to about 10-12 percent in 2017 and 15-20 system and supplement its revenues with a value percent in 2030, under current policies.94 added-tax (VAT). (Such a VAT, which would be rebated on exports under WTO rules, might also Elimination of these defi cits will require a comprehen- raise exports directly.)97 Th e administration and sive program of fi scal restraint, undertaken without de- others also have made tax reform proposals, which lay. Th is is not the place for a detailed budget proposal, could be modifi ed to provide additional revenues.98 but we believe such a program must include reductions in the growth of all catgories of spending – including • Large petroleum net imports now account for defense, homeland security, and domestic spending. A roughly one-third of the U.S. trade defi cit. more rigorous prioritization of defense programs will Increased energy taxation, especially on carbon be necessary, and homeland security expenditures must fuels, would directly strengthen the trade balance, be allocated more effi ciently, with less infl uence from indirectly improve the U.S. energy security posi- political considerations.95 On the domestic side, large tion, and begin to address the problem of climate reductions will require reforms in the major entitle- change. ment programs of Medicare, Medicaid, and Social Security, although other programs, such as agricultural CED has not in general been enthusiastic about tax subsidies, certainly can and should be reduced. CED incentives to increase private saving, which we believe has previously made proposals for entitlement reforms, are unlikely to raise national saving signifi cantly after which we believe should be included in such a fi scal accounting for asset substitution and their revenue program.96 eff ects. However, there are now several innovative mechanisms targeted on low- and middle-income
viii Th ese “Pay-As-You-Go” (PAYGO) provisions require that legislation that reduces revenues or increases entitlement spending also include provisions to off set these defi cit-increasing changes with additional revenues or reductions in entitlement spending.
36 workers that hold more promise for raising private sav- defi cit to 3 percent of GDP.101 Recent IMF research ing, and CED recommends their consideration: suggests that the required U.S. depreciation may be smaller than previously believed, because of method- • Adopt “automatic” 401(k)s. Legislation enacted ological problems with earlier studies.102 As noted in in 2006 allows employers to change the default Part IV above, the required depreciation will be smaller options for 401(k) plans from “opt-in” to “opt-out,” to the degree that supportive policies are adopted and providing automatic enrollment and automatic the period of adjustment is longer, to permit changes in escalation of contributions when earnings increase. the structure of production. Automatic payroll enrollment in IRAs should also be made available for workers without access to Th e United States, as the key currency country, should 401(k)s. not actively intervene in the exchange markets under normal circumstances. Further, the United States • Modify the Savers Credit. Th e credit is currently should urge other countries to refrain from intervening non-refundable (thereby excluding about 50 mil- to prevent market-driven exchange rate adjustment lion low-income households with no income tax and, if both parties recognize the need for sizable liability) and has a complex three-tier rate struc- adjustment, might note the need for such adjustment in ture covering annual incomes up to $50,000. A its public statements. (See below in relation to Japan.) refundable credit at a uniform 50 percent rate, with perhaps a slightly higher eligibility ceiling, would Finally, if fi scal policy is tightened to support the be more eff ective. adjustment process, as we recommend, monetary policy can be somewhat easier in seeking non-infl ationary Such changes are estimated to have powerful eff ects on growth than it otherwise would be, which will tend to saving behavior. Taken together, they could increase assist depreciation and relative price adjustment and to national saving by about 0.6 percent of GDP.99 Th e sustain investment. combination of these measures and the fi scal policy changes recommended above could increase national Our recommended reduction of the U.S. current saving (allowing for off sets in private saving) by roughly account defi cit by about 3 percent of GDP would be 3 percent of GDP by 2012. somewhat smaller than the 3.4 percent experienced during the 1987-1991 adjustment episode, and might Depreciation of the Dollar take place over a slightly longer period of time. Such a Between February 2002 (when the dollar adjustment reduction corresponds to approximately a one percent began) and July 2007, the real eff ective exchange rate of reduction in demand for the rest of the world, which the dollar has fallen by about 18 percent.100 However, would be spread over several years. We believe that this this depreciation has taken place predominately against reduction of U.S. demand in the global economy, taken the euro, sterling, and the Canadian dollar. In real off a rising trend, could be absorbed by the rest of the terms, the yen has actually fallen against the dollar world, especially if (as we recommend) further mea- during this period, while the renminbi is approximately sures were taken to increase demand abroad. In any unchanged, as are a number of other Asian currencies case, reductions in the U.S. budget defi cit to prepare linked in diff ering degrees to the dollar. In addition, for the future are imperative as a matter of domestic most of the dollar depreciation occurred during 2002- policy. 2004; the dollar then rose in 2005 before resuming its decline in 2006-2007. Policies in Other Countries It is quite uncertain how much further the dollar will Detailed recommendations for the adjustment poli- need to fall as the trade balance adjusts. Th e IMF cies of other countries can be best developed by those report on the 2006 Article IV consultations put the countries, most usefully as they participate in the mul- range of likely adjustment at 15-35 percent, while some tilateral consultations recommended at the end of this recent studies show somewhat lower depreciations of section. However, we do indicate below the direction roughly 10-20 percent in the context of global adjust- and broad parameters of policy changes that would be ments that would reduce the U.S. current account helpful to adjustment.
37 Europe Since the dollar began to fall in February 2002 the euro has appreciated (as of July 2007) by about 22 percent As a general matter, Europe should recognize that it in real eff ective terms, and by about 58 percent against needs to participate in the adjustment process, and the dollar. However, this appreciation was eff ectively that responsibility does not rest only with the United a recovery from the sharp depreciation that occurred States, as the largest defi cit country, or the Japanese and from 1999 to 2001. Given this recent appreciation, and Chinese, with substantially undervalued currencies. the fact that the euro area as a whole is essentially in It will be helpful if European countries pursue policies current account balance, little further eff ective (trade- to strengthen domestic demand while the U.S. tighten- weighted) appreciation of the euro may be required ing of fi scal policy reduces our economy’s contribution for dollar adjustment, assuming that Asian currencies to global demand. In this context, it is encouraging to appreciate.104 see the apparent improvement in growth in Germany However, we believe that eff ective depreciation of the and some other European countries, although much of euro is undesirable, and therefore that additional appre- this recent growth is related to higher exports. We rec- ciation of the euro against the dollar will be necessary ognize that expansionary fi scal policy in Germany and as other countries adjust. Th is will be especially true some other (but not all) euro area economies is con- if petro-surpluses remain very large and require more strained by their fi scal positions and/or the Stability extensive global adjustment. Th ere is room for the euro and Growth Pact, although their budgets would be to appreciate further, because in real eff ective terms the aided somewhat if growth were to strengthen in several euro is now at the levels of the mid-1990s. We urge countries together. Fiscal expansion should be possible the European authorities to refrain from intervention in some non-euro countries with large surpluses, such to inhibit such appreciation against the dollar. as Sweden, Switzerland, and oil producers Norway and Russia. Japan Because of the constraints on fi scal expansion, it is In struggling to end defl ation and emerge from its long important that European countries actively encourage economic slump, Japan drove interest rates extremely stronger growth through structural reforms, as has long low and intervened actively to hold down the value of been urged by the IMF and OECD.103 Reforms to the yen to stimulate exports. In the last several years, increase competition in product and services markets the Japanese economy has substantially recovered. can promote higher levels of consumer spending, and Although there has not been active exchange rate reforms that raise labor-force participation can also intervention since March 2004, the yen (which at that contribute to growth in incomes, consumption and time had already depreciated 15 percent in real eff ective investment. Th ese reforms are clearly desirable for terms from its average in 2000) had by July 2007 de- their own sake, even though their impact on demand preciated by an additional 26 percent, notwithstanding may be off set to some degree by increases in potential the continuation of very large current account surplus- output that diminish any reduction in current account es. Th e yen even fell by about 11 percent against the surpluses. declining dollar during this latter period. Its pervasive weakness, in the absence of intervention, is presumably Finally, especially in light of the limitations on fi scal a response to expectations of continuing low interest policy and the time required for structural reforms and rates (in spite of a gradual normalization of monetary their eff ects, it is very important that the European policy), to the “carry trade” associated with these low Central Bank pursue a monetary policy that supports rates, and to expectations of future intervention if the growth. We recognize that this may place downward yen were to rise signifi cantly.ix pressure on the euro that would raise current account surpluses, other things being equal. Th is may be a nec- Th e role of Japan in the adjustment process presents essary price to pay for growth; it is in no one’s interest something of a dilemma. It is above all essential that to return to widespread economic weakness in Europe. Japan be a source of growth in the Asian and global
ix Investors in the “carry trade” borrow yen (or other currencies) at low interest rates and use the funds to invest in assets in other currencies at higher rates of return. Th is involves net sales of the borrowed currency.
38 economies, and employ its economic policies to that rapid aggregate and per capita growth and an enormous end. However, a huge accumulation of government reduction in poverty. Although China’s growth strat- debt resulting from fi scal expansion during the slump, egy has been strongly trade-oriented for many years, continuing large (albeit declining) structural budget as Chinese saving has soared and the renminbi has defi cits, and an old and aging population indicate the depreciated with the dollar since 2002, export growth need for continuing fi scal consolidation. (Indeed, the has substantially exceeded that of imports, generating IMF staff has recommended an acceleration of this large trade and current account surpluses. In 2006 the consolidation beyond that planned by the Japanese latter was an extremely large 9.1 percent of GDP, and government.)105 Th is means that monetary policy must the trade surplus increased year-to-year by an enor- continue to support growth, even though the resulting mous 84 percent in the fi rst fi ve months of 2007.107 low interest rates tend to hold down the value of the As discussed in Part III, the surpluses are related to a yen. From an international perspective, rather than to very high saving rate, which has long been a feature of accelerate fi scal consolidation, it might be desirable to the Chinese economy. Also contributing more recently adjust the policy mix slightly by taking somewhat more have been the rapid incorporation of China into inter- gradual steps toward fi scal consolidation and pursuing national production networks, with large infl ows of monetary normalization somewhat more aggressively. FDI, and an undervaluation of the renminbi associated As in Europe, it would also be desirable to encourage with rapid productivity growth, low infl ation, and a peg more domestic demand, including higher consumer to the dollar that has been relaxed only slightly since spending, by accelerating the pace of structural market July 2005. China’s structural characteristics have thus reforms. IMF staff work indicates that this could combined with its policies to produce an extremely mitigate the impact of fi scal consolidation in raising the export-oriented pattern of growth, characterized by current account surplus.106 large current and capital account surpluses and very rapid accumulation of reserves, which totaled some In any case, the limitations of using macroeconomic $1.2 trillion in early 2007. policies alone for adjustment make it essential that the yen appreciate as part of a global adjustment process. In spite of its economic benefi ts, this export-oriented Th e euro has taken a disproportionate share of adjust- growth has created serious problems both internation- ment against the dollar since 2002. We believe that, ally and domestically. Internationally, it has contrib- with the recent strengthening of the Japanese economy, uted to the global imbalances and increasing trade a reversal of a signifi cant proportion of the yen’s 2000- tensions with both advanced and competing lower- to-mid-2007 37 percent real eff ective depreciation – a wage countries. Domestically, it has suppressed con- real eff ective appreciation of perhaps 10-20 percent – is sumption relative to investment and exports, increased appropriate. (Th e implied appreciation against the income disparities, reduced monetary policy control dollar would be substantially larger.) To accomplish over an overheated economy, and distorted the com- this, the Japanese authorities should not intervene to position of investment.108 Finally, the accumulation of impede appreciation or signal an intention to intervene massive reserves that earn only a fraction of the domes- in the future when the yen begins to rise. Th is pro- tic return to capital refl ects an enormous misallocation cess should be assisted by a public recognition by the of resources and economic loss to the Chinese people. Japanese and other authorities that such an apprecia- Th e Chinese authorities clearly recognize these prob- tion is a welcome and necessary component of global lems, and have announced their intention to place adjustment. Should the yen depreciate very greatly, more emphasis on domestic demand and consumption, and such “jawbone” intervention not suffi ce, Japan and address social and geographic income disparities, and the United States should consider joint direct exchange allow more exchange rate “fl exibility.”109 (A further rate intervention, following the course they pursued in small widening of the trading band for the renminbi 1998. was announced in May 2007.) Nevertheless, while China recognizing the diffi culties in shifting economic direc- tion in such a large, only partly market-driven economy, Th e Chinese economy has experienced extraordinary progress towards the new growth strategy has been progress in the past quarter-century, producing very very slow.110
39 We fear that protectionist sentiments in the United We recognize that the implementation of these policies, States and other higher-wage countries are rising dan- and in particular currency appreciation, would prob- gerously, and that the risk of instability posed by the ably have a smaller impact on the U.S. current account international imbalances is also increasing, as China’s defi cit, and perhaps even on the Chinese surplus, than trade surplus continues to grow. We therefore urge the anticipated in public discussions in the United States Chinese authorities to proceed with greater urgency to (for the reasons noted in Section III). However, the shift policies in the directions they have indicated. We combination of policies would constitute important recognize that such changes must be made carefully, progress towards reduction of international imbalances given weaknesses in the fi nancial system and the social and would be strongly in China’s own self-interest. and political requirements for continued rapid growth. Th is acceleration of Chinese policy changes conforms But we believe that signifi cant and visible eff orts by in general to previous public recommendations by the China are needed to head off the dangers we have IMF.112 However, we believe their timely implemen- described. In particular: tation is more likely in a framework of multilateral • Public consumption expenditures should be ex- discussions organized by the IMF than as a result of bi- panded in education, health care, public pensions, lateral discussions with only the United States. In such and other programs to improve welfare broadly a multilateral context, China can provide a powerful across the population and reduce the need for confi dence-building signal that it recognizes the need precautionary saving. for global adjustment and its international responsibili- ties as a major economic power. • Higher private consumption and effi cient private investment should also be encouraged through Petroleum Exporters fi nancial reforms that improve the intermediation Th e extremely large and rapid increase in the trade of private saving. In this regard, the development and current account surpluses of the oil exporters of effi cient private domestic banks, in competi- during 2002-2006 ended when oil prices stopped tion with foreign-owned banks, is critical, as is rising in mid-2006, but the surpluses have remained a modern system of supervision and prudential large. After oil price spikes in the past, large current regulation.111 account surpluses fell or even gave way to large defi cits • Th ere should be signifi cant near-term apprecia- in some cases as oil prices came down and spending on tion of the renminbi, in the range of perhaps 10 imports increased. Although this may happen again, percent (against the dollar) over a one-year period, the surpluses are now much larger in real terms than accompanied by a wider permitted trading band to in previous episodes; most analysts expect relatively increase fl exibility. After an initial adjustment of high oil prices to continue; and the imports of the Gulf this magnitude, we would expect to see renminbi Cooperation Council (GCC) countries appear to be appreciation in the range of 5-7 percent per year growing more slowly, as noted in Part III. Th ese cur- for several more years. Th e real, eff ective renminbi rent account surpluses may therefore remain unusually appreciation would be signifi cantly smaller than large, and the risk of even higher oil prices and larger that against the dollar, especially if (as we strongly surpluses continues because of the political instability recommend) other highly managed Asian curren- in the Middle East. cies are also allowed to appreciate. Middle East oil exporters in general have been increas- • In the longer term, over a period of some fi ve to ing public expenditures very rapidly in the last several ten years, as China vigorously pursues reforms to years. Saudi Arabia and the United Arab Emirates improve its fi nancial system, it should continue have undertaken large public-private investment gradually to liberalize its capital account; eventu- programs in both the energy and non-energy sectors to ally it should move to a largely market-determined increase oil production and diversify their economies.113 exchange rate that would prevent a reemergence of Th e rate of increase in their spending is limited by the large external imbalances as its rapid productivity absorptive capacities of their economies and a prudent growth continues. regard for the fi scal uncertainties related to the future
40 of oil prices. Th eir current expenditure policies may Other Surplus Countries therefore be making as much of a contribution to As noted in Part III, although the United States global adjustment as is feasible; Saudi Arabian imports accounts for nearly two-thirds of global current ac- increased by about 40 percent in 2006, after increas- count defi cits, a large number of countries run current ing by 23 percent annually on average in the preceding account surpluses, even after accounting for the large three years.114 surpluses of the petroleum exporters, Japan, China, and Prior to Kuwait’s switch to a peg based on a basket of Germany and the Netherlands within the Euro Area. currencies in May 2006, the currencies of the GCC Taken in the aggregate, these smaller surplus countries countries were all pegged rigidly to the dollar, both be- constitute a signifi cant proportion of U.S. trade. (For cause of the need for some exchange rate anchor and in example, Malaysia, Taiwan, Hong Kong, Singapore, contemplation of a planned GCC movement to a single Norway, Sweden, Switzerland, and Russia together currency in 2010. As the dollar has fallen, the peg has have a larger weight in the Federal Reserve’s broad real produced an anomalous eff ective depreciation of these dollar index than either China or Japan.)116 currencies in spite of soaring terms of trade, current It is diffi cult to generalize about a large group of coun- account surpluses, and foreign asset accumulation. tries, where circumstances and competing objectives Th is has somewhat inhibited adjustment by slowing diff er widely. However, where circumstances permit, the growth of imports, especially because GCC imports these smaller countries, some of which are running have a much larger European than U.S. component, extremely large surpluses relative to their economic although the small amount of domestic production size, also should allow their currencies to appreciate in these economies limits the scope for expenditure- and attempt to raise domestic demand. Many smaller switching to imports. More important, as in the case of surplus economies have become more dependent on China, the dollar peg has reduced the eff ectiveness of external demand, with lower growth of investment monetary policy and made it harder to control infl ation and consumption, than prior to the currency crises of in these booming economies. Th is was the reason given the late 1990s. Economic, fi nancial, and governance for Kuwait’s recent policy change.115 reforms can help raise investment rates in some of these Presumably, fl oating exchange rates would prove too countries. Without adjustment in the smaller coun- volatile for these countries, but we believe some ap- tries, exchange rate adjustments of the major currencies preciation would be appropriate for both domestic may be larger, and possible disruptions to output and and international reasons. While we understand the employment more costly for all nations. reluctance to expose these economies to the “Dutch In East Asia, Hong Kong, Malaysia, Taiwan, and disease” of uncompetitive overvalued exchange rates, Singapore, like China, have maintained fi xed or tightly this is not a strong argument for exchange rate depreci- managed links to the dollar, and developed large ation. In fact, domestic infl ation may produce eff ective current account surpluses (especially relative to their appreciation that is much harder to control. Because GDPs), and extraordinarily large reserve accumula- these countries are reconsidering their currency ar- tions for relatively small countries. It would be helpful rangements in any case, those other than Kuwait might for those countries that have tightly managed fl oating consider, as their individual circumstances dictate, exchange rates to allow their currencies to appreciate, either a discrete appreciation of the dollar peg or (as but this is unlikely unless China does so. Th ere is, Kuwait has done) a link to a more diversifi ed currency therefore, a regional problem of East Asian adjust- basket weighted towards the euro and Asian currencies ment, centered on China, which provides a very strong that refl ect the composition of GCC imports. rationale for multilateral consultations and coopera- Th ere are, of course, a number of non-Middle East oil tion. Hong Kong, which has long operated a fi xed exporters with large current account surpluses, such rate through a currency board, may, of course, wish to as Norway, Russia, Algeria, Nigeria, and Venezuela. maintain that arrangement, in which case a real appre- Th ese countries should also allow their currencies to ciation of the currency is likely to take place ultimately appreciate as part of the global adjustment process. through domestic infl ation.
41 Other Measures to Reduce Risk the participants agreed upon a joint report. In these respects the process broke new ground.119 Th e poli- As noted in Part IV, large and growing current account cies enumerated in the report, however, appear to be surpluses in recent years have given rise to an enormous principally those that these governments had adopted, increase in offi cial foreign exchange holdings. At the or set as general goals, prior to the consultations pro- same time, other currencies, and in particular the euro, cess. Th us, the United States says it will eliminate the have emerged as alternatives to the dollar in these budget defi cit by 2012; China suggests that exchange offi cial portfolios. Assets denominated in currencies rate fl exibility will gradually increase; and the Euro other than the dollar are also likely to fi nd a place in the Area indicates again its support for the Lisbon Strategy portfolios of the national investment authorities that of market reforms. Notably absent is any discussion more countries with very large reserves are now using of the more extensive exchange rate changes that we as a means of diversifying, and seeking higher returns believe are necessary for adjustment. While the devel- on, their foreign asset holding. opment of these multilateral consultations has been While the currency composition of offi cial foreign ex- constructive, it is not clear that they are likely to aff ect change portfolios has been quite stable, and diversifi ca- the policies of the participants signifi cantly; in fact, the tion has been limited, the potential for larger exchange U.S. Treasury Secretary denied that their purpose was market volatility or sudden exchange rate movements “to produce joint policy commitments”.120 Th e partici- as a result of portfolio changes, or the rumor of such pants indicated no fi rm intention of meeting again, but changes, has clearly increased. We recommend that agreed to do so “when developments warrant.” major holders of foreign exchange act to minimize such In spite of these consultations, the international risks by voluntarily adhering to an international reserve economy does not currently have established, well- diversifi cation standard. In accepting such a standard, functioning arrangements for multilateral cooperation countries would agree to (a) routinely disclose the on adjustment policies. Under its Articles of Agreement, currency composition of their foreign exchange port- the IMF has a mandate to oversee the eff ective opera- folios, and (b) make any adjustments of the currency tion of the international monetary system and the composition of their portfolios gradually. We believe compliance of members with their obligations to the additional transparency and assurance of gradual pursue policies that promote international stability. adjustment provided by such a standard would inspire Th e IMF exercised this mandate quite actively under confi dence and reduce the risk of disruption in the the Bretton Woods gold-exchange standard, when the 117 foreign exchange markets. discipline imposed by fi xed exchange rates provided it with considerable leverage over national policies. Multilateral Consultations and a More However, during the past three decades, the exchange Proactive IMF rates of major currencies largely have been fl oating, and Th e IMF convened multilateral consultations in 2006 the IMF has little power beyond that of “moral suasion” among the United States, Europe, Japan, China, and to aff ect the policies of countries that do not need to Saudi Arabia (with IMF staff ) to address the issue of borrow, in particular the large, systemically important large international imbalances. Th is group reported economies such as the United States, Japan, China, and to the IMF’s International Monetary and Financial the larger European countries. Committee (IMFC) on the outcome of its discussions Th e IMF has long conducted “surveillance” and annual on April 14, 2007, and each of the participants listed bilateral consultations with member countries indi- a number of policies it was pursuing, or contemplated vidually, and in the process has provided policy advice, pursuing, that are consistent with the overall adjust- including advice on systemic adjustment and stability. ment strategy that had been endorsed by the IMFC in However, policy implementation depends entirely upon September 2006.118 a country’s political “buy-in,” and this inevitably has Th is has been an important fi rst step in developing a required direct discussions and negotiations among the framework for multilateral consultations. Importantly, major economic powers. Not surprisingly, therefore, the consultations were convened by the IMF, and policy coordination has emerged principally at times
42 of crisis under large-power agreements by, for instance, implementation of the necessary adjustment policies. the G-10 (Smithsonian Agreement, 1971), G-5 (Plaza Needless to say, U.S. leadership in urging multilateral Accord, 1985), or G-7 (Louvre Agreement, 1986). adjustment policies will be credible and eff ective only While these political groups have acted eff ectively, they if the United States implements reductions in its own have operated largely outside the IMF. Th e IMF has fi scal defi cit. not played (or been allowed to play) a major role in As we have noted, the process of adjustment of the organizing international cooperation at such times of current large imbalances may take a long time. In crisis.121 addition, as discussed in Part III, the ongoing and Th e IMF, through its charter, membership, and ex- long-term process of globalization can be expected to pertise, is uniquely equipped to conduct surveillance, increase the size of imbalances in both current and organize multilateral consultations, and provide advice private capital accounts. Th is is the likely result of the on global imbalances and similar international econom- increased specialization in the trade of both goods and ic and fi nancial issues. Obviously, only governments services and assets, involving both the reorganization of can perform the task of initiating and implementing international production and portfolio diversifi cation. policies to facilitate adjustment. But we believe the Th ese larger imbalances may or may not turn out to IMF can and should be more proactive as a catalyst for be benign and refl ect new international equilibria in a consultations on, and implementation of, adjustment more interdependent world. But, in any case, they will policies. Indeed, the IMF’s own Offi ce of Independent hold the potential for greater instability. We therefore Evaluation recently issued an evaluation of the IMF’s believe that a regular and ongoing process of multilater- exchange rate policy advice during 1999-2005 that al surveillance and consultations, convened by the IMF, found the “IMF’s global responsibilities were often should be organized by the IMF and its shareholders. perceived to be underplayed, particularly in being a Th e composition of such an ongoing “international ruthless truth-teller to the international community consultative group,” and its relationship to the broader and a broker for international policy coordination.”122 IMF membership, will have to be worked out. Th e Th e evaluation found that insuffi cient attention composition might change to refl ect new problems and was given to “policy spillovers” and multilateral and circumstances. A small working group of roughly the regional perspectives in its bilateral surveillance ac- size recently convened may be necessary for the core tivities.123 Since the release of that report, the IMF’s consultations to be eff ective. However, in order to Executive Board has issued a new Decision on Bilateral produce the necessary political support, a mechanism Surveillance that replaces its 1977 policy statement on that also involves the broader IMF membership and exchange rate surveillance with a broader set of rules especially other very large emerging economies – not that explicitly take into account the eff ect of a country’s only China, but also India, Brazil, and Russia – will be economic and fi nancial policies (including exchange needed. Furthermore, although the recent consulta- rate policy) on external stability, and provides guidance tions involved a single seat for the Euro Area, European on the type of actions that would constitute “currency governments make fi scal policy decisions, so that major manipulation.”124 European governments will have to be involved. It will We commend this new action by the IMF. Th e not be an easy task to devise an appropriate and eff ec- Decision on Bilateral Surveillance complements the re- tive mechanism. However, we hope that by keeping cent multilateral consultations in taking initial steps to- the arrangements relatively fl uid, the composition of wards a more pro-active multilateral role. However, for a consultation group or groups can be separated from the IMF to play this role in a continuing and systematic the ongoing debate about a more fundamental reform way, it will require both leadership and vision on the of IMF governance, which may require considerable part of the major governments systemically involved time.125 with the imbalances. If a multilateral process is to We believe that such an ongoing multilateral consulta- succeed, representatives from some key countries must tion process would improve on current arrangements step forward as “champions,” and be willing to commit by making it clear that adjustment is a collective their governments to the consultation process and to
43 enterprise, and by eff ectively “rewarding” governments and negotiations of policy diff erences, which may be that are seen to participate in the program and con- necessary for both substantive and political reasons. tribute to international stability. Our recommenda- But it may reduce some of the political diffi culties and tions should be seen as directional objectives, likely to tensions characteristic of bilateral negotiations and the be implemented over a period of several years, with associated accusations, pleas, threats, and denials that some participants necessarily more constrained in often surround disagreement on national economic their policy contributions than others. Such a mul- policies. tilateral process will not replace bilateral discussions
44 VI. Conclusion
Th is policy statement has examined a new phenom- and other countries, over the next several years, which enon in the international economy, the unprecedented would reduce these risks. In general, this would involve size and duration of very large imbalances between the an incremental rebalancing of global demand from current account defi cits of capital importing countries the United States towards the rest of the world (and – preeminently the United States – and the counter- especially Asia), and measures to increase the response part surpluses of large capital exporters, among them of exchange rates to market forces. We have also China, Japan, Germany and the Netherlands, a number proposed that an ongoing international consultative of other smaller Asian economies, and the fuel export- process, convened by a more pro-active IMF, would ers. We believe these imbalances refl ect a number of improve the likelihood that governments would imple- factors. Of primary importance are the explosion of ment such adjustments in policy. fi nancial globalization, with its cross-border asset trade Th e process of globalization has resulted in unparal- and portfolio diversifi cation; the structural diff erences leled economic growth and improved standards of between low saving in the United States and high sav- living for people in many parts of the world. But ing abroad; and policies that interfere with the market with ever-increasing divisions of labor, capital and adjustment of these imbalances, including massive specialization across countries, globalization is likely exchange rate intervention in China and some other to continue to create imbalances from time to time Asian economies. because trade and capital fl ows are not symmetrical While large imbalances to some degree refl ect increased among the world’s trading partners. It is important not globalization, they also create risks for the United to allow these imbalances to precipitate crises through States and other countries – especially when their size disorderly adjustment or to become an impediment is enlarged by inappropriate policies that impede inter- to extending the benefi ts of globalization as widely as national adjustment. One major risk is the growth of possible. protectionism in the United States and other advanced Th e CED calls upon the leadership of the key countries countries, where wages are under pressure from foreign and of multinational institutions, especially the IMF, to competition. Another important risk is the possibility give greater attention to international imbalances and of “disorderly adjustment” – sharp changes in exchange the risks that accompany them. World leaders need rates, prices and interest rates, and possibly economic to take both global and national considerations into growth – that might ensue if investors failed to fi nance account as they develop and implement policies that ever-larger U.S. current account defi cits. Although we will adequately address imbalances, so that adjustments believe that an orderly market-led adjustment of the will be facilitated with minimum risks. Th e CED imbalances is the most likely outcome, we also believe it believes that the adoption of these recommendations would be imprudent to ignore these risks. would improve the prospects for a well-functioning and We have therefore made recommendations for di- prosperous global economy. rectional adjustments in policy by the United States
45 Memoranda of Comment, Reservation or Dissent
Page 35, James Q. Riordan, with which John White has asked to be associated. Th e report addresses critical issues and off ers many sound proposals. Unfortunately it does not adequately deal with the need to increase U.S. savings – especially private savings. Our tax system contributes to the problem because it favors consumption over savings. CED’s paper, “New Tax Framework,” (restated on pages 35-37) does little to correct this unfortunate bias against savings. Fundamental changes are needed. Th e premature and double taxation of saving need to be ended. Tinkering with subsidies for low income non-taxpayers will not do the job. It is a minor rearrangement of the deck chairs on our savings Titanic.
46 Endnotes
1 Th e total of recorded current account defi cits system- 9 Th e classic paper demonstrating this home bias was atically exceeds total surpluses by about .3 percent of Martin Feldstein and Charles Horioka, “Domestic world GDP indicating that the measured imbalances Saving and International Capital Flows,” Th e are somewhat overstated. IMF World Economic Economic Journal 90, no. 358 (1980): pp. 314-329. Outlook Database, April 2007 Edition, http://www. Th ere is recent evidence that this home bias has imf.org/external/pubs/ft/weo/2007/01/data/index. declined, see endnote 23. aspx (average of the world current account balance over world GDP from 2000-2005). In 2005 the 10 Th e “offi cial” infl ows are understated because signifi - world had a recorded current account defi cit equal to cant dollar assets of the governments of oil exporting $45.4 billion. countries are held indirectly through European or other non-offi cial intermediaries. In some coun- 2 For the absence of regular debtor to creditor pro- tries, such as Singapore, Saudi Arabia, and other oil gression, see William R. Cline, “Th e International exporting countries, substantial dollar claims are also Debt Cycle and the United States as an External held by quasi-offi cial investment entities and do not Debtor,” chap. 1 in Th e United States as a Debtor appear as offi cial reserve holdings. Matthew Higgins, Nation (Washington, DC: Peter G. Peterson Institute Th omas Klitgaard, and Robert Lerman, “Recycling for International Economics, Center for Global Petrodollars,” Current Issues in Economics and Finance Development, 2005). (Federal Reserve Bank of New York) 12, no. 9 (2006). 3 Edwin M. Truman, “Postponing Global Adjustment: 11 Measurements of the NIIP with direct investment An Analysis of the Pending Adjustment of Global at market value, which are used throughout this Imbalances,” Working Paper Series (Peter G. Peterson report, are available only from 1982. However, the Institute for International Economics), 2005, no. 6: p. NIIP with direct investment measured at current 12. cost, peaked in 1980 and then began its decline. U.S. Bureau of Economic Analysis, “International 4 Ibid., pp. 2-3. Investment Position of the United States at Yearend, 5 Catherine Mann, Is the U.S. Trade Defi cit Sustainable? 1976-2006,” International Investment Position Table (Washington, DC: Peter G. Peterson Institute for 2, 2007, http://www.bea.gov/international/index. International Economics, 1999). htm. 6 On the export slowdown, see Martin Neil Baily 12 Cline argues that higher returns for U.S. held as- and Robert Z. Lawrence, “Competitiveness and the sets occur only in FDI; see Cline, Debtor Nation, p. Assessment of Trade Performance,” chap. 10 in C. 67, table 2A.1. However, Lane and Milesi-Ferritti Fred Bergsten and the World Economy, ed. Michael indicate that the U.S. has sometimes enjoyed higher Mussa (Washington, DC: Peter G. Peterson Institute diff erential returns in other asset categories. Lane for International Economics, 2006), pp. 235-236; and Milesi-Ferritti, “Global Perspective on External Goldman Sachs, U.S. Economic Research Group, Positions,” tables 3-5. “Th e Case of the Missing Exports,” US Economics 13 U.S. Bureau of Economic Analysis, “Changes in Analyst, 2006, no. 06/08: pp. 4-6. Selected Major Components of the International 7 IMF, World Economic Outlook, Spillovers and Cycles in Investment Position, 1989-2006,” International the Global Economy, April 2007 (Washington, DC: Investment Position Table 3, 2007, http://www. IMF, 2007), pp. 248-252, tables 26-28. bea.gov/international/index.htm; Cline, “Valuation Eff ects, Asymmetric Returns, and Economic Net 8 Philip R. Lane and Gian Maria Milesi-Ferretti, Foreign Assets,” chap. 2 in Debtor Nation; Lane and “International Financial Integration,” IMF Staff Milesi-Ferritti, “Global Perspective on External Papers 50, Special Issue (2003); Philip R. Lane and Positions.” Th e “other” valuation adjustments in the Gian Maria Milesi-Ferretti, “A Global Perspective on data, which have consistently raised the NIIP posi- External Positions,” chap. 2 in G7 Current Account tion, have averaged nearly $70 billion annually since Imbalances: Sustainability and Adjustment, ed. Richard 1988. Th ey refl ect diff erences between market and H. Clarida (Chicago: University of Chicago Press, book values on the purchase, sale, liquidation, and 2007), pp. 67-98. capital gains and losses of foreign affi liates and other
47 Endnotes
revaluations and changes in classifi cation and cover- 20 IMF, “Global Imbalances: A Saving and Investment age. See Jeff rey H. Lowe, “Foreign Direct Investment Perspective;” IMF, World Economic Outlook, Financial in the United States: Detail for Historical-Cost Systems and Economic Cycles, September 2006 Position and Related Capital and Income Flows (Washington, DC: IMF, 2006), table 43. for 2002-2005,” Survey of Current Business 86, no. 9 (2006): p. 37. 21 IMF, World Economic Outlook, September 2006, p. 230, table 28. 14 Cline, Debtor Nation, p. 157. 22 Lane and Milesi-Ferretti document the increasing 15 Barry Eichengreen, “Th e Blind Men and the dispersion of international net asset positions and the Elephant,” Issues in Economic Policy (Brookings even faster growth of gross positions (asset trade). Institution), no. 1 (2006). Lane and Milesi-Ferritti, “Global Perspective on External Positions.” 16 Richard Cooper argues that U.S. saving is substan- tially understated in our current national accounting 23 See endnote 9 for a description of the “home bias.” framework, which does not recognize, for instance, Th e correlation between saving and investment rates that expenditures on consumer durables and, es- within each region has fallen from 0.6 in 1970-96 to pecially, education and the creation of knowledge 0.4 in 1997-2004. IMF, World Economic Outlook, constitute investment and saving. Th is is important September 2005, p. 95; Alan Greenspan, “Global in considering the adequacy of saving and capital Finance: Is it Slowing?” (speech, International formation with regard to future living standards. Symposium on Monetary Policy, Economic Cycle, However, even if this mismeasurement has become and Financial Dynamics, Banque de France, Paris, increasingly important (as seems likely), the reclassi- France, March 7, 2003). fi cation of consumption expenditures would increase both domestic investment and saving, and would not 24 Pierre-Oliver Gourinchas and Hélène Rey, “From aff ect the gap between the two that contributes to the World Banker to World Venture Capitalist: U.S. current account defi cit. It would, however, suggest External Adjustment and the Exorbitant Privilege,” a diff erent characterization of the trends underlying chap. 1 in Clarida, G7 Current Account Imbalances, the gap. Richard N. Cooper, “Understanding Global pp. 11-55; Ricardo J. Caballero, Emmanuel Farhi, and Imbalances” (speech, Conference Series 51: Global Pierre-Olivier Gourinchas, “An Equilibrium Model of Imbalances - As Giants Evolve, Federal Reserve Bank ‘Global Imbalances’ and Low Interest Rates,” NBER of Boston, Chatham, MA, June 14-16, 2006). Working Paper Series, no. 11996 (February 2006). 17 IMF, People’s Republic of China: 2006 Article IV 25 Following Richard Cooper’s rough calculation, the Consultation – Staff Report; Staff Statement; and Public “fully globalized” allocation of new saving would Information Notice on the Executive Board Discussion produce a net capital infl ow into the U.S. of about (Washington, DC: IMF, October, 2006), p. 38, table 0.9-1.0 trillion, more than enough to fi nance the 8; Ben S. Bernanke, “Th e Global Saving Glut and $0.8 trillion current account defi cit. Actual private the U.S. Current Account Defi cit” (speech, Homer capital fl ows ran about one-third (outfl ows) to one- Jones Memorial Lecture, Federal Reserve Bank of St. half (infl ows) of these idealized amounts. Cooper, Louis, St. Louis, MO, April 14, 2005); IMF, “Global “Understanding Global Imbalances,” p. 12. Imbalances: A Saving and Investment Perspective,” 26 Larry H. Summers, “Refl ections on Global Account chap. 2 in World Economic Outlook, Building Imbalances and Emerging Markets Reserve Institutions, September 2005 (Washington DC: IMF, Accumulation” (speech, L. K. Jha Memorial Lecture, 2005); Raghuram Rajan, “Perspectives on Global Reserve Bank of India, Mumbai, India, March 24, Imbalances” (speech, Global Financial Imbalances 2006; Dani Rodrik, “Th e Social Cost of Foreign Conference, Chatham House, London, January 23, Exchange Reserves,” NBER Working Paper Series, no. 2006). 11952 (January 2006). 18 Rajan, “Perspectives on Global Imbalances,” chart 2. 27 Olivier Jeanne and Romain Ranciere, “Th e Optimal 19 Cooper, “Understanding Global Imbalances.” Level of International Reserves for Emerging Market Countries: Formulas and Applications,” IMF Working Paper, 2006, no. 229. 48 Endnotes
28 Cooper, “Understanding Global Imbalances.” March 2002 and March 2007, http://www.census. gov/foreign-trade/www/press.html. 29 World Economic Forum, “Global Competitiveness Index 2006-2007: Top 50,” Country Rankings, 2006- 40 Energy Information Administration, “U.S. Data 2007, http://www.weforum.org/en/initiatives/gcp/ Projections,” Oil (Petroleum), Prices, yearly forecasts Global%20Competitiveness%20Report/index.htm. to 2030, http://www.eia.doe.gov/oiaf/forecasting. html. 30 Higgins, Klitgaard, and Lerman, “Recycling Petrodollars,” p. 6; Martin Feldstein, “Why Uncle 41 Michael P. Dooley, David Folkerts-Landau, and Sam’s Bonanza Might Not Be All Th at It Seems,” Peter Garber, “Th e Revived Bretton Woods System,” Financial Times, January 10, 2006, p. 19. International Journal of Finance and Economics 9, no. 4 (2004): pp. 307-313; Eichengreen, “Blind Men and 31 In 2001-2006 fi xed non-residential investment aver- the Elephant.” aged 10.4 percent of GDP; the decade averages for the 1970s, 1980s, and 1990s were all in the 11-12 42 IMF World Economic Outlook Database, April percent range. U.S. Bureau of Economic Analysis, 2007. “National Income and Product Accounts Tables,” tables 1.1.5 and 5.2.5, 2007, http://www.bea.gov/ 43 GDP at exchange rate conversion. IMF estimates; national/nipaweb/SelectTable.asp?Selected=N. for investment rates, saving rates, and exports see: IMF, People’s Republic of China: 2006 Article IV 32 IMF, World Economic Outlook, April 2007, p. 14; IMF, Consultation, p. 38, table 8; for reserves see IMF, Global Financial Stability Report, Market Developments statistical appendix to World Economic Outlook, April and Issues, April 2007, pp. 15-16. 2007, p. 269, table 35; for GDP and current account data see IMF World Economic Outlook Database, 33 Goldman Sachs, US Economic Research Group, April 2007. “Turns of Trade,” US Economic Analyst, 2007, no. 07/22; Cline, Debtor Nation, p. 29, fi g. 1.11. Th e 44 Dooley, Folkerts-Landau, and Garber, “Th e Revived seminal study of the asymmetry between import and Bretton Woods System.” export responsiveness to growth at home and abroad is Hendrick S. Houthakker and Stephen P. Magee, 45 Samuel J. Palmisano, “Th e Globally Integrated “Income and Price Elasticities in World Trade,” Enterprise,” Foreign Aff airs 85, no. 3 (2006). Review of Economics and Statistics 51, no. 2 (1969): pp. 46 C. Fred Bergsten et al., “China in the World 111-125. Economy: Opportunity or Th reat?” chap. 4 in China: 34 IMF, World Economic Outlook, September 2005, p. 99, Th e Balance Sheet: What the World Needs to Know table 2.2. Now About the Emerging Superpower (Washington, DC: Peter G. Peterson Institute for International 35 Baily and Lawrence, “Competitiveness and the Economics, 2006), p. 89. Assessment of Trade Performance,” pp. 232-234. 47 McKinsey Global Institute, A New Look at the U.S. 36 IMF, World Economic Outlook, Globalization and Current Account Defi cit: Th e Role of Multinational Infl ation, April 2006 (Washington, DC: IMF, 2006), Companies (New York: McKinsey & Company, 2004), p. 78, fi g. 2.5. p. 9; Lowe, “Ownership-Based Framework of the U.S. Current Account,” p. 46, table 1. Th is “ownership- 37 Higgins, Klitgaard, and Lerman, “Recycling based” measure adds to conventional exports and Petrodollars,” pp. 1-2. imports the net receipts of foreign affi liates. 38 IMF, statistical appendix to World Economic Outlook, 48 Yu Yongding, “Global Imbalances and China,” April 2007, pp. 250-257, tables 27, 28, and 30. Australian Economic Review 40, no. 1 (2007): pp. 10- 39 Th e calculation applies 2001 unit values to 2006 vol- 11. umes of imports and exports of petroleum products. 49 IMF World Economic Outlook Database, April U.S. Census Bureau, “FT900: U.S. International 2007. Trade in Goods and Services,” exhibits 9 and 17,
49 Endnotes
50 Sebastian Edwards, “Is the U.S. Current Account 55 For the background and history of the issue and Defi cit Sustainable? If Not, How Costly Is CFIUS, see Edward M. Graham and David Adjustment Likely to Be?” Brookings Papers on M. Marchick, US National Security and Foreign Economic Activity, 2005, no. 1: pp. 211-271. Direct Investment (Washington, DC: Institute for International Economics, 2006) and David M. 51 Catherine Mann, “Commentary: Th e End of Large Marchick, “Swinging the Pendulum Too Far: An Current Account Defi cits, 1970-2002: Are Th ere Analysis of the CFIUS Process Post-Dubai Ports Lessons for the United States?” Proceedings (Federal World” (policy brief, National Foundation for Reserve Bank of Kansas City) August 2005, pp. American Policy, Arlington, VA, January, 2007) 277-287; Maurice Obstfeld and Kenneth Rogoff , and David M. Marchick, Testimony before the House “Th e Unsustainable U.S. Current Account Position Financial Services Committee on Th e Committee on Revisited,” chap. 9 in Clarida, G7 Current Account Foreign Investment: One Year After Dubai Ports World, Imbalances, pp. 339-366; Edwards, “Is the U.S. 110th Cong., 1st sess., February 7, 2007. Current Account Defi cit Sustainable?” 56 Public Law No: 110-49 establishes the secretaries of 52 In 2005 Senators Chuck Schumer and Lindsey Treasury, Homeland Security, Commerce, Defense, Graham proposed legislation to impose across-the State, Energy and Labor, the Director of National board tariff s on Chinese imports. Offi ce of Senator Intelligence, the Attorney General (and other execu- Chuck Schumer, “Schumer-Graham Announce tive branch offi cials designated by the President) as Bipartisan Bill to Level Playing Field on China members of CFIUS. Th e new procedures would Trade,” news release, February 3, 2005, http://www. require more extensive Congressional reporting, for- senate.gov/~schumer/SchumerWebsite/pressroom/ malize the role of the National Intelligence Director, press_releases/2005/PR4111.China020305.html; and mandate a full investigation of proposed acquisi- David Barboza and Steven R. Weisman, “Paulson tions by companies owned by foreign governments. Urges China to Open Its Markets More Quickly,” See Victoria McGrane, “Changes to Investment Panel New York Times, March 8, 2007, p. C6; Mure Dickie, Cleared,” CQ Weekly, July 16, 2007, p. 2120. Eoin Callan, and Andy Bounds, “Chinese Products Face U.S. Import Duties,” Financial Times, March 57 Michiyo Nakamoto, “Japan Mulls Investment Fund to 30, 2007, p. 6; Stephanie Kirchgaessner, “Foreign Tackle Ageing Crisis,” Financial Times, April 23, 2007, Companies Face Huge U.S. Fines,” Financial Times, p. 7. February 27, 2007, p. 10. 58 Andrew Bary, “A World Awash in Money,” Barron’s, 53 An agreement on broad principles between the May 28, 2007, p. 19. administration and Congressional leadership was reached in May 2006 under which several recently 59 Andrew Bounds, “EU Signals Shift on Using Golden negotiated trade agreements (with Panama, Peru, Shares” Financial Times, June 23, 2007, p. 7. Colombia, and South Korea) might move forward 60 Krishna Guha, “US Grows Wary of Sovereign (after amendment) in exchange for the inclusion of Wealth Funds,” Financial Times, June 21, 2007, p. 8; provisions aff ecting labor and environmental stan- Daniel Gross, “Now It’s Th eir Turn to Buy U.S.,” Th e dards in the countries involved. However, it is uncer- Washington Post, June 3, 2007, p. B05. tain that there is suffi cient Congressional support to pass the legislation in the cases of South Korea and 61 Personal consumption rose quite steadily from 66.5 Colombia, and the agreement did not include approv- percent of GDP to 70.2 percent during 1991-2005. al of the President’s Trade Promotion Authority. See U.S. Bureau of Economic Analysis, “National Income Victoria McGrane, “Agreement on Labor Standards and Product Accounts Tables,” tables 1.1.5 and Breaks Deadlock on Trade Deal,” CQ Weekly, May 14, 2.3.5, 2007, http://www.bea.gov/national/nipaweb/ 2007, p. 1450. SelectTable.asp?Selected=N. 54 Robert McMahon, 110th Congress – Democrats and 62 Truman, “Postponing Global Adjustment,” p. 39, table Trade, Council on Foreign Relations, January 4, 2007, 1. Th e calculation here assumes 5 percent nominal http://www.cfr.org/publication/12339/. GDP growth and discounts the fall in the NIIP by up
50 Endnotes
to 1/2 for valuation changes, which have since 1982 Policy Research, September 18, 2006, http://www. off set nearly half of the cumulative deterioration in cepr.org/meets/wkcn/9/971/papers/krugman.pdf. the current account. 71 IMF, World Economic Outlook, April 2007, p. 16, fi g. 63 Foreign-owned direct investment and corporate 1.13. stocks in the U.S. were more than twice as large as the NIIP in 2006. U.S. Bureau of Economic Analysis, 72 IMF, World Economic Outlook, September 2006, p. 26, “International Investment Position at Yearend, 1976- box 1.3; Krugman, “Will Th ere Be a Dollar Crisis?” 2006.” Assuming this relationship going forward, the pp. 13-14. foreign-owned capital stock would be about 120-240 73 Menzie Chinn and Jeff rey Frankel, “Will the percent of GDP, or (with a capital-output ratio of Euro Eventually Surpass the Dollar as Leading roughly three), 40-80 percent of the total capital International Reserve Currency?” chap. 8 in Clarida, stock. G7 Current Account Imbalances, pp. 283-322. 64 IMF, Word Economic Outlook, April 2007, p. 85, box 74 Barry Eichengreen, “Global Imbalances and the 3.1. Lessons of Bretton Woods,” NBER Working Paper 65 Cline, Debtor Nation, p. 174; Raghuram Rajan, Series, no. 10497 (2004). former Economic Counsellor and Director of the 75 Edwin M. Truman and Anna Wong, “Th e Case for Research Department at the IMF, “Global Current an International Reserve Diversifi cation Standard,” Account Imbalances: Hard Landing or Soft Landing” Working Paper Series (Peter G. Peterson Institute for (speech, Credit Suiss First Boston Conference, Hong International Economics), 2006, no. 2. Kong, March 15, 2005). 76 Truman, “Postponing Global Adjustment.” 66 Paul R. Krugman, Has the Adjustment Process Worked? (Washington, DC: Peter G. Peterson 77 Adapted from Truman, “Postponing Global Institute for International Economics, 1991), pp. 7-8. Adjustment,” p. 13; using 2007 CBO estimates and assuming further depreciation of 20-30 percent on 67 Truman, “Postponing Global Adjustment,” p. 31. imports of 2.2 trillion and 50 percent pass through. Updated for 2007 estimates. Congressional Budget Congressional Budget Offi ce, Budget and Economic Offi ce, Th e Budget and Economic Outlook: Fiscal Outlook, p. 26, table 2-1. Years 2008 to 2017 (Washington, DC: Government Printing Offi ce, 2007), p. 26, table 2-1. 78 Richard N. Cooper, “Living with Global Imbalances: A Contrarian View,” Policy Briefs in International 68 Alan Greenspan, “International Imbalances” (speech, Economics (Peter G. Peterson Institute for Advancing Enterprise Conference, U.K. Department International Economics), 2005, no. 3. of Treasury, London, December 2, 2005). Other studies that emphasize long-term equilibrium adjust- 79 Nicholas P. Lardy, “China: Toward a Consumption- ment of saving, exchange rates, and relative prices Driven Growth Path,” Policy Briefs in International are Olivier Blanchard, Francesco Giavazzi, Filipa Sa, Economics (Peter G. Peterson Institute for “International Investors, the U.S. Current Account, International Economics), 2006, no. 6. and the Dollar,” Brookings Papers on Economic 80 Obstfeld and Rogoff , “Th e Unsustainable U.S. Activity, 2005, no. 1: pp. 211-271; Caballero, Current Account.” Th eir model suggests roughly a 30 Farhi, Gourinchas, “Equilibrium Model of ‘Global percent depreciation might be required for a 3 percent Imbalances’ and Low Interest Rates.” of GDP reduction in current account defi cit. 69 IMF, “Global Prospects and Policy Issues,” chap. 81 Cline, “Sustainability of the US Current Account 1 in World Economic Outlook, September 2006; Defi cit and the Risk of Crisis,” chap. 5 in Debtor Eichengreen, “Blind Men and the Elephant,” pp. 11- Nation. 12. 82 Edwards, “Is the U.S. Current Account Defi cit 70 Th is process is formally outlined by Paul Krugman, Sustainable?” “Will Th ere Be a Dollar Crisis?” Centre for Economic
51 Endnotes
83 Caroline Freund and Frank Warnock, “Current New Tax Framework: A Blueprint for Avoiding a Fiscal Account Defi cits in Industrial Countries: Th e Bigger Crisis (New York and Washington, DC: Committee Th ey Are, the Harder Th ey Fall?” chap. 4 in Clarida, for Economic Development, 2005); Research and G7 Current Account Imbalances, pp. 133-162. Policy Committee of the Committee for Economic Development, Exploding Defi cits, Declining Growth: 84 Notably Stephen Marris, Defi cits and Dollars: Th e Th e Federal Budget and the Aging of America (New World Economy at Risk (Washington, DC: Peter York and Washington, DC: Committee for Economic G. Peterson Institute for International Economics, Development, 2003); Research and Policy Committee 1987). of the Committee for Economic Development, Th e 85 Krugman, Has the Adjustment Process Worked? Emerging Budget Crisis: Urgent Fiscal Choices (New However, the sharp but temporary drop in the U.S. York and Washington, DC: Committee for Economic stock markets in 1987 may have been related to Development, 2005); Research and Policy Committee uncertainties related to the adjustments of exchange of the Committee for Economic Development, rates and monetary and fi scal policies. Cline, Debtor Fixing Social Security (New York and Washington, Nation, p. 179. Furthermore, McKinnon argues that DC: Committee for Economic Development, 1997); the sharp currency appreciations disrupted growth in Research and Policy Committee of the Committee Japan and Europe. Ronald McKinnon, “Th e Worth for Economic Development, Fixing Social Security: A of the Dollar,” Wall Street Journal, December 13, 2006, CED Policy Update (New York and Washington, DC: p. A18. Committee for Economic Development, 2005). 86 Barry Eichengreen, Global Imbalances and the Lessons 93 CED staff projections based on the Congressional of Bretton Woods (Cambridge, MA: MIT Press, Budget Offi ce’s March 2007 baseline modifi ed to 2007), pp. 141-143. refl ect the exclusion of an extrapolation of supple- mental appropriations required by baseline conven- 87 IMF, World Economic Outlook, September 2006, tions, a gradual reduction of military expenditures pp. 24-27, box 1.3; the model is elaborated in in Iraq and Afghanistan, an extension of tax cuts Hamid Faruqee et al., “Smooth Landing or Crash? scheduled to sunset, indexation of the AMT, and Model-based Scenarios of Global Current Account constant per capita domestic discretionary expendi- Rebalancing,” chap. 10 in Clarida, G7 Current Account tures, excluding homeland security. CED is grateful Imbalances, pp. 377-451. to the Council on Budget and Policy Priorities for assistance with the projections. For longer term pro- 88 Obstfeld and Rogoff , “Th e Unsustainable U.S. jections after 2017, see Congressional Budget Offi ce, Current Account;” IMF, “Th e Infl uence of Credit Th e Long-Term Budget Outlook (Washington, DC: Derivative and Structured Credit Markets on Government Printing Offi ce, 2005); Research and Financial Stability,” chap. 2 in Global Financial Stability Policy Committee of the Committee for Economic Report: Market Developments and Issues, April 2006 Development, Exploding Defi cits, Declining Growth; (Washington, DC: IMF, 2006). U.S. Government Accountability Offi ce, Th e Nation’s 89 IMF, World Economic Outlook, April 2007, p. 89. Long-Term Fiscal Outlook, April 2007 Update, GAO- 07-983R (Washington, DC, 2007). 90 Obstfeld and Rogoff , “Th e Unsustainable U.S. Current Account.” 94 Congressional Budget Offi ce, Budget and Economic Outlook, table 3-1, p. 50; Congressional Budget Offi ce, 91 See endnotes 55 and 56 above for discussion of Long-Term Budget Outlook, p. 10, table 1-1. CFIUS. 95 For a discussion of defense expenditures see Michael 92 Research and Policy Committee of the Committee E. O’Hanlon, Defense Strategy for the Post-Saddam for Economic Development, Restoring Prosperity: Era (Washington, DC: Brookings Institution Budget Choices for Economic Growth (New York Press, 2005); For a discussion of homeland secu- and Washington, DC: Committee for Economic rity expenditures see Congressional Budget Offi ce, Development, 1992); Research and Policy Committee Federal Funding for Homeland Security: An Update of the Committee for Economic Development, A (Washington, DC: Government Printing Offi ce,
52 Endnotes
2005); Veronique de Rugy, “What Does Homeland 103 See, for instance, Rodrigo de Rato, Managing Security Spending Buy?” AEI Working Paper, 2005, Director, IMF, “European Reform: Time to Step up no. 107. the Pace” (commentary in Il Sole 24 Ore newspaper, Italy, October 19, 2005); IMF, Germany: 2006 Article 96 Research and Policy Committee of the Committee IV Consultation – Staff Report; Staff Statement; and for Economic Development, Fixing Social Security; Public Information Notice on the Executive Board Research and Policy Committee of the Committee for Discussion (Washington, DC: IMF, July, 2006); IMF, Economic Development, Th e Employer-Based Health- France: 2006 Article IV Consultation – Staff Report; Insurance System Is Failing: What We Must Do About Staff Statement; and Public Information Notice on the It (New York and Washington, DC: Committee for Executive Board Discussion (Washington, DC: IMF, Economic Development, 2007). July, 2006); OECD, “Economic Policy Reforms: 97 Such border adjustments in theory would be off set by Going for Growth 2007 – European Union Country changes in the exchange rate. However, in practice, Note,” February 13, 2007, http://www.oecd.org/ given very large capital fl ows, this is unlikely. See dataoecd/48/19/38088845.pdf; Angel Gurría, C. Fred Bergsten, “A New Foreign Economic Policy OECD Secretary-General, “Creating More and Better for the United States,” chap. 1 in Th e United States Jobs in a Globalizing Economy,” (speech, Shaping and the World Economy: Foreign Economic Policy for the Social Dimension of Globalisation, Meeting of the Next Decade, eds. C. Fred Bergsten and the Peter G8 Employment and Labour Ministers, Dresden, G. Peterson Institute for International Economics Germany, May 7, 2007). (Washington, DC: Peter G. Peterson Institute for 104 BIS, “BIS Eff ective Exchange Rate Indices,” http:// International Economics, 2005), p. 30. www.bis.org/statistics/eer/index.htm (accessed 98 Research and Policy Committee of the Committee for August 2, 2007); Federal Reserve Bank of St. Louis, Economic Development, New Tax Framework. “Exchange Rates,” Monthly Rates, http://research. stlouisfed.org/fred2/categories/15 (accessed August 99 J. Mark Iwry, William G. Gale, and Peter R. Orszag 1, 2007). Real eff ective exchange rates are based on “Th e Potential Eff ects of Retirement Security relative consumer prices. Project Proposals on Private and National Saving: Exploratory Calculations,” (policy brief, Retirement 105 IMF, Japan: 2006 Article IV Consultation – Staff Security Project, Washington, DC, 2006); Richard Report; Staff Statement; and Public Information Notice H. Th aler and Shlomo Benartzi, “Save More on the Executive Board Discussion (Washington, DC: Tomorrow: Using Behavioral Economics to Increase IMF, 2006), p. 13. Employee Saving,” Journal of Political Economy 112, 106 Ibid, pp. 27-28. IMF economic model simulations no. 1, (2004): pp. 164-187. suggest that an additional 1/4 percent per year in 100 Federal Reserve Board, “Summary Measures of the productivity growth combined with a moderate rise Foreign Exchange Value of the Dollar,” Price-adjusted in female labor participation would lower Japan’s Broad Dollar Index, 2007, http://www.federalreserve. current account by 1/3 percent of GDP relative to the gov/releases/h10/Summary/. baseline. 101 IMF, United States: 2006 Article IV Consultation – 107 Ministry of Commerce of the People’s Republic of Staff Report; Staff Statement; and Public Information China, “Main Indicators of Financial Trade and Notice on the Executive Board Discussion (Washington, Economy (2007/01-05),” http://english.mofcom.gov. DC: IMF, July 2006), p. 16; Alan Ahearne et al., cn/aarticle/statistic/ieindicators/200707/20070704 “Global Imbalances: Time for Action,” Policy Briefs in 881664.html (accessed August 3, 2007). International Economics (Peter G. Peterson Institute 108 Bergsten et al., China: Th e Balance Sheet, chaps. 2 and for International Economics), 2007, no. 4: p. 6, table 4. 1. 109 Ma Kai, Minister, National Development and 102 IMF, “Exchange Rates and the Adjustment of Reform Commission, People’s Republic of China, External Imbalances,” chap. 3 in World Economic “Th e 11th Five-Year Plan: Targets, Paths and Policy Outlook, April 2007. Orientation,” ministerial statement, March 19, 2006.
53 Endnotes
110 Nicholas R. Lardy, “China: Toward a Consumption- demand in emerging Asia, together with greater Driven Growth Path,” Policy Briefs in International exchange rate fl exibility in a number of surplus coun- Economics (Peter G. Peterson Institute for tries; and increased spending consistent with absorp- International Economics), 2006, no. 6. tive capacity and macroeconomic stability in oil- producing countries.” See IMFC, “Communiqué of 111 Wing Th ye Woo, “Th e Structural Nature of Internal the International Monetary and Financial Committee and External Imbalances in China,” Brookings of the Board of Governors of the International Institution, December 29, 2005, http://www.econ. Monetary Fund,” IMF, September 17, 2006, http:// ucdavis.edu/faculty/woo/Woo.JCEBS.31Dec05.pdf. www.imf.org/external/np/cm/2006/091706.htm; Wing argues that the lack of effi cient intermediation IMF, “IMF’s International Monetary and Financial of saving is a major source of the large Chinese cur- Committee Reviews Multilateral Consultation,” press rent account surplus. release no. 07/72, April 14, 2007. 112 IMF, People’s Republic of China: 2006 Article IV 119 Lipsky, “Multilateral Approach to Global Imbalances.” Consultation. Th e report recommended renminbi appreciation, but did not specify a numerical amount. 120 Scheherazade Daneshkhu, “World Bank/IMF Meetings: Big Economies RenewVow on Imbalances,” 113 IMF, “IMF Managing Director Rodrigo de Rato Financial Times, April 16, 2007, p. 7. Welcomes the Large Investment Programs in the GCC Countries and Highlights the Importance 121 Edwin M. Truman, A Strategy for IMF Reform of Planned Monetary Union,” press release (Washington, DC: Peter G. Peterson Institute for no. 06/240, November 4, 2006; IMF, “IMF International Economics, 2006), p. 78. Executive Board Concludes 2006 Article IV 122 IMF, Independent Evaluation Offi ce, An IEO Consultation with Saudi Arabia,” public informa- Evaluation of IMF Exchange Rate Policy Advice, 1999- tion notice no. 06/108, September 27, 2006. 2005 (Washington, DC: IMF, 2007), p. 14. Th e 114 John Lipsky, “Th e Multilateral Approach to Global reference is to the experience of both offi cial authori- Imbalances” (speech, Brussels Economic Forum, ties that received IMF advice and IMF staff . European Commission, Brussels, Belgium, May 31, 123 Ibid. 2007). 124 IMF, “IMF Executive Board Adopts New Decision on 115 Wall Street Journal, “Kuwait Abandons Peg to Dollar, Bilateral Surveillance Over Members’ Policies,” public Putting Pressure on Gulf States,” May 21, 2007, p. information notice no. 07/69, June 21, 2007. A4. 125 Truman, Strategy for IMF Reform; Edwin M. 116 Ahearne et al., “Global Imbalances: Time for Action,” Truman, ed., Reforming the IMF for the 21st Century p. 7, footnote 14. (Washington, DC: Peter G. Peterson Institute for 117 Such a standard has been proposed by Truman International Economics, 2006). and Wong. See Truman and Wong, “Case for an International Reserve Diversifi cation Standard.” 118 Th at strategy encompassed “steps to boost national saving in the United States, including fi scal consolida- tion; further progress on growth-enhancing reforms in Europe; further structural reforms, including fi scal consolidation in Japan; reforms to boost domestic
54 CED Trustees
Co-Chairs CHARLES E.M. KOLB COUNTESS MARIA BEATRICE ARCO W. BOWMAN CUTTER President Chair Managing Director Committee for Economic Development American Asset Corporation Warburg Pincus LLC WILLIAM W. LEWIS DEBORAH HICKS BAILEY RODERICK M. HILLS Director Emeritus Chairman & CEO Chairman McKinsey Global Institute Solon Group, Inc. McKinsey & Company, Inc. Hills Stern & Morley LLP EDWARD N. BASHA, JR. BRUCE K. MACLAURY Chief Executive Offi cer President Emeritus Basha Grocery Stores Executive Committee Th e Brookings Institution NADINE BASHA IAN ARNOF STEFFEN E. PALKO Chair Chairman Vice Chairman & President (Retired) Arizona Early Childhood Development Arnof Family Foundation XTO Energy and Health Board
PETER BENOLIEL DONALD K. PETERSON ALAN BELZER Chairman Emeritus Chairman & CEO (Retired) President & Chief Operating Offi cer Quaker Chemical Corporation Avaya Inc. (Retired) Allied Signal ROY J. BOSTOCK DONNA SHALALA Chairman President DEREK C. BOK Sealedge Investments, LLC University of Miami Interim President Harvard University FLETCHER L. BYROM FREDERICK W. TELLING President & CEO Vice President, Corporate Strategic Planning LEE C. BOLLINGER MICASU Corporation Pfi zer Inc. President Columbia University FRANK P. DOYLE JOSH S. WESTON Executive Vice President (Retired) Honorary Chairman STEPHEN W. BOSWORTH General Electric Company Automatic Data Processing, Inc. Dean Fletcher School of Law and Diplomacy EDMUND B. FITZGERALD RONALD L. ZARRELLA Tufts University Managing Director Chairman & CEO Woodmont Associates Bausch & Lomb JACK O. BOVENDER Chairman & CEO JOSEPH GANTZ HCA-Health Care Corporation of Partner America GG Capital, LLC Board of Trustees JOHN BRADEMAS PATRICK W. GROSS KENT M. ADAMS President Emeritus Chairman President New York University Th e Lovell Group Caterpillar Inc. RANDY J. BRAUD STEVEN GUNBY PAUL A. ALLAIRE U.S. Country Controller Chairman, Th e Americas & Senior Vice Chairman (Retired) Shell Oil Company President Xerox Corporation Th e Boston Consulting Group, Inc. STEPHEN E. ALLIS WILLIAM E. BROCK Founder and Senior Partner JAMES A. JOHNSON Partner in Charge of Government Aff airs Th e Brock Group Vice Chairman KPMG LLP Perseus Capital HERBERT M. ALLISON BETH BROOKE Global Vice Chair, Strategy, THOMAS J. KLUTZNICK Chairman, President, & CEO Communications, President TIAA-CREF and Regulatory Aff airs Th omas J. Klutznick Co. Ernst & Young, LLP
55 CED Trustees
ROBERT H. BRUININKS STEPHEN A. CRANE W.D. EBERLE President Chairman Chairman University of Minnesota Insurance and Re-insurance Strategies Manchester Associates, Ltd.
DONALD R. CALDWELL DENNIS C. CUNEO ROBERT A. ESSNER Chairman & Chief Executive Offi cer Counsel Chairman, President & CEO Cross Atlantic Capital Partners Arent Fox Wyeth
DAVID A. CAPUTO KENNETH W. DAM ALLEN I. FAGIN President Max Pam Professor Emeritus of American Chairman Pace University and Foreign Law and Senior Lecturer Proskauer Rose LLP University of Chicago Law School GERHARD CASPER DIANA FARRELL President Emeritus PAUL DANOS Director Stanford University Dean, Th e Amos Tuck School of Business McKinsey Global Institute Dartmouth College McKinsey & Company, Inc. RAYMOND G. CHAMBERS Chairman of the Board (Retired) RONALD R. DAVENPORT KATHLEEN FELDSTEIN Amelior Foundation Chairman of the Board President Sheridan Broadcasting Corporation Economics Studies, Inc. ROBERT B. CHESS Chairman RICHARD H. DAVIS TREVOR FETTER Nektar Th erapeutics Partner President & CEO Davis Manafort, Inc. Tenet Healthcare Corporation MICHAEL CHESSER Chairman, President & CEO RICHARD J. DAVIS MATTHEW FINK Great Plains Energy Services Senior Partner President (Retired) Weil, Gotshal & Manges LLP Investment Company Institute CAROLYN CHIN Chairman & Chief Executive Offi cer JOHN J. DEGIOIA PATRICK FORD Cebiz President President & CEO, USA Georgetown University Burson-Marsteller JOHN L. CLENDENIN Chairman (Retired) SAMUEL A. DIPIAZZA HARRY FREEMAN BellSouth Corporation Global Chief Executive Offi cer Chairman PricewaterhouseCoopers LLP Th e Mark Twain Institute ELIZABETH COLEMAN President LINDA M. DISTLERATH, PH.D MITCHELL S. FROMSTEIN Bennington College Vice President, Global Health Policy Chairman Emeritus Merck & Co., Inc. Manpower Inc. FERDINAND COLLOREDO MANSFELD WILLIAM H. DONALDSON CONO R. FUSCO Partner Chairman Managing Partner - Strategic Relationships Cabot Properties, LLC Donaldson Enterprises Grant Th ornton
GEORGE H. CONRADES IRWIN DORROS PAMELA B. GANN Chairman & Chief Executive Offi cer President President Akamai Technologies Inc. Dorros Associates Claremont McKenna College
KATHLEEN B. COOPER ROBERT H. DUGGER E. GORDON GEE Dean, College of Business Administration Managing Director Chancellor University of North Texas Tudor Investment Corporation Vanderbilt University
DAVID M. COTE T. J. DERMOT DUNPHY THOMAS P. GERRITY Chairman & CEO Chairman Joseph J. Aresty Professor Honeywell International Inc. Kildare Enterprises, LLC Professor of Management Th e Wharton School of the University of DAVID CRANE CHRISTOPHER D. EARL, PH.D Pennsylvania President & CEO President & CEO NRG Energy, Inc. BIO Ventures for Global Health
56 CED Trustees
ALAN B. GILMAN HEATHER R. HIGGINS JOSEPH E. KASPUTYS Chairman President Chairman, President & CEO Th e Steak n Shake Company Randolph Foundation Global Insight, Inc.
CAROL R. GOLDBERG HAYNE HIPP WILLIAM E. KIRWAN President Chairman & CEO (Retired) Chancellor Th e AvCar Group, Ltd. Th e Liberty Corporation University System of Maryland
ALFRED G. GOLDSTEIN JOHN HOFFMEISTER KAKUTARO KITASHIRO President & Chief Executive Offi cer President Chairman AG Associates Shell Oil Company IBM Japan
JOSEPH T. GORMAN PAUL M. HORN YOTARO KOBAYASHI Chairman & CEO (Retired) Senior Vice President, Research Senior Corporate Advisor and Former TRW Inc. IBM Corporation Chairman Fuji Xerox EARL G. GRAVES PHILIP K. HOWARD Chairman & Publisher Partner, Senior Corporate Advisor, THOMAS F. LAMB, JR. Earl G. Graves Publishing Co., Inc. and Strategist Senior Vice President, Government Aff airs Covington & Burling PNC Financial Services Group, Inc. GERALD GREENWALD Chairman SHIRLEY ANN JACKSON KURT M. LANDGRAF Greenbriar Equity Group President President & CEO Rensselaer Polytechnic Institute Educational Testing Service BARBARA B. GROGAN Founder CHARLENE DREW JARVIS W. MARK LANIER, ESQ. Western Industrial Contractors President Partner Southeastern University Th e Lanier Law Firm P.C. JEROME H. GROSSMAN Senior Fellow WILLIAM C. JENNINGS RICK A. LAZIO Kennedy School Health Care Delivery Chairman Executive Vice President, Global Project US Interactive, Inc. Government Relations & Public Policy Harvard University J.P. Morgan Chase & Co. JEFFREY A. JOERRES RONALD GRZYWINSKI Chairman & CEO ROBERT G. LIBERATORE Chairman Manpower Inc. Group Senior Vice President ShoreBank Corporation Global External Aff airs and Public Policy L. OAKLEY JOHNSON DaimlerChrysler Corporation ADAM J. GUTSTEIN Senior Vice President, Corporate Aff airs Chief Executive Offi cer American International Group, Inc. JOHN LIFTIN Diamond Management & Technology Vice Chairman, General Counsel and Consultants, Inc. VAN E. JOLISSAINT Secretary Corporate Economist Th e Bank of New York JUDITH H. HAMILTON DaimlerChrysler Corporation Chairman & CEO (Retired) IRA A. LIPMAN Classroom Connect ROBERT L. JOSS Founder & Chairman Dean, Graduate School of Business Guardsmark, LLC HOLLIS HART Stanford University Director, International Operations JOHN C. LOOMIS Citigroup Inc. PRES KABACOFF Vice President, Human Resources Chief Executive Offi cer General Electric Company WILLIAM HASELTINE HRI Properties President LI LU Haseltine Associates ROBERT KAHN President Director, Country Risk Management Himalaya Management RICHARD H. HERSH Citigroup Inc. Former President COLETTE MAHONEY Trinity College EDWARD A. KANGAS President Emeritus Global Chairman & CEO (Retired) Marymount Manhattan College Deloitte Touche Tohmatsu
57 CED Trustees
ELLEN R. MARRAM NICHOLAS G. MOORE GEORGE A. RANNEY, JR. President Senior Counsel and Director President & CEO Barnegat Group LLC Bechtel Group, Inc. Chicago Metropolis 2020
CECILIA MARTINEZ DONNA S. MOREA NED REGAN Executive Director President, U.S. Operations & India University Professor Th e Reform Institute CGI Th e City University of New York
DAVID MAXWELL JAMES C. MULLEN E.B. ROBINSON, JR. President President & CEO Chairman (Retired) Drake University Biogen Idec Inc. Deposit Gurantee Corporation
T. ALLAN MCARTOR DIANA S. NATALICIO JAMES D. ROBINSON III Chairman President Partner Airbus of North America, Inc. Th e University of Texas at El Paso RRE Ventures
ALONZO L. MCDONALD MATTHEW NIMETZ JAMES E. ROHR Chairman & Chief Executive Offi cer Managing Partner Chairman & CEO Avenir Group, Inc. General Atlantic LLC PNC Financial Services Group, Inc.
WILLIAM J. MCDONOUGH DEAN R. O’HARE ROY ROMER Vice Chairman and Special Advisor Chairman & CEO, (Retired) Superintendent of Schools (Retired) to the Chairman Th e Chubb Corporation LA Unifi ed School District Merrill Lynch & Co., Inc. RONALD L. OLSON DANIEL ROSE DAVID E. MCKINNEY Partner Chairman Vice Chair Munger, Tolles & Olson LLP Rose Associates, Inc. Th omas J. Watson Foundation M. MICHEL ORBAN LANDON H. ROWLAND SUSAN R. MEISINGER Partner Chairman President & Chief Executive Offi cer RRE Ventures EverGlades Financial Society for Human Resource Management JERRY PARROTT NEIL L. RUDENSTINE V.P., Corporate Communications Chair, ArtStor Advisory Board LENNY MENDONCA and Public Policy Andrew W. Mellon Foundation Chairman Human Genome Sciences, Inc. McKinsey Global Institute GEORGE E. RUPP McKinsey & Company, Inc. CAROL J. PARRY President President International Rescue Committee ALAN G. MERTEN Corporate Social Responsibility President Associates EDWARD B. RUST George Mason University Chairman & CEO VICTOR A. PELSON State Farm Insurance Companies HARVEY R. MILLER Senior Advisor Managing Director UBS Securities LLC ARTHUR F. RYAN Greenhill & Co., LLC President, Chairman & CEO PETER G. PETERSON Prudential Financial ALFRED T. MOCKETT Senior Chairman Chairman & CEO Th e Blackstone Group BERTRAM L. SCOTT Motive, Inc. President, TIAA-CREF Life Insurance TODD E. PETZEL Company AVID MODJTABAI Managing Director and Chief Investment TIAA-CREF Executive Vice President and Offi cer Chief Information Offi cer Azimuth Trust Management, LLC JOHN E. SEXTON Wells Fargo & Co. President DOUG PRICE New York University G. MUSTAFA MOHATAREM Founder Chief Economist Educare Colorado WALTER H. SHORENSTEIN General Motors Corporation Chairman of the Board Shorenstein Company LLC
58 CED Trustees
GEORGE P. SHULTZ LAWRENCE H. SUMMERS JOHN P. WHITE Distinguished Fellow Managing Director Lecturer in Public Policy Th e Hoover Institution Shaw & Co., L.P. Harvard University Charles W. Elliot University Professor JOHN C. SICILIANO Harvard University HAROLD M. WILLIAMS Partner President Emeritus Grail Partners LLC HENRY TANG Getty Trust Governor FREDERICK W. SMITH Committee of 100 LINDA SMITH WILSON Chairman, President & CEO President Emerita FedEx Corporation JAMES A. THOMSON Radcliff e College President & Chief Executive Offi cer SARAH G. SMITH RAND MARGARET S. WILSON Chief Accounting Offi cer Chairman & CEO Goldman Sachs Group Inc. STEPHEN JOEL TRACHTENBERG Scarbroughs President IAN D. SPATZ George Washington University H. LAKE WISE Vice President, Public Policy Executive Vice President and Chief Legal Merck & Co., Inc. TALLMAN TRASK, III Offi cer Executive Vice President Daiwa Securities America Inc. STEVEN SPECKER Duke University Chairman & Chief Executive Offi cer JACOB J. WORENKLEIN Electric Power Research Institute VAUGHN O. VENNERBERG Chief Executive Offi cer Senior Vice President and Chief of Staff US Power Generating Company, LLC ALAN G. SPOON XTO Energy Inc. Managing General Partner KURT E. YEAGER Polaris Venture Partners ROBERT J. VILHAUER President Emeritus Vice President, Public Policy and Analysis Electric Power Research Institute JAMES D. STALEY Th e Boeing Company President & CEO RONALD L. ZARRELLA YRC Regional Transportation JAMES L. VINCENT Chairman & CEO Chairman (Retired) Bausch & Lomb Inc. PAULA STERN Biogen Inc. Chairwoman STEVEN ZATKIN Th e Stern Group, Inc. FRANK VOGL Senior Vice President, Government Relations President Kaiser Foundation Health Plan, Inc. DONALD M. STEWART Vogl Communications Professor EDWARD J. ZORE Th e University of Chicago DONALD C. WAITE President & CEO Director Northwestern Mutual ROGER W. STONE McKinsey & Company, Inc. Chairman Roger and Susan Stone Family JERRY D. WEAST Foundation Superintendent of Schools Montgomery County Public Schools MATTHEW J. STOVER Chairman LKM Ventures, LLC
59 CED Honorary Trustees
RAY C. ADAM ALFRED C. DECRANE, JR. LEON C. HOLT, JR. Retired Chairman Retired Vice Chairman and Chief ROBERT O. ANDERSON Texaco Corporation Administrative Offi cer Retired Chairman Air Products and Chemicals, Inc. Hondo Oil & Gas Company ROBERT R. DOCKSON Chairman Emeritus SOL HURWITZ ROY L. ASH CalFed, Inc. Retired President Retired Chairman Committee for Economic Development Litton Industries LYLE J. EVERINGHAM Retired Chairman GEORGE F. JAMES ROBERT H. BALDWIN Th e Kroger Co. Retired Chairman DAVID T. KEARNS Morgan Stanley THOMAS J. EYERMAN Chairman Emeritus Retired Partner New American Schools Development GEORGE F. BENNETT Skidmore, Owings & Merrill Corporation Chairman Emeritus State Street Investment Trust DON C. FRISBEE GEORGE M. KELLER Chairman Emeritus Retired Chairman of the Board HAROLD H. BENNETT Pacifi Corp Chevron Corporation
JACK F. BENNETT RICHARD L. GELB FRANKLIN A. LINDSAY Retired Senior Vice President Chairman Emeritus Retired Chairman ExxonMobil Corporation Bristol-Myers Squibb Company Itek Corporation
HOWARD BLAUVELT W. H. K. GEORGE ROBERT W. LUNDEEN Retired Chairman Retired Chariman ALAN S. BOYD ALCOA Th e Dow Chemical Company Retired Vice Chairman Airbus Industrie North America WALTER B. GERKEN RICHARD B. MADDEN Retired Chairman & Chief Executive Offi cer Retired Chairman & Chief Executive Offi cer ANDREW F. BRIMMER Pacifi c Investment Management Co. Potlatch Corporation President Brimmer & Company, Inc. LINCOLN GORDON AUGUSTINE R. MARUSI Former President Retired Chairman PHILIP CALDWELL Johns Hopkins University Borden Inc. Retired Chairman Ford Motor Company JOHN D. GRAY WILLIAM F. MAY Chairman Emeritus Former Chairman & CEO HUGH M. CHAPMAN Hartmarx Corporation Statue of Liberty-Ellis Island Foundation Retired Chairman Nations Bank of Georgia JOHN R. HALL OSCAR G. MAYER Retired Chairman Retired Chariman E. H. CLARK, JR. Ashland Inc. Oscar Mayer & Co. Chairman & Chief Executive Offi cer Th e Friendship Group RICHARD W. HANSELMAN JOHN F. MCGILLICUDDY Former Chairman Retired Chairman & Chief Executive Offi cer A. W. CLAUSEN Health Net Inc.. J.P. Morgan Chase & Co. Retired Chairman & Chief Executive Offi cer Bank of America ROBERT S. HATFIELD JAMES W. MCKEE, JR. Retired Chairman Retired Chairman DOUGLAS D. DANFORTH Th e Continental Group CPC International, Inc. Executive Associates PHILIP M. HAWLEY CHAMPNEY A. MCNAIR JOHN H. DANIELS Retired Chairman of the Board Retired Vice Chairman Retired Chairman & CEO Carter Hawley Hale Stores, Inc. Trust Company of Georgia Archer Daniels Midland Company ROBERT C. HOLLAND J. W. MCSWINEY RALPH P. DAVIDSON Senior Fellow Retired Chairman of the Board Retired Chairman Th e Wharton School of the University of MeadWestvaco Corporation Time Inc. Pennsylvania
60 CED Honorary Trustees
ROBERT E. MERCER DEAN P. PHYPERS ROCCO C. SICILIANO Retired Chairman Retired Chief Financial Offi cer Th e Goodyear Tire & Rubber Company IBM Corporation ELMER B. STAATS Former Controller General of the United RUBEN F. METTLER ROBERT M. PRICE States Retired Chairman & Chief Executive Offi cer Retired Chairman & Chief Executive Offi cer TRW, Inc. Control Data Corporation FRANK STANTON Retired President LEE L. MORGAN JAMES J. RENIER CBS Corporation Retired Chairman of the Board Retired Chairman & CEO Caterpillar Inc. Honeywell Inc. EDGER B. STERN, JR. Chairman of the Board ROBERT R. NATHAN JAMES Q. RIORDAN Royal Street Corporation Chairman Chairman Nathan Associates Quentin Partners co. ALAXANDER L. STOTT
JAMES J. O’CONNOR IAN M. ROLLAND WAYNE E. THOMPSON Retired Chairman & Chief Executive Offi cer Retired Chairman & Chief Executive Offi cer Retired Chairman Exelon Corporation Lincoln National Corporation Merritt Peralta Medical Center
LEIF H. OLSEN AXEL G. ROSIN THOMAS A. VANDERSLICE Chairman Retired Chairman SIDNEY J. WEINBERG, JR. LHO Group Book-of-the-Month Club, Inc. Senior Director NORMA PACE WILLIAM M. ROTH Goldman Sachs Group Inc. President CLIFTON R. WHARTON, JR. Paper Analytics Associates THE HONORABLE WILLIAM RUDER Former Chairman & CEO CHARLES W. PARRY Former US Assistant Secretary of Commerce TIAA-CREF Retired Chairman DOLORES D. WHARTON ALCOA RALPH S. SAUL Retired Chairman of the Board Former Chairman & CEO WILLIAM R. PEARCE CIGNA Corporation Th e Fund for Corporate Initiatives Director ROBERT C. WINTERS American Express Mutual Funds GEORGE A. SCHAEFER Retired Chairman of the Board Chairman Emeritus JOHN H. PERKINS Caterpillar Inc. Prudential Financial Retired President RICHARD D. WOOD Continental Illinois National Bank and ROBERT G. SCHWARTZ Retired Chief Executive Offi cer Trust Company MARK SHEPHERD, JR. Eli Lilly and Company Retired Chairman Texas Instruments Incorporated CHARLES J. ZWICK
61 CED Research Advisory Board
Chair: DOUGLAS HOLTZEAKIN Economic Policy Chair JOHN L. PALMER John McCain 2008 University Professor and Dean Emeritus Th e Maxwell School HELEN LADD Syracuse University Professor of Economics Duke University
ROBERT E. LITAN Members: Vice President, Research & Policy Ewing Marion Kauff man Foundation ANTHONY CORRADO Charles A. Dana Professor of Government ZANNY MINTONBEDDOES Colby College Washington Economics Correspondent Th e Economist ALAIN C. ENTHOVEN Marriner S. Eccles Professor of Public & Private Management, WILLIAM D. NORDHAUS Emeritus Sterling Professor of Economics Stanford University Cowles Foundation Yale University BENJAMIN M. FRIEDMAN William Joseph Maier Professor of Political Economy RUDOLPH PENNER Harvard University Arjay and Frances Miller Chair in Public Policy Th e Urban Institute ROBERT HAHN Executive Director HAL VARIAN AEI-Brookings Joint Center Professor at Haas School of Business University of California Berkeley
62 CED Staff
CHARLES E.M. KOLB President
Research Development
JOSEPH J. MINARIK MARTHA E. HOULE Senior Vice President and Director of Research Vice President for Development and Secretary of the Board of Trustees
JANET HANSEN Vice President and Director of Education Studies RICHARD M. RODERO Director of Development
ELLIOT SCHWARTZ JENNA IBERG Vice President and Director of Economic Studies Development Associate
VAN DOORN OOMS Finance and Administration Senior Fellow LAURIE LEE Chief Financial Offi cer and Vice President of Finance and MATTHEW SCHURIN Administration Research Associate
ANDRINE COLEMAN DAPHNE MCCURDY Accounting Manager Research Associate
JERI MCLAUGHLIN JULIE KALISHMAN Executive Assistant to the President Research Associate
AMANDA TURNER Communications/Government Relations Director of Administration MICHAEL J. PETRO Vice President and Director of Business and JANVIER RICHARDS Government Relations and Chief of Staff Accounting Associate
MORGAN BROMAN Director of Communications
AMY MORSE Communications and Outreach Associate
ROBIN SAMERS Director of Trustee Relations
JEANNETTE FOURNIER Director of Foundation Relations
63 Statements On National Policy Issued By The Committee For Economic Development
Selected Recent Publications: Built to Last: Focusing Corporations on Long-Term How Economies Grow: Th e CED Perspective on Raising Performance (2007) the Long-Term Standard of Living (2003) Th e Employer-based Health-Insurance System (EBI) Is At Learning for the Future: Changing the Culture of Math and Risk: What We Must Do About It (2007) Science Education to Ensure a Competitive Workforce Th e Economic Promise of Investing in High-Quality (2003) Preschool: Using Early Education to Improve Economic Exploding Defi cits, Declining Growth: Th e Federal Budget Growth and the Fiscal Sustainability of States and the and the Aging of America (2003) Nation (2006) Justice for Hire: Improving Judicial Selection (2002) Open Standards, Open Source, and Open Innovation: A Shared Future: Reducing Global Poverty (2002) Harnessing the Benefi ts of Openness (2006) A New Vision for Health Care: A Leadership Role for Private Enterprise, Public Trust: Th e State of Corporate Business (2002) America After Sarbanes-Oxley (2006) Preschool For All: Investing In a Productive and Just Society Th e Economic Benefi ts of High-Quality Early Childhood (2002) Programs: What Makes the Diff erence? (2006) From Protest to Progress: Addressing Labor and Education for Global Leadership: Th e Importance of Environmental Conditions Th rough Freer Trade (2001) International Studies and Foreign Language Education Th e Digital Economy: Promoting Competition, Innovation, for U.S. Economic and National Security (2006) and Opportunity (2001) A New Tax Framework: A Blueprint for Averting a Fiscal Reforming Immigration: Helping Meet America’s Need for Crisis (2005) a Skilled Workforce (2001) Cracks in the Education Pipeline: A Business Leader’s Measuring What Matters: Using Assessment and Guide to Higher Education Reform (2005) Accountability to Improve Student Learning (2001) Th e Emerging Budget Crisis: Urgent Fiscal Choices (2005) Improving Global Financial Stability (2000) Making Trade Work: Straight Talk on Jobs, Trade, and Th e Case for Permanent Normal Trade Relations with Adjustments (2005) China (2000) Building on Reform: A Business Proposal to Strengthen Welfare Reform and Beyond: Making Work Work (2000) Election Finance (2005) Breaking the Litigation Habit: Economic Incentives for Developmental Education: Th e Value of High Quality Legal Reform (2000) Preschool Investments as Economic Tools (2004) New Opportunities for Older Workers (1999) A New Framework for Assessing the Benefi ts of Early Education (2004) Investing in the People’s Business: A Business Proposal for Campaign Finance Reform (1999) Promoting Innovation and Economic Growth: Th e Special Problem of Digital Intellectual Property (2004) Th e Employer’s Role in Linking School and Work (1998) Investing in Learning: School Funding Policies to Foster Employer Roles in Linking School and Work: Lessons from High Performance (2004) Four Urban Communities (1998) Promoting U.S. Economic Growth and Security Th rough America’s Basic Research: Prosperity Th rough Discovery Expanding World Trade: A Call for Bold American (1998) Leadership (2003) Modernizing Government Regulation: Th e Need For Reducing Global Poverty: Engaging the Global Enterprise Action (1998) (2003) U.S. Economic Policy Toward Th e Asia-Pacifi c Region Reducing Global Poverty: Th e Role of Women in (1997) Development (2003) Connecting Inner-City Youth To Th e World of Work (1997)
64 CED Counterpart Organizations Close relations exist between the Committee for Economic Development and independent, nonpolitical research organizations in other countries. Such counterpart groups are composed of business executives and scholars and have objectives similar to those of CED, which they pursue by similarly objective methods. CED cooperates with these organizations on research and study projects of common interest to the various countries concerned. Th is program has resulted in a number of joint policy statements involving such international matters as energy, assis- tance to developing countries, and the reduction of nontariff barriers to trade.
CE Circulo de Empresarios Madrid, Spain
CEAL Consejo Empresario de America Latina Buenos Aires, Argentina
CEDA Committee for Economic Development of Australia Sydney, Australia
CIRD China Institute for Reform and Development Hainan, People’s Republic of China
EVA Centre for Finnish Business and Policy Studies Helsinki, Finland
FAE Forum de Administradores de Empresas Lisbon, Portugal
IDEP Institut de l’Entreprise Paris, France
IW Institut der deutschen Wirtschaft Koeln Cologne, Germany
Keizai Doyukai Tokyo, Japan
SMO Stichting Maatschappij en Onderneming Th e Netherlands
SNS Studieförbundet Naringsliv och Samhälle Stockholm, Sweden
65
Reducing Risks From Global Imbalances Committee for Economic Development
2000 L Street N.W., Suite 700 Washington, D.C. 20036 202-296-5860 Main Number 202-223-0776 Fax 1-800-676-7353
www.ced.org A Statement by the Research and Policy Committee of the Committee for Economic Development