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Monday, November 22, 2010

"Rebalancing The Global Economy"

Here are my comments on Ben Bernanke's speech "Rebalancing the Global Economy" which was delivered at the Sixth European Central Banking Conference in Frankfurt, Germany on 19 November 2010. I have quoted here salient extracts. For the complete speech use the link at the bottom of this post.

"...in an international system in which exchange rates were allowed to fully reflect market fundamentals …, advanced economies would pursue accommodative monetary policies as needed to foster recovery and to guard against unwanted disinflation. At the same time, emerging market economies would tighten their own monetary policies to the degree needed to prevent overheating and inflation. The resulting increase in emerging market interest rates relative to those in the advanced economies would naturally lead to increased capital flows from advanced to emerging economies and, consequently, to currency appreciation in emerging market economies. This currency appreciation would in turn tend to reduce net exports and current account surpluses in the emerging markets, thus helping cool these rapidly growing economies while adding to demand in the advanced economies. Moreover, currency appreciation would help shift a greater proportion of domestic output toward satisfying domestic needs in emerging markets. The net result would be more balanced and sustainable global economic growth." Ben Bernanke, Rebalancing the Global Economy (19 Nov 2010)

Bernanke argues for emerging economies to act according to "market fundamentals" to prevent their economies "overheating" when the truth is that he wants US growth to increase at the cost of emerging-economy growth. To make this plea under the pretext that this would be good for developing economies and lead to "more balanced and sustainable global economic growth" is duplicitous. He no-where in his speech acknowledges the massive wealth inequalities the world now has and the need to rebalance these, a rebalancing that must entail slower growth for developed economies (particularly the most developed economy) and faster growth for emerging economies. We are a long way from equality, so there is a long way to go before growth rate differentials need to be "rebalanced". If we want all countries to be developed countries (and all people to rise out of poverty) then we need to accept large growth differentials until this equality is reached, then it will be time for even growth.

"Globally, both growth and trade are unbalanced, as reflected in the two-speed recovery and in persistent current account surpluses and deficits. Neither situation is sustainable. Because a strong expansion in the emerging market economies will ultimately depend on a recovery in the more advanced economies." Ben Bernanke, Rebalancing the Global Economy (19 Nov 2010)

There is no current evidence that a "two-speed recovery" with "persistent current account surpluses and deficits" is unsustainable. That "strong expansion in the emerging market economies will ultimately depend on a recovery in the more advanced economies" is questionable. Perhaps "ultimately" it is true, but this is saying little: strong expansion in emerging market economies with weak expansion in developed economies could last for a long time. And this has to happen for global wealth to become more evenly distributed.

"Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals."

"In the longer term, significantly greater flexibility in exchange rates to reflect market forces would be desirable and achievable. That flexibility would help facilitate global rebalancing and reduce the problems of policy spillovers that emerging market economies are confronting today." Ben Bernanke, Rebalancing the Global Economy (19 Nov 2010)

The "rebalancing" the world needs is in wealth, and that is well served by unbalanced growth rates between developed and developing countries. But Bernanke wants a "rebalancing" of growth, not wealth. This is not on. Bernanke and the States instead need to look internally at how they correct the inequality between individuals in a slow growth economy. This they have not done. China also needs to look at how it can correct the inequality between individuals in a high growth rate economy.

"…it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits." Ben Bernanke, Rebalancing the Global Economy (19 Nov 2010)

In other words, Bernanke (and the US) want control of the monetary system to return greater growth to the United States (the most developed and most wealthy country on Earth) at the cost of growth to developing nations which are still grossly poorer per capita than the US and other Western nations. This is not what needs to happen. A rebalancing in global wealth is entirely appropriate. What we all do need to look at is how we balance the wealth between individuals within nations, fast and slow growing. When is this going to happen?

By Ben Wallace
Author of The Common Purpose Manifesto

Full Text of the Bernanke Speech (19 Nov 2010) here: http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm

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