Financial Crisis and Global Imbalances:A Development Perspective- by Yilmaz Akyuz(Orient Black Swan,South centre,2012)pp xix+190,Rs625/-
By Dr.Debesh Bhowmik
It is argued that the global economy suffers from a demand gap in large part because of sustained declines in the share of labour income in most major economies, including the US,Europe,Japan and China. Until the outbreak of the subprime debacle , the deflationary threat posed by underconsumption was averted and the global economy enjoyed a rapid growth .This, however, resulted in growing global trade imbalances and financial fragility which eventually culminated in a global crisis.A return to the pre-crisis pattern of growth can prove to be more damaging.A global rebalancing between major surplus and deficit countries would be necessary .This can not be done through nominal currency adjustments.A nominal appreciation of the of the Chinese Yuan against the dollar will not solve Chinese underconsumption or US overspending. China should move to consumption led growth through faster growth of wages.This would appreciate the real exchange rate of the Yuan and reduce net exports,but it would at the same time provide a domestic offset by expanding domestic consumption, and hence allow it to maintain strong growth.The US should move to export led growth not through wage cuts but through increased productivity through investment in infrastructure and education.However, a US –China rebalancing would not be sufficient to restore an acceptable pace of growth in the world economy.The two major mature surplus economies,Japan and Germany, which have been siphoning global demand without adding to global growth ,would also need to reduce their reliance on exports and add to global demand.Until the outbreak of the subprime crisis, the resulting trade deficits in the periphery were financed with large capital inflows from the core Eurozone countries,notably from German and French banks, encouraged by the changed risk perceptions and convergence of interest rates after the move to the Economic and Monetary Union.These unsustainable intra-uerozone imbalances and debt accumulation were laid bare with the global crisis.The renewed surge in capital inflows has created different imbalances and fragilities in different developing countries accordint to their degree of openness to various forms of capital and policy response.Major economies such as Brazil,india, SouthAfrica and Turkey have been relying increasing on foreign capital to meet their growing external shortfalls and many of them have been experiencing currency appreciations faster than surplus developing economies in East Asia .By constrast, most East Asian countries have been successful in maintaining strong payment positions, but they have also been facing credit and asset bubbles.in other words, all major recipients are now exposed to the risk of a sudden stop and reversal, though in different ways, even to a greater extent than that experienced after the Lehman collapse.The countries which have been enjoying the twin benefits of global liquidity expansion-ie, the boom in commodity prices and capital flows-as well as those running growing deficits are particularly vulnerable.Asian economies with strong current account and reserves positions are unlikely to face serious payments and currency instability even in the event of sharp and sustained declines in capital inflows.However, their financial markets are highly exposed to destabilizing impulses from abroad because of increased foreign presence and their closer integration into the international financial system.The consequent damage could be more severe and longer lasting than that experienced during the Lehman collapse at both global and national level.
For most emerging economies in other regions,there is a need to reduce dependence on capital inflows.Collectively developing economies have been running a current account surplus and they do not need capital from advanced economies for external financing.in fact they have been recycling their twin surpluses to the advanced economies in the form of investment in reserve currencies.However, a number of developing countries have been running structural deficits and are dependent on capital inflows to finance imports, investment and growth.There is thus a need to establish, at both the regional and global levels, reliable and stable mechanisms for South South recycling from surplus to deficit countries without going through Wall Street or the City.
The above book states more than that because it is collection of papers for the South Centre during 2009-2011 on the global crisis.