Global imbalances and EM financial markets | FT Alphaville

Global imbalances and EM financial markets

The US trade deficit numbers were released today (pdf), but most of what you need to know is in this chart from Calculated Risk:

Exports declined by $2bn in the month, while imports climbed by $5.9bn–and as you can see above, it’s nothing to do with the price of oil.

Combined with Tuesday’s news that China’s surplus had widened to its largest point in eighteen months, it seems that pre-2008 trends related to global imbalances have returned. In fact, after an immediate correction in the aftermath of the financial crisis, these trends have been returning for some time now. Another chart, this one from Luiz de Mello and Pier Carlo Padoan:

The formula for fixing imbalances is by now a familiar one: the US should save, invest, and export more; while China (and some of the other surplus countries) should allow its currency to rise against the dollar and simultaneously enact policies that will stimulate domestic demand.

All well and good, but there’s another aspect to rectifying imbalances that should be emphasized, as shown by a recent paper from two economists at the World Bank.

Ha Nguyen and Luis Serven, the authors, find that international asymmetries in the the supply and demand for financial assets are as responsible for these imbalances as the supply and demand for goods. They’re talking, mostly, about the demand for rich-country assets by emerging country savers, who lack better options within their countries’ underdeveloped financial markets.

Of course, the push to accumulate reserves, whether by countries pursuing export-led growth or those who simply wish to defend against a 1990s-style crisis, is well-known as a cause of imbalances.

To set things straight, say Nguyen and Serven, emerging countries therefore need to develop internal financial markets in addition to pursuing the mechanistic and policy reforms that economists conventionally recommend. The authors are, however, pessimistic:

…barring deep – and, to date, unforeseen – reforms to speed up the development of emerging countries’ financial markets, savers from those countries will very likely continue to demand large volumes of financial assets from more developed markets.

This development would introduce new problems–financial innovation brings its own risks, obviously–and therefore would probably have to be managed gently and gradually. But the issue should be included in broader discussions of how to deal with imbalances.

As should other clever ideas for addressing the issue. Consider, for instance, Steve Randy Waldman’s idea (also here) that countries should manage their capital accounts directly:

The simplest way to do this is to tax (or subsidize) the purchase of domestic financial assets other than zero-interest cash by nonresidents. There need be no interference in Ricardian free trade, the exchange of present goods and services. But the cross-border trade in promises would be taxed and regulated.

FT Alphaville (or at least this correspondent) isn’t qualified to either endorse or reject this idea. Maybe it’s politically impossible in a country like the US. Our point is merely that more such original thinking would be welcome.

CORRECTION: An earlier version of this post incorrectly noted that both imports and exports climbed in the month, with imports climbing more. Actually, exports declined in the month by $2bn. We’ve updated the language. Thanks to commenter Bob for alerting us to the mistake.

Related links:
Global imbalances, origins and prospects – VoxEU
Trade deficit increases sharply in June – Calculated Risk
China trade surplus widens – FT