[VIEWPOINT]Follow the world’s money for cluesWhile riots and territorial disputes garner headlines, to see where the world is headed, watch what governments do, not what they say.
The U.S. current-account deficit, a broad measure of the nation’s international trade and investment position, is heading toward $800 billion, or 6 percent of GDP. In both relative and absolute terms, these figures are larger than observed during the last great period of international imbalances in the mid-1980s and are extraordinarily high by any standard.
In the past, imbalances of these magnitudes have been associated with financial turbulence or crises such as Black Monday in October 1987, and there is some evidence of contemporary fragility in the markets as demonstrated by the market reactions to relatively innocuous comments by Korean, Japanese and Chinese policymakers over the past several months.
The primary driver of these imbalances, as in the 1980s, is U.S. fiscal policy, and in this respect there is no end in sight. As in the 1980s, the United States has a president committed to both tax cuts and increased military spending, indeed, for the first time in U.S. history cutting taxes while leading the nation to war. Moreover, the centerpiece of President George W. Bush’s domestic agenda is a reform of the Social Security retirement system that will probably end up costing the government money, as transition rules are written so that no important voting constituency is made worse off, at least in the short run.
U.S. fiscal policy is important in that all things being equal, government budget deficits lower national saving and thereby contribute to the trade and current-account imbalances. Those deficits are, in turn, important contributors to demands for trade protection. As in the previous episode in the 1980s, there is little that Korea can do to affect U.S. fiscal policy, and, inter alia, the political atmosphere in which trade policy is formed.
Yet in economics every purchase is also a sale, and the counterpart of U.S. fiscal profligacy and trade deficits are Asian countries’ excess saving and trade surpluses. Like 20 years ago, the Asian countries ― notably Japan and, to a lesser extent, China ―appear to be unable to generate sustained domestically led growth and as a consequence, remain reliant on external demand and rising trade surpluses.
In this regard, Korea will probably escape the worst of the political fallout. Although Koreans are justifiably proud of their rising global profile, in this case being small, at least relative to China and Japan, is actually an advantage, permitting Korea to fly low on the political radar screen. More important, unlike the Asian giants, Korea has permitted some real appreciation in the value of the won, as any local exporter can attest.
So while Korea may occasionally pop up in stories filed from Washington on trade frictions over the next few years, these political charges will have more to do with rounding up the usual suspects than a careful consideration of the facts. Korea should be able to avoid the cross-fire.
Ultimately, the successful adjustment of these imbalances will require a real depreciation of the U.S. dollar against the Japanese yen and the Chinese yuan to encourage a shift in resources from the nontradable to the tradable sector in the United States and the converse reallocation in Japan and China.
This exchange rate realignment obviously causes concern in Asia. What is striking about the situation is the lack of an Asian key currency. The day when the yen could play this role has probably passed, and the yuan is not yet ready. Commentators hold forth the prospect of an Asian exchange rate mechanism like the old European model or eventually an Asian currency unit like the euro.
Are such developments plausible amid intra-Asian conflicts over territory, history and Japan’s bid for a seat on the U.N. Security Council? In the wake of the Asian financial crisis, Asian governments set up a network of bilateral swap agreements through the Chiang Mai Initiative. The amounts of these swaps are not large, certainly not enough to play a decisive role in any replay of the 1997 crisis. But they do represent the real embryonic manifestations of Asian monetary cooperation.
Some of these agreements are coming up for renewal. Will they lapse? Will they be renewed at the current, largely symbolic, level? Or will Asian central banks put their financial muscle ― more than $2 trillion in official reserves ― where the politicians’ hortatory statements have been and renew the agreements at much larger levels?
Forget Dokdo. If you want to know where Asia and the world are headed, heed the famous advice of that famous anonymous source, “Deep Throat,” who helped two young journalists bring down a U.S. president in the Watergate scandal: “Follow the money.”
* The writer is a senior fellow at the Institute for International Economics in Washington D.C.
by Marcus Noland