Olivier Blanchard, Chief
IMF economist:
Can Asia help in the global recovery?
By Jon Fernquest 
This
week the IMF made an important announcement that a recovery from the global
economic crisis seems to be underway (Read yesterday's
AFP article in the Bangkok Post). The announcement was accompanied by a thorough analysis of what it will take to sustain the recovery
Olivier Blanchard, professor of Economics at MIT and currently chief economist at the IMF, was the author of this analysis (See Wikipedia and MIT webpage).
Dr. Blanchard is a master of complete and detailed economic explanations (Read an insightful podcast at The Economist earlier this year).
Today's article is an extract from an analysis that Dr. Blanchard prepared for the IMF that appeared yesterday (Read article).
Lot's of people are talking about the global economic recovery nowadays.
Suranand Vejajjiva discussed the recovery in his weekly Bangkok Post column today (Read article).
In his article he mentions the recent Economist article "Asia: An astonishing rebound" which discusses how Asia is leading the global recovery (Read article).
Yesterday, the Bangkok Post business section also featured an interview with Thailand's Finance Minister in an article published (Read article).
Today's article is information packed and lays down the essential issues for Asia's economic future, at least as the IMF sees it. Here it is:
Can Asia help?
If the U.S. recovery is to take place, if the fiscal stimulus must be phased out, and if private domestic demand is weak, then U.S. net exports must increase. In other words, the U.S. current account deficit must decrease. That means that the rest of the world, now in substantial surplus, must reduce that current account surplus. Where should this reduction come from?recovery, economic recovery - when the economy
gets better and starts growing again after an economic downturn
fiscal stimulus - temporary government spending or tax cuts in order to get the economy moving and growing again
phased out - ended slowly
demand - the amount of goods and services that a person wants
private domestic demand - consumers and businesses buying things inside the country
public domestic demand - the government buying things inside the country
U.S. net exports - exports - imports, the difference between exports and imports (the net amount of goods being sold outside the country)
current account - exports - imports (roughly)
current account deficit - when imports are greater than exports (current account negative, -)
current account surplus - when exports are greater than imports (current account negative, +)
world (current account) in substantial surplus - world exports to US much greater than imports from the US
fiscal stimulus - temporary government spending or tax cuts in order to get the economy moving and growing again
phased out - ended slowly
demand - the amount of goods and services that a person wants
private domestic demand - consumers and businesses buying things inside the country
public domestic demand - the government buying things inside the country
U.S. net exports - exports - imports, the difference between exports and imports (the net amount of goods being sold outside the country)
current account - exports - imports (roughly)
current account deficit - when imports are greater than exports (current account negative, -)
current account surplus - when exports are greater than imports (current account negative, +)
world (current account) in substantial surplus - world exports to US much greater than imports from the US
It is natural to look first at the countries with large current account surpluses. Among them, most prominently, are Asian countries. And most prominent among them is China. From the point of view of the United States, a decrease in China’s current account surplus would help increase demand and sustain the U.S. recovery. That would result in more U.S. imports, which would help sustain world recovery.
prominent - most
important and most well-known
From the point of view of - looking at the problem from the US side (benefits and costs for them)
sustain the U.S. recovery - keep the US recovery going forward (so that it doesn't slow down and stop)
From the point of view of - looking at the problem from the US side (benefits and costs for them)
sustain the U.S. recovery - keep the US recovery going forward (so that it doesn't slow down and stop)
Why might China be willing to go along? Because it may well be in its own interest: China’s growth has been based on an export-led growth model that relies on a high saving rate, leading to low internal demand, and a low exchange rate, leading to high external demand. The model has been highly successful, but is leading to the accumulation of extremely large reserves and pressure is building to increase consumption.
willing to go along
- wants to join in and participate
in its own interest - it will also benefit from it
export-led growth model, export-oriented industrialization (EOI) - the strategy of generating economic growth by exporting to richer western countries that Japan, South Korea, China, and Southeast Asian countries used after World War II (See Wikipedia)
X relies on Y - X needs Y
a high saving rate - save a large percentage of income
internal demand - demand within the country (for the country's goods)
low internal demand - low demand for products manufactured inside the country
external demand - demand for the country's exports (outside the country)
high external demand - high demand for a country's exports (people outside country demanding goods manufactured inside country)
low exchange rate - when the value of a country's currency is low compared to other countries (so its goods are cheaper)
reserves, foreign exchange reserves - foreign currencies kept by the central bank of a country ()
accumulation of reserves - collecting and holding over time large amounts of currencies of other countries (especially US dollar)
pressure is building to Y - being force to do Y
in its own interest - it will also benefit from it
export-led growth model, export-oriented industrialization (EOI) - the strategy of generating economic growth by exporting to richer western countries that Japan, South Korea, China, and Southeast Asian countries used after World War II (See Wikipedia)
X relies on Y - X needs Y
a high saving rate - save a large percentage of income
internal demand - demand within the country (for the country's goods)
low internal demand - low demand for products manufactured inside the country
external demand - demand for the country's exports (outside the country)
high external demand - high demand for a country's exports (people outside country demanding goods manufactured inside country)
low exchange rate - when the value of a country's currency is low compared to other countries (so its goods are cheaper)
reserves, foreign exchange reserves - foreign currencies kept by the central bank of a country ()
accumulation of reserves - collecting and holding over time large amounts of currencies of other countries (especially US dollar)
pressure is building to Y - being force to do Y
The high rate of saving reflects the lack of social insurance and the resulting high precautionary saving by households, limited access of households to credit, and governance issues in firms that lead them to retain too high a proportion of their earnings. Providing more social insurance, increasing household access to credit, and improving firms' governance are all desirable on their own, and would lead both to lower saving and higher internal demand.
X reflects Y - X
shows Y
social insurance - when the government pays for things that the gove
precautionary - being careful, doing things to prepare for or to avoid danger or problems
precautionary saving - saving money to deal with future problems (healthcare, )
high precautionary saving by households - money families save for emergencies (healthcare, losing a job, etc...)
credit - loans
access to credit - able to get loans
limited access to credit - difficult to get loans
retained earnings - the part of profits that is fed back into the business, profits invested back in business
retain too high a proportion of their earnings - put too much of their profits back into the business
corporate governance, firm governance - the high level policy decisions about how a company is run made by the board of directors on behalf of shareholders and other stakeholders (See wikipedia and stakeholder theory)
social insurance - when the government pays for things that the gove
precautionary - being careful, doing things to prepare for or to avoid danger or problems
precautionary saving - saving money to deal with future problems (healthcare, )
high precautionary saving by households - money families save for emergencies (healthcare, losing a job, etc...)
credit - loans
access to credit - able to get loans
limited access to credit - difficult to get loans
retained earnings - the part of profits that is fed back into the business, profits invested back in business
retain too high a proportion of their earnings - put too much of their profits back into the business
corporate governance, firm governance - the high level policy decisions about how a company is run made by the board of directors on behalf of shareholders and other stakeholders (See wikipedia and stakeholder theory)
If such an expansion of demand runs into supply-side constraints, this higher internal demand would have to be partly offset by lower external demand, meaning an appreciation of the Chinese renminbi (RMB) at least in real terms. Both higher Chinese import demand and a higher RMB will increase U.S. net exports.
expansion
of demand runs
into supply-side constraints - not enough factories and
skilled workers to produce all the goods demanded
appreciation, currency appreciation - when a currency increases in value making the countrys' exports more expensive and less competitive
appreciation, currency appreciation - when a currency increases in value making the countrys' exports more expensive and less competitive
Other emerging market Asian countries also run large current account surpluses. Their motivations vary—some want to accumulate reserves as insurance, others chose an export-led growth strategy that incidentally affects the current account and reserve accumulation. Many of these countries could decrease saving, public or private (as the dramatic decline in household saving in Korea since the 1990s demonstrates), and allow their currency to appreciate. That would lead to a shift from external to internal demand and to a reduction in their current account surplus.
emerging market countries
- a country
with an economy that is growing rapidly, currently 28 emerging markets
in the world with India and China the two largest (See Wikipedia)
motivations - reasons for doing something
their motivations vary - they did it for different reasons
accumulate reserves as insurance - collect large amounts of foreign currencies to use to keep the country's currency from changing too much (any great change would have negative effect on some people, for example: a large rise in value would make exports more expensive and decrease exports)
incidentally affects - has an extra unplanned effect
public saving - when the government effectively saves for the whole country (what is happening with the Chinese government's reserve accumulation)
private saving - saving by consumers and businesses
saving, public or private - saving by all sectors: government, companies, and households
motivations - reasons for doing something
their motivations vary - they did it for different reasons
accumulate reserves as insurance - collect large amounts of foreign currencies to use to keep the country's currency from changing too much (any great change would have negative effect on some people, for example: a large rise in value would make exports more expensive and decrease exports)
incidentally affects - has an extra unplanned effect
public saving - when the government effectively saves for the whole country (what is happening with the Chinese government's reserve accumulation)
private saving - saving by consumers and businesses
saving, public or private - saving by all sectors: government, companies, and households
Their incentives, however, are weaker than China’s. Having substantial reserves has proved very useful in the crisis. Swap lines from central banks, and multilateral credit lines—such as the "flexible credit line" created by the IMF during the crisis—could reduce the demand for reserves. But swap lines and credit lines might not be renewed, and so do not offer quite the same degree of safety as reserves. (Establishing arrangements to substantially reduce reserve accumulation would also be both highly desirable in the long run and would help to sustain the recovery in the short and the medium run.) Thus, countries that have adopted an export-led growth model may reassess that policy and give more weight to internal demand, but any change is likely to be gradual.
an incentive - a
reward that encourages certain kinds of behaviour
X's incentives are weaker than Y's - X gets more reward for a behaviour than Y gets
substantial reserves - large amounts of other countries currencies kept (for safety reasons)
a party to a transaction - an individual, company, organisation, or country
swaps, currency - when two parties exchange an amount of their currencies for a period of time
swap lines - an arrangement to do a swap in the future if you need one
swap lines from central banks - an arrangement between the central banks of two countries to do a swap if one of the countries needs it
bilateral - between two countries
multilateral - between two or more countries
a credit line - an arrangement to provide a loan if needed
multilateral credit lines - an arrangement to provide a country a loan
do not offer quite the same degree of safety as -
medium run, medium term - a period of time that is 2-10 years into the future
short run - a period of time that is less than 2 years into the future
in the short and the medium run - a period of time that is not more than 10 years into the future
reassess - think about it again and possibly change
reassess that policy - think about the policy again and possibly change
give more weight to Y - treat Y as more important
internal demand - demand for goods and services inside a country
X's incentives are weaker than Y's - X gets more reward for a behaviour than Y gets
substantial reserves - large amounts of other countries currencies kept (for safety reasons)
a party to a transaction - an individual, company, organisation, or country
swaps, currency - when two parties exchange an amount of their currencies for a period of time
swap lines - an arrangement to do a swap in the future if you need one
swap lines from central banks - an arrangement between the central banks of two countries to do a swap if one of the countries needs it
bilateral - between two countries
multilateral - between two or more countries
a credit line - an arrangement to provide a loan if needed
multilateral credit lines - an arrangement to provide a country a loan
do not offer quite the same degree of safety as -
medium run, medium term - a period of time that is 2-10 years into the future
short run - a period of time that is less than 2 years into the future
in the short and the medium run - a period of time that is not more than 10 years into the future
reassess - think about it again and possibly change
reassess that policy - think about the policy again and possibly change
give more weight to Y - treat Y as more important
internal demand - demand for goods and services inside a country
To get a sense of magnitudes, another rough computation is useful. The GDP of emerging Asia is roughly 50 percent of U.S. GDP (with the ratio projected to increase to 70 percent in 2014). So, if all its trade was with the United States, Asian countries would have to lower their current account position by 4 percent of GDP to improve the U.S. current account by, say, 2 percent of GDP (which represents a 3 percent shortfall in the ratio of consumption to GDP less the 1 percent increase in U.S. demand coming from lower real interest rates). Since emerging Asia’s trade is not all with the United States, the adjustment would likely have to be even larger. This raises the question of whether other countries can and should play a role [discussed in the next section of the paper, whole paper here].
Gross Domestic product (GDP) - a
measure of economic activity in a country, the value of the country's
output of goods and services. GDP is defined roughly as: GDP =
Household Consumption + Business Investment + Change in
Inventories + (Government Spending - Taxes) +
(Exports - Imports) (See Economist
Glossary)
public debt - the money the government has borrowed to pay for deficits and owes
external demand - demand for the exports of a country (demand for things that a country produces outside the country)
public debt - the money the government has borrowed to pay for deficits and owes
external demand - demand for the exports of a country (demand for things that a country produces outside the country)
Read the rest of the article here.
