It is now generally recognised that the very large macroeconomic
imbalances between the US and the rest of the world,
which are associated with very large capital inflows
into the US, are unsustainable beyond a point. There
is no doubt that the current situation is absurd, and
certainly counter to the perceived role of international
financial markets, which are supposed to encourage flows
of financial resources from capital-rich to capital-poor
economies.
Two of the richest
large economies - the United States and the United Kingdom
- are net receivers of financial resources, in the US
case amounting to more than 6 per cent of GDP. The United
States currently receives slightly more than 70 per
cent of total world savings as capital inflows. Earlier,
Japan and the Euro area were the main financiers of
the US deficits, but from around 2001, developing countries,
especially in Asia, have become a significant source
of such financing.
The newly industrialising countries of Asia (hereafter
Asian NICs) have been sending out more than 6 per cent
of GDP as capital outflow in the past three years. All
other developing countries taken together (including
China and India) are now exporting capital to the tune
of 4 per cent of GDP.
For the United States, this allows for economic expansion
based on foreign capital inflows, and also involves
a growing burden of foreign debt. Currently 52 per cent
of US Treasury Bills are held by foreigners, up from
20 per cent only five years ago. But the consequences
for developing country governments which are increasingly
the holders of this debt may be even more significant.
This remarkable extent of outflow of capital from the
developing world obviously reflects an excess of domestic
savings over domestic investment. However, this excess
came about not because of any real increase in savings
rates in the aggregate, but because investment rates
have not gone up commensurately.
In the Asian NICs, the period of most significant increase
in net lending abroad was when domestic savings rates
were actually falling, because investment rates were
falling even faster. For all other developing countries,
net external lending has increased quite sharply in
the recent past mainly because investment rates have
stagnated even as savings rates have gone up.
In most developing countries, the savings increase has
resulted from enhanced savings effort by the public
sector, and not from household or private corporate
savings. Therefore increases in domestic savings rates
in developing countries dominantly reflect fiscal consolidation
and expenditure cutbacks by their governments. So the
major reason for the apparent excess of capital which
is then being exported to the US and other developed
countries is deflationary policies on the part of developing
country governments, which suppress domestic consumption
and investment.
The Asian NICs have mostly been in fiscal surplus since
2000, while the weighted average of fiscal deficits
for all other developing countries was less than 2 per
cent of GDP last year and is projected to come down
to only 1 per cent of GDP in 2005. In the majority of
developing countries, where savings rates have not increased,
the increase in net lending abroad has been generated
by lower investment rates, driven by compression of
public investment.
This obviously has effects on current levels of economic
activity, but it also affects future growth prospects
because of the long-term potential losses of inadequate
infrastructure investment, etc. The deflationary effect
of this fiscal strategy is reflected in lower levels
of economic activity than could have been potentially
achieved, as well as higher levels of unemployment.
There has been an increase in open unemployment rates
across developing Asia, where there is hardly any unemployment
benefit or social security system.
The obvious question is: why are developing country
governments pursuing such an apparently counterproductive
policy which runs against the interests of their own
current and future economic growth? The answer lies
in a combination of international forces which have
been unleashed by the collective adoption of certain
national policies.
The first such force is the international domination
of finance, which has resulted from national policies
of financial deregulation, and created the possibility
of large possibly destabilizing movements of speculative
capital. It is certainly true that increasingly developing
country governments all guard against the possibility
of damaging capital flight by building up substantial
foreign exchange reserves even when these may involve
large fiscal losses.
But this is only part of the story. The second force
which is dominant in development strategy today is the
obsession with exports as the engine of growth. Across
the developing world, the basic stimulus to growth is
seen to come from increasing access to and getting larger
shares of the international market, rather than building
up the domestic market. Even in countries which do not
show large trade surpluses at present, such as China
and much of East Asia, the stimulus to growth still
is seen to come from exports.
Since all countries except the US are playing this particular
game, it follows that the US economy remains the most
important stimulus not only to world trade but to world
economic activity generally. Even for countries like
China, where exports to the US account for only around
one-fifth of total exports, this remains the driving
force for the accumulation which then generates such
high rates of aggregate growth and in turn high aggregate
savings.
In this context, domestic deflation in developing countries
becomes almost necessary to perpetuate the system which
provides the current pattern of growth. By fuelling
the US economic expansion, it ensures a continuing market
for exports by the rest of the world. And central bank
intervention to mop up the dollars that are then invested
in US securities ensures that exchange rates do not
appreciate to levels whereby exports would be affected.
But this very obsession with export growth as the means
to development creates its own contradictions. It leads
to heightened competitive pressure (the famous race
to the bottom) which reduces unit values of exports
even as export volumes may increase. It prompts technological
changes in export and import competing industries which
mean that new production tends to generate less employment,
and therefore have lower domestic multiplier effects.
In any case, all developing countries together cannot
really hope to increase their share of world markets
unless they diversify their ultimate export destinations.
Most important, this strategy prevents more sustainable
and equitable patterns of economic expansion based on
the domestic market.
The peculiar paradoxes of the world economy today therefore
reflect not only the political economy structures of
international capitalism, but also policy choices by
developing country governments with respect to both
trade and finance. In such circumstances, financial
liberalisation and trade promotion can become the means
to undermine the development project in general.
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