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.