A realignment of global exchange rates is unlikely to prove effective in correcting growing imbalances in the world economy, the United Nations warns in its annual beginning-of-year forecast released on Wednesday. The World Economic Situation and Prospects notes that despite improving global growth prospects, with world output expected to increase by 3.5 per cent in 2004, "large imbalances remain" and are expected to grow further this year. "The imbalances are epitomised by the US current account deficit of more than $500bn in 2003; matched by the aggregate of the surpluses of a number of economies in Asia and Europe, such as China, Japan, Germany and Russia," the report says. "However, they cannot be sustained indefinitely, and their eventual correction will have profound implications for the future stability, efficiency and equity of the world economy."
The conventional approach to imbalances, the report says, focuses almost exclusively on trade flows, implying they are temporary and can be reversed through an adjustment in exchange rates. But an alternative analysis, "based on modern international macroeconomic theory", focuses on global asset allocation. "According to this approach, global imbalances are the result of a worldwide asset allocation that is determined by long-run, cross-country differences in growth, rates of return on capital, saving-investment gaps and other structural factors," the UN says. Because the global trade and finance system is "far from perfectly competitive", the imbalances do not represent an efficient allocation of capital and goods. As a significant issuer of international currency, the US is in a unique position to benefit "at the expense of others in both the long run and the short run". While changes in the exchange rate "may be appropriate to correct the cyclical component of the imbalances", the adjustment of their perennial elements "has to be brought about primarily by a narrowing of international structural differentials".
hey you over there - slow down so the rest of us can catch up
"This is a longer-term process which cannot be achieved solely through a realignment of exchange rates; an attempt to do so is likely to result in extreme movements and excessive adjustment costs," the UN warns. It says the depreciation of the US dollar in 2003, the pressures on some developing countries to revalue and rising trade tensions are based on a "misconceived and misleading" belief that a change in exchange rates is both necessary and sufficient to adjust global imbalances. Instead, policymakers should take the longer view, pursuing a "gradual and simultaneous adjustment in both deficit and surplus countries, through policies that would reduce cross- country differences in growth rates and savings- investment gaps."
| In other words, manage the economies with an eye toward equalizing the outcomes regardless of the inputs... |
José Antonio Ocampo, the UN economic affairs chief, says policymakers should avoid the temptation to deploy protectionist measures. Europe and Japan, he says, should take steps to "boost their private consumption and long-term growth". |