Transcript OLD WINE IN NEW BOTTLE:

Global Imbalances –
Adjustments by Surplus/Deficit
Countries
Dr Michael Lim Mah Hui
May 23, 2011
South Centre
Geneva
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Three Structural Imbalances to
Global Financial Crisis
 Current Account Imbalance
 Imbalance between financial sector and
real economy – financialization of economy
 Income and Wealth Imbalance
2
Thesis
 Current account imbalance is only a
manifestation of more serious structural
imbalances
 These are sectoral imbalance btw finance
and real economy, and income and wealth
inequality
3
Bernanke and Savings Glut
 Bernanke blames current account surplus
countries for excess savings > lower
interest rates > financing deficits and debt
of US
 Disingenuous to blame surplus countries
and not deficit countries
 A country cant run surplus unless other
countries run deficit
 Question is what cause surplus & deficit
4
Surplus = Savings > Investments
Deficit = Investments > Savings
 China accused of pursuing weak exchange
rate policy to boost exports; US guilty of
pursuing loose monetary policy that
encourage excessive borrowings &
consumption
 Important question is what cause some
countries to have excess savings over
investments and others excess
investments over savings
5
U.S. – Inequality, Underconsumption and Financial Crisis
 Wage stagnation & growing inequality >
under-consumption by majority
 Under-consumption by majority and excess
savings by minority – 2 sides of same coin
 Under-consumption resolved by overconsumption thru rising household debt
 Excess savings recycled thru financial
system to finance HH debt > debt bubble
6
CEO’s Pay, Corp Profits, S&P 500
Prodn Workers Pay, Fed Min wage
 1990-2005
Minm wage
minus 9%
Prodn Workers
Pay + 4%
Corp Profits
+ 107%
S&P 500
+141%
CEO’s Pay
+300%
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Wages lagged behind productivity
8
U.S. inequality and two bubbles
 Excess savings also > asset bubble as risk
appetite rises
 Both eventually imploded > financial crisis
9
Inequality Preceded Great
Depression and GFC
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China – Inequality, Underconsumption & CA Surplus
 Inequality also > underconsumption
 Share of GDP to labor fell from 57% to
37% over last 20 years
 Share of personal consumption to GDP fell
from 55% to 35% over same period
 High savings rate of 50% due to
precautionary savings and high corporate
savings and investments for export >
current account surplus
11
Decline in Private Consumption in
China
12
Inequality, Under-consumption and
Current Account Imbalances
 Both in China and U.S. inequality > under
consumption
 In U.S. under-consumption “solved” by debt
aided by over-leveraged & exotic financial
system where savings recycled to
household debt
 In China – excess savings channeled to
investments for exports; bank lending to
18% of bank loans
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Policy Implications and Lessons
 Global current account imbalance related
to income imbalance & sectoral imbalance
 For surplus countries, need to reduce
dependence on exports in favor of
domestic consumption
 Rebalancing requires reducing inequality
 Wages must rise in tandem with
productivity increases
 Growth must be with employment creation
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Policy Implications
 For deficit countries like US, also need to
have wages rise to strengthen household
balance sheet, and to reduce debt
 Reduce financialization and speculation
 For surplus countries, rechannel excess
savings from investments in US debt or
from exotic financial instruments to regional
and domestic investments.
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Policy Implications
 SWF instead of investing in speculative
finance & adding to fin fragility; rechannel
funds for intra-regional development
 Concept of SARR – socially accept rate of
return
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 THANK YOU
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Globalization = Increasing world
integration thru trade, capital, labor,
information flows




Globalization uneven and asymmetric
High growth but increasing inequality
Fuelled by deregulation and liberalization
Frequency of financial crisis increased after
liberalization -1970-2007–127 financial
crises
 High correlation btw inequality and financial
crisis
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Banking Crises 1880 - 2010
 Note few banking crises 1940s -1970s
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Inequality & Financial Crisis
 Key to understanding long term structural
causes of Global Financial Crisis is to
examine the link between:
 growth, debt, inequality, financialization.
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After post WW2 growth, U.S. real GDP growth
on decline fr 4.4% to 2.6% (1960-2006)
Chart 2: Avg Real GDP growth
1960-69 - 4.4%
5.0%
4.5%
1970-79 – 3.3%
1990-99 – 3.1%
Per Cent GDP Growth
1980-89 – 3.1%
4.0%
3.5%
3.0%
Avg Real GDP growth
2.5%
l
2.0%
1.5%
1.0%
0.5%
0.0%
2000-06 – 2.6%
1960-69 1970-79 1980-89 1990-99 2000-06
Year
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Debt-driven Economy, 1960-2007
Chart 3 : U.S. GDP & Debt by Sector
1960-2007
GDP rose - 27x
60,000
Total Debt - 64x
50,000
Financial -490x
GDP
Household- 64x
Non Financial
Corp – 53x
US$ billions
40,000
Total Debt
Financial Debt
30,000
Non-Financial
Corporate
Household Debt
20,000
Government Debt
10,000
2007
2005
2000
1995
1990
1985
1980
1975
1970
1965
-
1960
Govt- 24x
Y ear
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Income and Wealth Inequality in
U.S. Worsened after 1970s
 1970-2006, real wages of workers
stagnated, while that of CEOs spiraled
 Share of GDP going to capital increasing
and to labor decreasing
 Gini index rose fr 0.35 to 0.46 – worse than
many third world countries
 Top 1% took 25% of total income
 Top 1% took 33% of total wealth
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Greenspan is puzzled
 “We know in an accounting sense what is
cause it (this divergence btw productivity
and wages)…but we don’t know in an
economic sense….”
 He worries that if wages for average US
workers don’t start to rise more quickly,
political support for free markets may be
undermined.
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Many causes for inequality
 Education, skills, technology, trade
 Loss of bargaining power – Reagan broke
national accord btw labor and capital
 Global labor arbitrage
 Neo-liberal state policies favor capital
 Capital share of GDP rose with tax cuts in
dividends, capital gains, estate duties,
corporate earnings
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Stephen Roach of Morgan Stanley
 “ As the pendulum of economic power has
swung from labor to capital in the
developed world, there is now a clear and
growing risk that the pendulum of political
power could swing from capital back to
labor” (The Next Asia, 2009:91)
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Marx, Morgan Stanley & Global
Labor Arbitrage
 Globalization didn’t confer equitable
benefits
 Contest btw returns to capital and labor
pendulum swung in favor of capital
 China, India, former USSR entrance into
global labor market – 1.5 billion addition
weakened labor bargaining power
 Japan, Canada & 12 European c’tries –
labor’s GDP share fell fr 56% to 53.7% btw
2001 & 2006
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China – Higher Inequality Amidst
Growth Boom
 Wages of Chinese workers lagged behind –
productivity grew 20%, wages 12% (2000-04)
 In 2002 –it was 57cents, 3% of avg US hourly pay
 Large pool of migrant workers fr rural sector
 Share of GDP to labor – drop fr 57% to 37%
(1978-2005)
 Gini almost doubled fr 0.32 to 0.50 (1978-2006)
 Premier Wen – China’s economy “unstable,
unbalanced, uncoordinated, unsustainable”
 Wage situation beginning to reverse
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Marx - Contest btw Capital & Labor
 Capitalism’s basic contradiction – contest
btw labor and capital for economic pie –
transformed over time
 Capital’s strategies to enhance profits




- increase capital intensity
- part time, temporary, contractual labor
- labor flexibility, jobless recovery
- leveraged buy-out
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Inequality and Under-consumption
 When wages stagnate or kept low > structural
tendency to under-consumption (lack of effective
demand) > excess capacity or low production >
drag on profit > interruption in the production and
accumulation process
 Inequality impacts 2 ways –


under-consumption on one hand
excess savings on other hand
Under-consumption and Excess Savings are two
sides of same coin
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Overconsumption and Debt Bubble
 Under-consumption is “resolved” through debt >
over-consumption
 Wages stagnated but personal consumption rose
fr 60% GDP to 72% (1960s to 2007)
 National savings rate declined by 10%
 Household debt rose 64x to 100% of GDP
 Financial innovations fuelled debt bubble – credit
card, home equity low, negative amortization,
securitization
 Net equity extraction fr homes rose to 9% of
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disposable income
Excess Savings and Asset Bubble





Tiny minority with excess savings and liquidity
Savings recycled to household loans
Not content with fixed deposits
High risk appetite
Placed in hands of financiers who churn out
derivatives and leveraged instruments
 Ponzi financing – lending based not on cash flow
but on rising asset prices and taking on more debt
 Inevitable crash of both asset bubble and debt
bubble
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Financialization of Economy
 Basic dynamics of market economy not
changed
 Forms & specifics have changed
 Fr competitive capital to monopoly capital
to finance capital
 US, btw 1960-2006, financial sector
 14% of GDP to 20% (twice as large as next
 FIRE sector- 30% of total corporate profit
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Financial fragility and instability
major cause of economic crisis
 Major economic crises caused by fragility,
instability and implosion of financial sector
 Asset bubble rather than wage and consumer
price inflation causing crisis
 Central bankers have been remiss and kept eyes
on wrong ball
 Also misguided in belief in efficient market
hypothesis that markets price assets efficiently
and are self-regulating
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China Equation – Inequality, Underconsumption & Export Surplus
 Bernanke – blame Asia for savings gluts and
contributing to global imbalances
 Disingenuous to blame current account surplus
country and not deficit country
 US only country with ability to run huge CA deficit
for long period because of international curr
status
 China accused of managing weak yuan to boost
exports, US guilty of loose monetary policy that
encourage overspending
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U.S. Current Account Balance
200
20
07
20
05
20
03
20
01
19
99
19
97
19
93
19
91
19
89
(400)
19
87
(200)
19
95
-
19
85
Current Account
Balance $ Billion
U.S. Current Account Balance
U.S.
(600)
(800)
(1,000)
Year
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China – Current Account Surplus =
Savings Investment Gap
 More important question is what cause a country
to have more savings than investment and v.v
 China’s savings over 50%; Investments 40%
 Private consumption fell from over 70% to 35%
(1960s to 2007)
 Why high savings?
 - precautionary savings – many SOE workers
thrown out of work, social services no longer free
 - corporate savings – SOEs not taxed, don’t pay
out dividends, reinvest into export production
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Tale of Two Gluts – Savings Glut
and Debt & Overconsumption Glut
 China current account surplus rose fr
$12bn 1990 to $426bn in 2008
 Foreign reserves rose fr $30bn in 1990 $3
trillion in 2011.
 Under-consumption and excess savings in
poor country funding excess consumption
and debt bubble in the U.S.
 SWF investments in speculative finance
capital adds to financial instability
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China’s Current Acct Surplus, FX
Reserves, U.S. Current Acct Deficit
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Conclusions and Policy Implications
 “There can be no dispute that the current
crisis is due to a systemic, policy-driven
environment of financialization and
speculation originating in the North, often
foisted upon reluctant developing countries
through misguided advice and aid
conditionality. The crisis must be resolved
through intervention at those levels.”
(UNCTAD)
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Conclusions
 Globalization driven by financial and
speculative capital has distorted
development in real economy
 Two major imbalances – imbalance btw
finance and real economy
 Inequality is worsening
 This in turn driven by basic fundamentals of
contest btw capital and labor
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Conclusions
 For now, pendulum has swung in favor of
capital, aided by neo-liberal state policies
 Inequality has resulted in underconsumption and excess savings whose
dynamics are played out in global
imbalances and financial crises
 If history is any guide, adjustment process
without change in policy direction will not
resolve the problems
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Conclusions
 Inequality a structural problem that requires
policy shift fr market fundamentalism to
policy of inclusiveness – raise wages
concomitant with productivity increases
 Present strategy of reviving growth by
cutting labor costs only leads to jobless
recovery
45
Conclusions
 Without improvement in employment,
wages, reduction of inequality,
strengthened household balance sheet,
growth is not sustainable.
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Implications for Emerging
Economies
 Growth must be not be driven by
financialization and speculation
 Growth must be more balanced and
inclusive
 Wages must rise with productivity
increases if want to reduce export
dependence and promote domestic
consumption
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Conclusions
 Encourage more debate, dialogue, new
ideas and cooperation among EMCs
 Formulate new agenda for different type of
globalization
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Some specifics
 Presently only 10% of total FDI flows is btw
South-South countries
 Rather than invest in speculative capital,
recycle huge surplus of EMCs within region
 Introduce socially acceptable rate of return
rather than maximizing shareholders value
 Depend more on domestic and intraregional markets – reduce inequality,
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Conclusions
 Increase regional cooperation in trade,
investments, exchange rate coordination
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IMF Working paper 10/268
Michael Kumhof and Romain Ranciere
Inequality, Leverage and Crises
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THANK YOU
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