Rebalancing the Global Economy
| DOI | http://doi.org/10.1111/j.1758-5899.2011.00115.x |
| Published date | 01 May 2012 |
| Date | 01 May 2012 |
| Author | Stefan Collignon |
Rebalancing the Global Economy
Stefan Collignon
Sant’Anna School of Advanced Studies, Pisa
Abstract
Imbalances are a dominant feature of the world economy and they are often seen as having contributed to the global
financial crisis. A revaluation of the Chinese currency is often recommended to reduce the current account imbalance
between the US and China. This article argues that emerging Asia’s current account surpluses are a necessary
condition for rapid catch-up growth and should not be eliminated soon; instead the excessive dollar bias in Asian
holdings of external claims needs to be reduced, because the problem behind the recent crisis was that the emerging
economies have placed their foreign exchange reserves almost exclusively in USD assets and have neglected
alternative assets like the Euro and the Yen. A policy proposal for a common Asian peg to a basket of Euro and Yen
is made.
Policy Implications
•Policies to restore global balances must not create additional tensions for China, Asia, Europe or the United States.
A cooperative management of the global economy is recommended.
•Chinese exchange rates policy must be seen in the broad context of the Asian development model. A rapid revalu-
ation or shift to flexible exchange rates would undermine the Chinese development model and deprive the world
of an immense source of economic growth.
•The undervaluation of the RMB should only gradually be removed as the Chinese economy improves productivity
and catches up to advanced economies’ production standards.
•Fixed exchange rates support economic development by reducing uncertainty for investment and trade. Stabilising
the exchange rates between major currencies and Asia as a region is important to allow the continuing integration
of its developing economies into the world market.
•The US economy needs flexibility in exchange rate movement while it is going through the necessary adjustment
of its current account balance, but not Asia. Asia should peg to a basket of euro and yen and Chinese foreign
exchange reserves should be marginally shifted into these new reserve currencies. Europe must not protect its
industries, but rather seek to stimulate economic growth by inviting Chinese and Asian investment by developing
its financial markets.
A global economy needs global management. This was
the lesson from the current global financial crisis, when
policy makers set up the G20. But very quickly the new
global economic governance became stuck in the grid-
lock of international bureaucracy. Banal and dry com-
muniqués are a sure sign that governments cannot
agree on substance when partial interests block coopera-
tive decisions in the collective interest. Today, America
and Europe are at loggerheads with China and Asia over
global imbalances. Exchange policies are a key variable
in this debate and the revaluation requests made by the
west are resisted in Asia. The stability of the global econ-
omy requires cooperative solutions for overcoming glo-
bal imbalances.
Yet, while imbalances have dominated the world econ-
omy for decades, there is no agreement on whether they
are harmful or not. For some economists, they are unsus-
tainable and have contributed to the global financial cri-
sis (Obstfeld and Rogoff, 2009); for others they are the
unintended consequence of otherwise desirable develop-
ments.
1
Unless these opposing views are brought
together, managing the global economy will remain an
empty wish. This article presents a new approach to an
old problem and it shows how making use of the euro
could contribute to a win-win solution for the global
economy.
Global imbalances matter. There is little doubt that
high savings and the accumulation of foreign exchange
reserves by Asian central banks have fuelled the domestic
American credit boom, which collapsed in 2008. As his-
tory teaches, the larger the bubble grows, the harder the
subsequent fall. Hence, ignoring global imbalances would
be irresponsible. While it is true that the US current
account deficits have recently narrowed, the system that
Global Policy Volume 3 . Issue 2 . May 2012
ª2012 London School of Economics and Political Science and John Wiley & Sons Ltd. Global Policy (2012) 3:2 doi: 10.1111/j.1758-5899.2011.00115.x
Research Article
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