Global imbalances
and exchange rates
Jomo Kwame Sundaram
26 January 2010
Global imbalances grow
USD bn
1000
Latin America
Other industrialised
800
Other Asia
China
600
Japan
400
Oil exporters
200
0
.
-200
-400
United States
-600
-800
Euro Area
Central and Eastern
-1000
2
90 91
92 93
94 95
96 97
98 99
00 01
02 03
04 05
06 07
Europe
World trade collapse
12
10.9
9.2
7.7
Annual percentage change
8
6.6
4.1
4
2.4
0.5
0
2004
2005
2006
2007
2008
2009
2010
-4
-8
-12
-11.1
3
South exports fall more
(volume index, 1998 = 100)
280
Developing and other non-OECD
country exports
260
240
220
World trade
200
180
160
OECD country exports
140
120
20
06
M
20 1
06
M
20 3
06
M
20 5
06
M
20 7
06
M
00 9
6M
20 11
07
M
20 1
07
M
20 3
07
M
20 5
07
M
20 7
07
M
00 9
7M
20 11
08
M
20 1
08
M
20 3
08
M
20 5
08
M
20 7
08
M
00 9
8M
20 11
09
M
1
100
Source: CPB
Mineral prices fell more
Imbalances narrow
600
United States
400
Japan
Billion US$
200
0
European Union
-200
-400
-600
Developing
countries (excl
China) and EiT
-800
China
2004
2005
2006
2007
2008
2009
6
ST real interest rates
Short-term real interest rates of major economies (%)
4
3
2
Japan
U.S.
Euro
1
Negative
0
Area
Rates
-1
2008M7
2008M1
2007M7
2007M1
2006M7
2006M1
2005M7
2005M1
2004M7
2004M1
2003M7
2003M1
2002M7
2002M1
2001M7
2001M1
2000M7
2000M1
-2
7
US Fed LT rates
Yields of U.S. T-Bonds and Corporate Bonds ％（1978－2007）
persistenly
20
18
falling long-term
16
rates
14
12
10
8
6
4
2
0
1/31/1978 6/30/1982 11/30/1986 4/30/1991 9/30/1995 2/29/2000 7/31/2004
BAA corporate bond
AAA corproate bond
8
10-year T-bond
（％）
Easy liquidity
Measurement of Traditional Liquidity
Indicator in Major Economies
（as a percentage of total GDP of U.S., Japan and Euro Area)
Base Money
2008Q1
2007Q3
2007Q1
2006Q3
Reserve
2006Q1
2005Q3
2005Q1
9
Base Money＋Reserve
2004Q3
2004Q1
2003Q3
2003Q1
2002Q3
2002Q1
2001Q3
2001Q1
2000Q3
2000Q1
12
10
8
6
4
2
0
Net transfer of financial resources
from South to North
200
Billions of US dollars
0
-200
-400
-600
-800
-1000
Developing economies
Africa
Eastern and Southern Asia
Western Asia
Source: UN World Economic Situation and Prospects 2008 (forthcoming)
Latin America
Net capital importers
Capital Importers
Turkey
3%
Others
20%
Greece
3% Italy
3%
Australia
3%
U.K.
9%
Spain
9%
U.S.
50%
11
Capital inflows contract
$ Billions
750
500
250
0
2005
2006
2007
2008
2009*
Bretton Woods vs Keynes
•
•
•
•
•
•
•
•
•
Dollar-gold parity ($35/oz.)
Permanent US current account deficit possible
Seigneurage income
Vietnam  Run on Eurodollars  1971
End of BW system 
‘Non-system’: IMF Interim Committee
Rise of Japan  Plaza 2  endaka
Drucker: X border flows; K acct liberalization
Rise of China  exchange rates, SWF
EA miracle + X rates
• EP con EP: ISI + EOI; scale
economies
• Undervalued X rates since postwar
Japan
• SEA mid-80s devaluations + endaka
• Unlike NEA, SEA FDI-dependent
• Finance dominant, oppose $
appreciation post-1995 end of
endaka  1997-98 crisis
China boom + X rates
•
•
•
•
•
•
•
•
•
1994 RMB ‘devaluation’
Contract manufacturing: learning by doing
End of TVEs boom  scale economies
Productivity gains + Lewisian L market 
consumer price deflation + high growth
China super-competitive
Big overall trade surplus
 reserves accumulation from mid-2000s
$3trn USD assets, including >$1trn US T bonds
China cannot afford massive $ depreciation
Japanese endaka  end of Japanese miracle
Self-protection
• 1990s’ LA, EA crises 
accumulate reserves
- no lender of last resort
- onerous IMF conditionalities
• No insurance element
Crisis + reserves
Financial positions stronger than during
Asian + LA crises (more foreign
reserves, ‘better’ fiscal balances)
But reserves rapidly evaporated with
export collapse; fiscal space also
diminished
• IMF late ‘09 paper (Blanchard, et al.):
Reserve accumulation did not help in
crisis
17
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