Economists urge continued cooperation to address global imbalances

"Most economists are optimistic about the current economic recovery but pessimistic about further cooperation among global financial communities," former finance minister Chalongphob Sussangkarn said after attending the meeting of some 400 researchers and policy-makers at the Global Development Network (GDN) Conference in Prague from January 16-18.

Large capital inflows into Asia, betting on a strong recovery in the region, have become a pressing issue and concerned many parties. The inflows have already caused asset bubbles and could trigger asset price crashes later, Hong Kong University economics professor Edward Chen told the conference.

In Thailand, as the baht moves towards 32 to the US dollar, Prime Minister Abhisit Vejjajiva's government has started worrying about the negative impact of the stronger currency on exports. Abhisit last Wednesday asked the Bank of Thailand to prepare a report on the movement of regional currencies.

There are growing calls for some kind of tax on capital flows, to rein in excessive speculation. The International Monetary Fund and many economists support the idea.

If policy-makers can reach an agreement, it is likely that such a tax will be imposed in many countries, particularly in Asia - if not across the globe. "No individual country can do it alone," Chalongphob told the conference.

The key is policy coordination among governments to address global imbalances. The imbalances between the large current-account surplus in Asia and the large current-account deficit in the US is considered one of the major causes of the global economic crisis.

In the past, large liquidity flows from oil-exporting countries and East Asia's export-led growth economies to the US market caused the powerful US Federal Reserve to lose control of monetary conditions in the US.

"In recent years, the Fed has lost the ability fully to control monetary conditions in the US," said Chalongphob, pointing to the surprising drop in long-term rates and rise in short-term rates prior to the sub-prime lending crisis in the US.

Former Fed chairman Alan Greenspan said in congressional testimony in July 2005 that the third major uncertainty facing the economic outlook related to the behaviour of long-term interest rates. The yield on 10-year treasury notes, presently near 4.25 per cent, is about 50 basis points below its level of late spring 2004. The decline in long-term rates occurred against a backdrop of generally firm US economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast-approaching retirement of the baby-boom generation.

"The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. To economists, such a pattern is new. The trend of mortgage rates, or long-term interest rates more generally, is likely to be influenced importantly by the worldwide evolution of intended saving and intended investment. We at the Federal Reserve will be closely monitoring the path of this global development [that] few, if any, have previously experienced," Greenspan said.

Inter-American Development Bank vice president Santiago Levy said Latin American countries had responded to the crisis better than expected. He said strong economic fundamentals alone could not completely explain the whole picture, but that timely international coordination to inject large amounts of money into the market had contributed to their better performance.

On the subject of future liquidity injections into troubled markets, Levy said they "must be large, preventive and timely ... regardless of where the next financial crisis originates".

He added that he thought the recent policy coordination probably reflected the fact that the crisis originated in the heart of capitalism: The United States.

Guillermo Calvo, a professor of economics at Columbia University in New York City, said that while he was impressed by the international cooperation displayed by the Group of 20 (G-20) forum, consisting of advanced and emerging economies, it was not adequate. He proposed the creation of a lender of last resort to act like a central bank by injecting liquidity globally to tackle future financial crises.

Paris School of Economics director Francois Bourguignon said the G-20 was only a consultative body and could not impose uniform policy decisions on individual actors.

Alan Taylor, director of the Centre for the Evolution of the Global Economy at the University of California's Davis Department of Economics, took an optimistic view, saying a positive outcome from the imbalance was that firms in Asia might now buy more tangible assets in the US.

He is also convinced "self-insurance" has worked, referring to the large foreign reserves accumulated by countries in Asia prior to the crisis, which he said helped the countries cushion the shock.

However, Ernesto Zedillo, director of the Centre for the Study of Globalisation at Yale University in New Haven, Connecticut, begged to differ, saying that without an appropriate institutional mechanism, the next crisis would come sooner rather than later.

"The G-20 Pittsburgh records from 2009 show impeccable analysis. They said we need a coordinated response to tackle global imbalance. Then they commissioned a peer-review of macro-economic policies. This is a joke! We will never get global coordination without an institutional mechanism with sufficient teeth to make it credible and enforceable," said Zedillo, who is also a chairman of the GDN.

Padma Desai, director of Columbia University's Centre for Transition Economies, predicted modest post-crisis financial reforms in the US, saying banks would be required to increase their capital bases.

She said a Wall Street reform and consumer-protection bill now before the US Senate had already been watered down.