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Global Capital Flows to the Rich

The so-called global imbalance today seems more dangerous for all other countries than for the US. A fundamental reform of the international monetary system is overdue. The US dollar is no longer the stable anchor of the world monetary system.

By Jorg Goldberg

[The US trade and balance of payments deficit is the greatest threat to the world economy, particularly to the fragile economies of developing countries. The longer effective counter-strategies are delayed, the greater the danger of international finance crises. A worldwide consensus exists on this. Opinions about counter-strategies are less uniform. Regardless of the proposed measures, the main causal agent, the US, can live well with the deficit. This article published by attac Germany in "Sand im Getriebe" Nr. 61, 2007 is translated from the German on the World Wide Web,  http://www.attac.de.]

Two new volumes that resulted from a 2006 international conference in the Netherlands (Forum on Debt and Development, FONDAD) confirm this. FONDAD was founded in 1987 with the support of prominent scholars like Jan Tinbergen and Robert Triffin. The conference on "Global Imbalances and the US Debt Problem" was an important event on a high technical level for the future of the international monetary system. Beside academics, political decision-makers in national central banks (China, Netherlands, and South Africa) and multinational institutions (IMF, WTO, Bank for International Settlements, United Nations and the African Development Bank) participated.


Many articles in the first volume show that the US deficit is an old phenomenon according to Jan Teunissen, director of FONDAD. A currency system in which international money is produced by a national central bank (of the US) depends on "printing" more money than is needed nationally. The US deficit (beside its range) has characteristics that make it a special crisis factor today. This was underscored by Jan Kregel in the UN Department of Economic and Social Affairs. The deficit today is multilateral, touching all regions including developing countries. It is mainly financed by private capital flows. Political control is limited because of the international production chains. The deficit is not merely an affair of the finance markets. The US has been a debtor nation since 1989. Until then, US foreign assets were greater than US indebtedness.

The multilateral character of the US deficit leads to the absurd situation reflected in the title of the first volume ("Should developing countries support the US dollar?") that poor countries contribute to financing the excess US consumption today. Up to the 1990s, people were worried about the indebtedness of developing countries. Today, the massive dollar reserves of poor countries are the problem. "Capital flows uphill" from poor to rich countries," Teunissen explains (I, 11). Developing countries are forced to hold currency reserves that are lacking for development investments. On the other hand, they will suffer most under a crisis correction. If financing the US deficit slackens, the dollar will fall under a devaluation pressure. The interest rates will rise internationally along with risk charges for credits to developing countries.

The effects of a dollar devaluation are very drastic for African countries, as Louis Kasekenda of the African Development Bank explained. African exports are mainly denominated in dollars while imports are in euro (II, 13). The dangers have real economic effects. "The greatest risk lies in a significant slowing down of the US economy and the global import demand" (I, 27), Barry Eichengrun and Yung Chui Park emphasize. The US today is the worldwide "consumer of last resort" (II, 93).


What can be done to prevent the "disorderly correction" (I, 15) of the US deficit? Many suggestions are given to the US as the main causal agent. More savings are necessary; the US budget deficit should be reduced. Above all, the tax cuts ordered by the Bush administration should be stopped. The conference participants know there is hardly interest in such a policy in the US. "The so-called global imbalance today seems more dangerous for all other countries than for the US" (I, 98), says Fan Gang from the Chine central bank. Eichengreen and Park are both recognized scholars. Park is an important financial advisor in South Korea. "It would be nice if the United States would participate in a cooperative process by tackling the indigenous roots of the double deficit. But the developing countries cannot wait for this." (I, 41)

Many articles in both volumes offer proposals for developing countries given the inactivity of the US. In the first volume, there is a discussion whether the devaluation of the Chinese RMB as demanded by the US is sensible. While the RMB is slightly overrated, a devaluation would not reduce the US deficit. Half of China's exports are manufactured in international businesses including many US subsidiaries. Developing countries are urged to pursue an expansive budgetary policy to invest more and improve conditions for regional integration.


On principle, the majority of the participants think a fundamental reform of the international monetary system is overdue. "The US deficit is the necessary result of an institutional solution that allowed the US to maintain a permanent deficit and print as much money as they wanted" (I, 102). There is no argument about this. The participants are less united about a concrete reform. Some articles urge an end to the dollar standard and advance proposals with which Keynes failed at the 1944 conference at Bretton Woods because of American resistance. The creation of a "world currency unit" is urged by Fan Gang (I, 103). Jane D' Arista from the US recalls Keynes' proposal of an International Clearing Agency (II, 138).

Others do not go so far and only plead for a preventive multinational policy that treats national imbalances. The IMF actually has the task of working out imbalances in developing countries. "The IMF hardly has any influence on the greatest debtor land, the US," declared William White from the Bank for International Settlements (II, 87). "Resistance against more international cooperation is connected with the different cultures, analytical methods and perception of risks. National interests should not be underrated," White said (II, 88).


Whether one prefers a more immanent treatment of the current deficit problem by changing internal policies (including US policies), pleads for stronger multinational institutions in the framework of the existing monetary system (for example, the IMF) or demands an end to the dollar standard, nothing can prevail against the US. Maintaining the deficit corresponds to the interests of the US. A financial crash there would damage the US the least. From the standpoint of US policy, it is rational to leave the task of deficit management to the rest of the world. Teunissen remarked in his introduction to the book by David Calleo: "A large part of the US international economic policy is dictated by the desire to make the international system serve national policy" (I, 6).

References: Jan Joost Teunissen/ Age Akkerman (ed), Global Imbalances and the US Debt Problem: (I) Should Developing Countries support the US Dollar?, (II) Remedies for a Failing International Financial System, FONDAD: The Hague 2006 and 2007 (eee. http://www.fondad.org)

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