[1318] in peace2
From Poor to Rich
daemon@ATHENA.MIT.EDU (Felix AuYeung)
Fri Dec 14 08:15:48 2001
Message-ID: <B0DAC1CD7DB7D511B98C00105ACC5A2B056CC7@BDCFB>
From: Felix AuYeung <FAuYeung@pittsburghfoodbank.org>
To: "'peace-list@mit.edu'" <peace-list@mit.edu>
Cc: Brit Holmberg <BHolmberg@pittsburghfoodbank.org>,
Joyce Rothermel
<JRothermel@pittsburghfoodbank.org>,
"'bd23@andrew.cmu.edu'"
<bd23@andrew.cmu.edu>,
"'rose@dors.org.uk'" <rose@dors.org.uk>
Date: Fri, 14 Dec 2001 08:16:09 -0500
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From Poor to Rich: Capital Is Flowing in the Wrong Direction
Philip Bowring
International Herald Tribune
Wednesday, December 12, 2001
HONG KONG The Argentine currency and debt saga has dragged on for so long
that it is easy to think of it as a one-country crisis. But it may be just
the tip of the iceberg of an alarming imbalance in liquidity between
developed and developing countries. At a time when the world needs a demand
boost from countries in the best position to grow - the developing world -
capital is moving in the wrong direction.
.
A liquidity shortage is being exacerbated by the volatility of capital
flows, forcing developing countries to maintain higher foreign exchange
reserves than previously deemed necessary.
.
According to the latest IMF data, 2001 will be the second year in a row when
there has been a net outflow of capital from the developing countries to
support consumption in the West. Overall, they are expected to have a
current account surplus of $20 billion after $60 billion in 2000.
.
The IMF has suggested that private capital flows to the developing world
could fall further in the next few months. The Bank for International
Settlements likewise has just reported a sharp fall in lending to developing
countries. Net debt of all developing countries has fallen to $1.45
trillion. That compares with U.S. net foreign debt, according to the Federal
Reserve's quarterly data published on Dec. 7, of $2.6 trillion. U.S. foreign
debt per capita is now almost three times that of Argentina.
.
Overall, international liquidity has increased rapidly in the last three
years mainly due to the U.S. trade deficit. Total foreign reserves rose by
11 percent to $1.53 trillion, and the portion in dollars climbed to 68
percent. However, most of this increase has been accounted for by other
industrial countries plus China. Even developing countries which have seen
their reserves grow remain nervous. Those which, of their own volition or
after IMF persuasion, allow free capital flows fret over whether their
reserves are big enough to withstand sudden changes in market sentiment. For
them, seeking protection in larger reserves has become a habit restraining
them from the stimulus that their economies need.
.
Such caution is evident throughout Asia except in South Korea, where a huge
rise in reserves and OECD status have revived self-confidence in the
currency's stability. The rise in the dollar proportion of global reserves
has also increased other countries' sensitivity to the dollar's value. The
strength of the dollar has had a negative impact on most of the developing
world, not just economies with dollar-pegged currencies such as Argentina.
.
Developing countries worry about the U.S. recession. And there is increasing
resentment at an international financial architecture which imposes so many
constraints on them but allows America to use the position of the dollar to
avoid reasonable monetary and balance of payments discipline.
.
Broad money supply has grown by 13 percent in the United States in the past
year - double the European Central Bank's upper limit. The past six months
have seen the Federal Reserve create huge amounts of money by increasing its
holdings of U.S. government securities by $25 billion.
.
Japan and Europe are also being urged to push higher money growth.
.
In Asia, currency concerns have been a major cause of very low money growth
and hence of feeble domestic demand despite continued strong trade balances.
.
Easy money in America may ensure that the recession is a shallow one. But
the ability to print money at will is coming under scrutiny and must lead to
pressure from developing countries for a boost to their international
liquidity via a new issue by the IMF of special drawing rights.
.
That will, as in the past, be opposed by the West on the grounds that it is
both inflationary and an unjustified, unilateral transfer of resources to
the developing world. But with inflation allegedly dead, and with global
demand everywhere looking weak, a dose of global monetary stimulus for the
non-OECD world looks like a good idea for everyone.
.
U.S. debt levels, the dismal demographics of Japan and Europe, the
volatility of free capital flows, the overweighting of the dollar in
international reserves, the unfair advantage that reserve currency status
gives to the three rich blocs all point to the need for a formal boost to
international liquidity in a way that spurs demand in the developing world.
