1. 1 Global Imbalances – Adjustments by Surplus/Deficit Countries Dr Michael Lim Mah Hui May 23, 2011 South Centre Geneva

2. 2 Three Structural Imbalances to Global Financial Crisis  Current Account Imbalance  Imbalance between financial sector and real economy – financialization of economy  Income and Wealth Imbalance

3. Thesis  Current account imbalance is only a manifestation of more serious structural imbalances  These are sectoral imbalance btw finance and real economy, and income and wealth inequality 3

4. Bernanke and Savings Glut  Bernanke blames current account surplus countries for excess savings > lower interest rates > financing deficits and debt of US  Disingenuous to blame surplus countries and not deficit countries  A country cant run surplus unless other countries run deficit  Question is what cause surplus & deficit 4

5. Surplus = Savings > Investments Deficit = Investments > Savings  China accused of pursuing weak exchange rate policy to boost exports; US guilty of pursuing loose monetary policy that encourage excessive borrowings & consumption  Important question is what cause some countries to have excess savings over investments and others excess investments over savings 5

6. U.S. – Inequality, Under- consumption and Financial Crisis  Wage stagnation & growing inequality > under-consumption by majority  Under-consumption by majority and excess savings by minority – 2 sides of same coin  Under-consumption resolved by over- consumption thru rising household debt  Excess savings recycled thru financial system to finance HH debt > debt bubble 6

7. 7 CEO’s Pay, Corp Profits, S&P 500 Prodn Workers Pay, Fed Min wage  1990-2005 Minm wage minus 9% Prodn Workers Pay + 4% Corp Profits + 107% S&P 500 +141% CEO’s Pay +300%

8. Wages lagged behind productivity 8

9. U.S. inequality and two bubbles  Excess savings also > asset bubble as risk appetite rises  Both eventually imploded > financial crisis 9

10. 10 Inequality Preceded Great Depression and GFC

11. China – Inequality, Under- consumption & CA Surplus  Inequality also > underconsumption  Share of GDP to labor fell from 57% to 37% over last 20 years  Share of personal consumption to GDP fell from 55% to 35% over same period  High savings rate of 50% due to precautionary savings and high corporate savings and investments for export > current account surplus 11

12. Decline in Private Consumption in China 12

13. 13 Inequality, Under-consumption and Current Account Imbalances  Both in China and U.S. inequality > under consumption  In U.S. under-consumption “solved” by debt aided by over-leveraged & exotic financial system where savings recycled to household debt  In China – excess savings channeled to investments for exports; bank lending to 18% of bank loans

14. Policy Implications and Lessons  Global current account imbalance related to income imbalance & sectoral imbalance  For surplus countries, need to reduce dependence on exports in favor of domestic consumption  Rebalancing requires reducing inequality  Wages must rise in tandem with productivity increases  Growth must be with employment creation 14

15. Policy Implications  For deficit countries like US, also need to have wages rise to strengthen household balance sheet, and to reduce debt  Reduce financialization and speculation  For surplus countries, rechannel excess savings from investments in US debt or from exotic financial instruments to regional and domestic investments. 15

16. Policy Implications  SWF instead of investing in speculative finance & adding to fin fragility; rechannel funds for intra-regional development  Concept of SARR – socially accept rate of return 16

17.  THANK YOU 17

18. 18

19. 19

20. 20 Globalization = Increasing world integration thru trade, capital, labor, information flows  Globalization uneven and asymmetric  High growth but increasing inequality  Fuelled by deregulation and liberalization  Frequency of financial crisis increased after liberalization -1970-2007–127 financial crises  High correlation btw inequality and financial crisis

21. Banking Crises 1880 - 2010  Note few banking crises 1940s -1970s 21

22. 22 Inequality & Financial Crisis  Key to understanding long term structural causes of Global Financial Crisis is to examine the link between:  growth, debt, inequality, financialization.

23. 23 After post WW2 growth, U.S. real GDP growth on decline fr 4.4% to 2.6% (1960-2006) 1960-69 - 4.4% 1970-79 – 3.3% 1980-89 – 3.1% 1990-99 – 3.1% 2000-06 – 2.6%

24. 24 Debt-driven Economy, 1960-2007 GDP rose - 27x Total Debt - 64x Financial -490x Household- 64x Non Financial Corp – 53x Govt- 24x

25. Income and Wealth Inequality in U.S. Worsened after 1970s  1970-2006, real wages of workers stagnated, while that of CEOs spiraled  Share of GDP going to capital increasing and to labor decreasing  Gini index rose fr 0.35 to 0.46 – worse than many third world countries  Top 1% took 25% of total income  Top 1% took 33% of total wealth 25

26. Greenspan is puzzled  “We know in an accounting sense what is cause it (this divergence btw productivity and wages)…but we don’t know in an economic sense….”  He worries that if wages for average US workers don’t start to rise more quickly, political support for free markets may be undermined. 26

27. 27 Many causes for inequality  Education, skills, technology, trade  Loss of bargaining power – Reagan broke national accord btw labor and capital  Global labor arbitrage  Neo-liberal state policies favor capital  Capital share of GDP rose with tax cuts in dividends, capital gains, estate duties, corporate earnings

28. Stephen Roach of Morgan Stanley  “ As the pendulum of economic power has swung from labor to capital in the developed world, there is now a clear and growing risk that the pendulum of political power could swing from capital back to labor” (The Next Asia, 2009:91) 28

29. 29 Marx, Morgan Stanley & Global Labor Arbitrage  Globalization didn’t confer equitable benefits  Contest btw returns to capital and labor pendulum swung in favor of capital  China, India, former USSR entrance into global labor market – 1.5 billion addition weakened labor bargaining power  Japan, Canada & 12 European c’tries – labor’s GDP share fell fr 56% to 53.7% btw 2001 & 2006

30. 30 China – Higher Inequality Amidst Growth Boom  Wages of Chinese workers lagged behind – productivity grew 20%, wages 12% (2000-04)  In 2002 –it was 57cents, 3% of avg US hourly pay  Large pool of migrant workers fr rural sector  Share of GDP to labor – drop fr 57% to 37% (1978-2005)  Gini almost doubled fr 0.32 to 0.50 (1978-2006)  Premier Wen – China’s economy “unstable, unbalanced, uncoordinated, unsustainable”  Wage situation beginning to reverse

31. 31 Marx - Contest btw Capital & Labor  Capitalism’s basic contradiction – contest btw labor and capital for economic pie – transformed over time  Capital’s strategies to enhance profits - increase capital intensity - part time, temporary, contractual labor - labor flexibility, jobless recovery - leveraged buy-out

32. 32 Inequality and Under-consumption  When wages stagnate or kept low > structural tendency to under-consumption (lack of effective demand) > excess capacity or low production > drag on profit > interruption in the production and accumulation process  Inequality impacts 2 ways – under-consumption on one hand excess savings on other hand Under-consumption and Excess Savings are two sides of same coin

33. 33 Overconsumption and Debt Bubble  Under-consumption is “resolved” through debt > over-consumption  Wages stagnated but personal consumption rose fr 60% GDP to 72% (1960s to 2007)  National savings rate declined by 10%  Household debt rose 64x to 100% of GDP  Financial innovations fuelled debt bubble – credit card, home equity low, negative amortization, securitization  Net equity extraction fr homes rose to 9% of disposable income

34. 34 Excess Savings and Asset Bubble  Tiny minority with excess savings and liquidity  Savings recycled to household loans  Not content with fixed deposits  High risk appetite  Placed in hands of financiers who churn out derivatives and leveraged instruments  Ponzi financing – lending based not on cash flow but on rising asset prices and taking on more debt  Inevitable crash of both asset bubble and debt bubble

35. 35 Financialization of Economy  Basic dynamics of market economy not changed  Forms & specifics have changed  Fr competitive capital to monopoly capital to finance capital  US, btw 1960-2006, financial sector  14% of GDP to 20% (twice as large as next  FIRE sector- 30% of total corporate profit

36. 36 Financial fragility and instability major cause of economic crisis  Major economic crises caused by fragility, instability and implosion of financial sector  Asset bubble rather than wage and consumer price inflation causing crisis  Central bankers have been remiss and kept eyes on wrong ball  Also misguided in belief in efficient market hypothesis that markets price assets efficiently and are self-regulating

37. 37 China Equation – Inequality, Under- consumption & Export Surplus  Bernanke – blame Asia for savings gluts and contributing to global imbalances  Disingenuous to blame current account surplus country and not deficit country  US only country with ability to run huge CA deficit for long period because of international curr status  China accused of managing weak yuan to boost exports, US guilty of loose monetary policy that encourage overspending

38. 38 U.S. Current Account Balance

39. 39 China – Current Account Surplus = Savings Investment Gap  More important question is what cause a country to have more savings than investment and v.v  China’s savings over 50%; Investments 40%  Private consumption fell from over 70% to 35% (1960s to 2007)  Why high savings? - precautionary savings – many SOE workers thrown out of work, social services no longer free - corporate savings – SOEs not taxed, don’t pay out dividends, reinvest into export production

40. Tale of Two Gluts – Savings Glut and Debt & Overconsumption Glut  China current account surplus rose fr $12bn 1990 to $426bn in 2008  Foreign reserves rose fr $30bn in 1990 $3 trillion in 2011.  Under-consumption and excess savings in poor country funding excess consumption and debt bubble in the U.S.  SWF investments in speculative finance capital adds to financial instability 40

41. China’s Current Acct Surplus, FX Reserves, U.S. Current Acct Deficit 41

42. Conclusions and Policy Implications  “There can be no dispute that the current crisis is due to a systemic, policy-driven environment of financialization and speculation originating in the North, often foisted upon reluctant developing countries through misguided advice and aid conditionality. The crisis must be resolved through intervention at those levels.” (UNCTAD) 42

43. Conclusions  Globalization driven by financial and speculative capital has distorted development in real economy  Two major imbalances – imbalance btw finance and real economy  Inequality is worsening  This in turn driven by basic fundamentals of contest btw capital and labor 43

44. Conclusions  For now, pendulum has swung in favor of capital, aided by neo-liberal state policies  Inequality has resulted in under- consumption and excess savings whose dynamics are played out in global imbalances and financial crises  If history is any guide, adjustment process without change in policy direction will not resolve the problems 44

45. Conclusions  Inequality a structural problem that requires policy shift fr market fundamentalism to policy of inclusiveness – raise wages concomitant with productivity increases  Present strategy of reviving growth by cutting labor costs only leads to jobless recovery 45

46. Conclusions  Without improvement in employment, wages, reduction of inequality, strengthened household balance sheet, growth is not sustainable. 46

47. Implications for Emerging Economies  Growth must be not be driven by financialization and speculation  Growth must be more balanced and inclusive  Wages must rise with productivity increases if want to reduce export dependence and promote domestic consumption 47

48. Conclusions  Encourage more debate, dialogue, new ideas and cooperation among EMCs  Formulate new agenda for different type of globalization 48

49. Some specifics  Presently only 10% of total FDI flows is btw South-South countries  Rather than invest in speculative capital, recycle huge surplus of EMCs within region  Introduce socially acceptable rate of return rather than maximizing shareholders value  Depend more on domestic and intra- regional markets – reduce inequality, 49

50. Conclusions  Increase regional cooperation in trade, investments, exchange rate coordination 50

51. IMF Working paper 10/268 Michael Kumhof and Romain Ranciere Inequality, Leverage and Crises 51

52.  THANK YOU 52