The flip side of global imbalances

It is essentially difficult to talk about imports without also talking about exports which actually is a silly point but we need to remember this when we talk about global imbalances evoking the US current account deficit because there obviously is a flip side to this coin. The simple version of this is to look at the hawky US narrative demanding a revaluation of the Yuan to curb the massive bilateral trade-deficit. Whether or not this is a valid claim the US-Chinese trade relationship pretty well sums up the notion of global imbalances in the sense that this is what it is all about; imports and exports.

In his recent column William Pesek from Bloomberg talks about the other end of the global imbalances continuum, namely the Asian addiction to exports. His points are worth considering.

The World Bank's latest take on East Asia is both wonderful and terrible.

First, the wonderful part. The Washington-based institution raised its 2006 growth forecast for East Asia -- excluding Japan and the Indian subcontinent -- to 6.6 percent from its November estimate of 6.2 percent. It lauded economies for their remarkable resilience in the face of high oil prices.

"Coming into 2006, things look quite strong," Homi Kharas, World Bank chief economist for East Asia and the Pacific, said in Sydney on March 30.

Now for the terrible part: "A lot of the growth,'' Kharas said,  is being fueled by exports.''

So growth based too much on exports is not good, but then again growth based too much on import is not good either I suppose. As William notes, the problem concerning Asia's reliance on exports (can we include Japan here as well?) is that export led growth explicitly relies on exogenous factors.

"What's wrong with exports? Nothing, until you look more closely at the World Bank's twice-yearly report on East Asia. It noted that the region's share of trade to gross domestic product is now the highest in the world, exceeding even that of the European Union. East Asia's exports now exceed $2 trillion.

That means growth is still essentially a leveraged play on the global economy. Almost nine years after the start of the Asian financial crisis, the region remains addicted to producing goods cheaply and shipping them to rich nations.

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For all the optimism about Asia, its fortunes still rise and fall with trends in the U.S. economy and other large ones. And that leads to a variety of vulnerabilities."

Following up on this point I can also refer to Brad Setser who, albeit with a different aim and perspective, implies how growth based on imports tend to be more sustainable in the future because it feeds on strong domestic demand which in this case translates into an endogenous factor.

Returning to William Pesek his main argument draws on the continuum of global imbalances;

any shock hitting the U.S. economy may change investors' perceptions given the existing global current-account imbalance.'' That, he said, ``would generate very significant turmoil, so East Asian economies ought to be ready for that.''

Asia has come a long way since 1997. Foreign-currency debt was reduced, banking systems strengthened, currency reserves rebuilt, transparency improved and corruption is, to varying degrees, being addressed. The next step is to make Asia less dependent on the U.S. consumer.

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"Asia's failure to wean itself off exports leads to a global imbalance, just like U.S. trade deficits. While it may not be as dangerous, Asia's inability to create growth domestically may be slowing the benefits of globalization."

So there you have it, the flip side of the global imbalances. This is not to say that the global economy is all about Asia and the US but this dual relationship mirrors very well the imbalances of the global economy. Another question is whether growth materialize in imports or exports and crucially whether we can say that one is better than the other. On this question I think the grand morale is that balance beats imbalance which essentially leaves the question open.