Sunday, April 02, 2006

Martin Wolf and the World Economy

Martin Wolf (links from Brad Setser) has set out an immensely broad sweep picture of the state of the imbalances in the world economy. Regardless of the accuracy of his conclusions I would recommend it as a read if you want to try to get to grips with the issue.

His core observation on the world as it stands is that the current policy of Asian countries of neutralising surpluses by recycling to the United States is effective in avoiding an Asian bubble but creates reserves in Asia and deficits in the US which are reaching unmanageable levels, it is also very expensive for Asian countries. For this reason the large Chinese economy needs to move towards less export led growth.

His final conclusions are phrased in terms of a number of actions which need to be taken at the same time but to my mind he has really set out a series of desirable steps such as market exchange rates and a reduction in worldwide surpluses which are contingent on the prior step of reforming financial sectors in developing countries. This is necessary to avoid repeating the Asian Financial Crisis where financial systems which had been successful serving a less developed economy demonstrated vast flaws when dealing with exposure to international finance.

His ideas on how this financial reform should proceed are the Basel standard including strong regulators, proper transparency etc. but he does acknowledge that more information is needed on the efficacy of differing regulatory regimes. This clarity might be provided by the study highlighted in the Economist (requires subscription) which questions the wisdom of granting vast powers to financial regulators in developing states. It would appear that the crucial reforms are particularly those ensuring transparency in the affairs of banks; allowing lenders and borrowers to decide on the soundness of banks rather than empowering an additional layer of, often inscrutable, officialdom.

No comments: