KONGThe 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
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
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
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
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.