Newspaper article International New York Times

Seeking Economic Balance ; U.S. Policy Makers Need a Way to Get Developing Countries to Borrow Again

Newspaper article International New York Times

Seeking Economic Balance ; U.S. Policy Makers Need a Way to Get Developing Countries to Borrow Again

Article excerpt

Maybe the question we should ask is how we can make developing countries unafraid to borrow from us again and to buy more of our products.

Ben S. Bernanke and Lawrence H. Summers are in the midst of a vigorous blog debate about why the world's economy is so messed up and how it can be fixed.

Mr. Bernanke, the former Federal Reserve chairman, says a "global savings glut," caused by people and governments overseas saving too much, has driven up unemployment in the United States and driven down wages, gross domestic product and interest rates. The mechanisms are complicated, but one of the main reasons imbalances matter is that any country that is saving too much is not buying enough American exports.

This is a cheerier story than the "secular stagnation" theory of Mr. Summers, a former Treasury secretary. Because if the United States can fix the imbalances -- get other countries to stop saving so much and start buying more American products and borrowing more American money -- the country's economy should more or less return to normal.

But is there a good way for American policy makers to fix imbalances that arise abroad? "We don't really have powerful tools," Mr. Bernanke said Monday in response to a question from The New York Times.

He rejected one idea floated by some left-of-center economists like Dean Baker: demanding the inclusion of anti-currency manipulation provisions in trade agreements like the Trans-Pacific Partnership, which would aim to prevent countries from deliberately weakening their currencies in order to gain an advantage in exporting.

Mr. Bernanke offers plausible reasons for rejecting this approach. Other countries would be unlikely to agree to such provisions. It's not clear you could develop treaty rules that effectively distinguish between currency manipulation and valid monetary policy activity. Most important, some currency-weakening policies are actually good for the global economy, especially if the country with the weakening currency has a weak economy (think Abenomics in Japan). An international regimen that cracks down on weak-currency policies could therefore, in some cases, make global imbalances worse.

But if not currency provisions in trade accords, then what? "Obviously, there's not a real legal stick to use," he said, "but countries do respond I think to diplomatic overtures and to pressure from their trading partners when what they're doing is perceived as, you know, counterproductive to the global economy."

That is, ask nicely.

The best example of the Ask Nicely strategy is China, whose weak currency policy was one of the leading sources of global trade imbalance over the last 20 years. In recent years, the Chinese have allowed their currency to appreciate. Perhaps they did this because of pressure from the United States and other trade partners; perhaps because the weak renminbi, great though it was for Chinese manufacturers, was suppressing domestic consumption and reducing real income for the country's citizens.

Either way, China's policy persisted for an awfully long time and caused significant problems in the American economy. …

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