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G20 Leaders Voice Worry on Trade

21/02/2011    41

PARIS — With the world’s economies moving at two different speeds, fast-growing developing countries are luring money at a pace that, if left unchecked, could set the stage for future problems, the Federal Reserve chairman, Ben S. Bernanke, said Friday.

Mr. Bernanke also defended again the Fed’s steps to bolster economic growth in the United States, this time at a central banking conference here before a meeting of the Group of 20 finance ministers and central bankers. The Fed has kept interest rates low and made money more available to encourage domestic growth even as many other countries have grown increasingly worried about inflationary pressures and taken some steps to curb growth.

China and other emerging markets have blamed the Fed’s strategy for sending waves of capital rushing to their shores, creating a threat of inflation. But Mr. Bernanke said the influx of capital appeared to be driven more by investors’ desire to get a higher return in emerging economies than by the Fed’s policies.

He admonished emerging nations to acknowledge that they have “a strong interest in a continued economic recovery in the advanced economies,” and said they should consider deploying their own tools — including adjusting the level of their currency — to manage their economies and prevent overheating.

Mr. Bernanke did not mention China in his remarks, although they appeared to be a veiled reference to Beijing’s policy of keeping its currency, the renminbi, artificially low to gain a trade advantage. As Mr. Bernanke spoke, the Chinese central bank governor, Zhou Xiaochuan, appeared on the same stage.

The extent to which advanced economies are lagging emerging markets is a major preoccupation among policy makers here. The United States Treasury secretary, Timothy F. Geithner, told the group that forecasts for growth of about 5 to 7 percent in emerging markets, 3 to 4 percent in the United States, and 1 to 2 percent in Europe this year seemed accurate to him. The question, he said, was: “How do we get sustainable durable growth in the advanced economies?”

In a star-studded lineup from the world of economic policy makers, the central bank governors of Britain, France, Japan and China, as well as Jean-Claude Trichet, the governor of the European Central Bank, took turns underscoring their worry that the uneven nature of global growth could undermine the recovery.

Mervyn King, the governor of Britain’s central bank, said China was pursuing structural reforms slowly while countries like the United States and Britain, facing the prospect of high unemployment, favor a quicker adjustment path. There is a risk, he added, that this conflict will result in persistently high levels of unemployment if advanced nations fall even further behind.

Mr. Bernanke said a way to address imbalances in global growth was for countries that export more than they import to allow their currencies to reflect overall economic performance. He also urged those with large trade deficits to increase their savings and put their fiscal policies on more sustainable paths.

The Fed chairman said countries maintaining undervalued currencies had “contributed to spending that’s unbalanced and unsustainable,” which, together with surging demand in fast-growing emerging markets, was fueling a worrisome rise in commodity prices.

“Spillovers can go both ways,” Mr. Bernanke said. “Resurgent demand in the emerging markets has contributed significantly to the sharp recent run-up in global commodity prices.”

Meanwhile, countries that have allowed market forces to determine the level of their money have been penalized by seeing their competitiveness erode, he said.

Mr. Zhou later appeared to concede the point, to a degree. He noted that Chinese exporters complained that they would all go out of businesses if the government were to allow the renminbi to rise by 3 percent. “But then that happens and then they survive,” he said. In fact, he added, “they have room to improve and survive.”

Policy makers in advanced economies have been calling on China to stoke demand from within its own country to even out its trade dominance. Mr. Zhou said China was working on that. “One day we’ll have a domestic market too, depending on price elasticity,” he said.

China could also shift from an export-dominated manufacturing economy to a more service-oriented one to meet domestic needs. “But that would be slow, it would take 10 years at best,” Mr. Zhou said.

Officials from the Group of 20 are gathering here Friday and Saturday, and are trying to come to an agreement on a set of “indicators” to help identify when economic and financial developments in some countries would pose problems for all the others. Among other things, European officials have proposed monitoring a country’s current-account balance, its public deficit and debt, the savings ratio, net foreign assets and real exchange rates.

But Beijing is fighting against using exchange rates and currency reserves as a measure. These have become an issue of contention for other countries that see China using its exchange rate to stoke exports, even as trade deficits and surpluses have started to rise in many countries.

“We’re trying to build a system that has a better balance of exchange rate policy in large emerging countries,” Mr. Geithner said.

Both China and Germany have batted down calls from the United States to cap current-account surpluses or deficits at a certain percentage of economic growth.

Christine Lagarde, the finance minister of France, which is presiding over the meeting this year, warned that if countries stuck to “business as usual,” the world risked falling into a debt crisis.

“The more desirable scenario is that deficit countries curb and reduce debt, and surplus countries are prepared to boost their domestic demand,” she said. “Where collective gains are possible, global growth would be reconciled by a reduction of imbalances,” she said.

Officials are also focused on how to improve oversight of the banking system to mend problems that emerged from the recent financial crisis and prevent another one from emerging in the coming years.

“How do you fix oversight? That’s the problem,” Mr. Geithner said. “The rules have to be designed better and applied more uniformly across countries.”

He said that the American system of overseeing its banks was “very complicated,” and that it would be better to make oversight more integrated. But the United States approach of giving tough love to its banks seems to have worked: Citigroup and others, which taxpayers supported with huge bailouts during the depths of the crisis, have yielded a return to the Treasury.

Europe, by contrast, seems to have much less tolerance for allowing the failure of its financial institutions. European banks have been a source of worry as the region grapples with a sovereign debt crisis that has seen Greece and Ireland take bailouts, creating fears that many banks still face unreported losses.

At the same time, Mr. Geithner said Europe was making “some progress” in exiting the crisis, and noted that markets were showing “confidence that Europe is meeting the challenges.”

Feb 18th, 2011

Source: The New York Times