A major risk for the world economy вЂ“ and for developing countries вЂ“ is an abrupt unwinding of global imbalances. This observation was made by authors who contributed to the first volume (Global Imbalances and the US Debt Problem: Should Developing Countries Continue to Support the US Dollar?) that resulted from a conference held in The Hague in 2006. вЂњThe scale of the US deficit, its rapid growth and that of US net liabilities, make the problem an increasing source of concern,вЂќ stressed Jane DвЂ™Arista and Stephany Griffith-Jones in their chapter in the first volume.
вЂњThere are serious concerns about how the unwinding of global financial imbalances might affect the external financing conditions in which emerging market economies operate,вЂќ writes Louis Kasekende, chief economist of the African Development Bank, in the chapter he contributes to this second volume. вЂњThe greatest risk would arise from an abrupt and disorderly adjustment of major exchange rates, combined with a higher-than-expected rise in international interest rates.вЂќ
Other authors in this volume share KasekendeвЂ™s concern. For example, Latin American economists Ariel Buira and MartРЅn Abeles observe that вЂњa sudden reallocation of portfolios away from dollar-denominated assets, or even just a gradual decline in the demand of US dollars as a reserve currency due to diversification, would entail large costs as the value of these assets falls and dollar interest rates rise, leading to a slowdown of the US economy and (given the structure of global
demand) to a decline in worldwide economic activity.вЂќ Buira and Abeles warn that a fall in worldwide economic activity could in turn trigger pervasive вЂњbeggar-thy-neighbourвЂќ policy responses, including protectionism and extensive competitive devaluations. вЂњSuch a scenario would affect economies across the globe, but would be particularly harmful to developing economies.вЂќ
While the previous volume gave special attention to the position of China in global imbalances, this volume gives special attention to Africa and East Asia. One chapter, by chief economist William R. White of the Bank for International Settlements (BIS), provides a fresh, unorthodox, long-term view on global imbalances. He does so by following the approach of the so-called Austrian School of economic thinking. The two subsequent chapters deal with the role of the International Monetary
Fund in addressing global imbalances. The last four chapters discuss the need for reform of the international monetary and financial system.
Before highlighting a few of the observations and remedies presented in this volume, let me recall that several of the authors of the previous volume emphasised a fundamental flaw of the current international monetary system. For example, Jane DвЂ™Arista and Stephany Griffith-Jones stressed that the US deficits are not only the result of overspending by the United States, but also of an international monetary system that uses the dollar as the key currency, thus generating debt in
the key currency country вЂ“ the US. Fan Gang, an influential Chinese economist and member of the monetary policy committee of ChinaвЂ™s central bank, went even further. He saw the international monetary system as the main cause of the US deficits and global imbalances. He stressed that the fundamental problem is not in US policies, but in a global currency system which allows the US to run high deficits and print as much money as it needs. Fan Gang favoured a reform of the international monetary system that would end the hegemony of the dollar. вЂњThe US dollar is no longer a stable anchor in the global financial system,вЂќ he observed, вЂњnor is it likely to become one: thus it is time to look for alternatives.вЂќ