I think we learned a lot from the current crisis. We learned that financial systems need regulation. We learned that regulation cannot be exclusively national. We learned that the initial financial crisis evolveinto a profound economic crisis. And we learned that it is not sufficient to solve the financial crisis to solve the economic crisis that followed: you have to take rapid and strong measures to sustain effective demand. But I think we forget the major problem. We are addressing the current crisis as if there was only one type of financial crisis, the type that we are facing today, that is, a banking crisis. We forget the balance of payment crisis. This might not be a risk for a great country like the United States or other rich countries, although Great Britain suffered from it in the early 1980s. But for all other countries, the developing countries and middle-income countries, these crises are very relevant. And given the increasing role and weight that these countries have in the world, we might say that the balance of payment crises have syste- mic consequences. Thus, we should look for measures to prevent them.
The same concern was raised at Bretton Woods. I’m in favor of international currency, but I don’t believe that it will solve that particular problem. I’m in favor of increasing the role of developing coun- tries in the new financial architecture, but again, I don’t believe this will solve the problem. Rather, we have to address the balance of payment crisis as a problem in its own right.
So, what will resolve the problem? National policies, surveillance of the financial system and measures to limit current account deficits and debts. We must remember that growth is supposed to be stimulated through domestic savings, not foreign ones; that foreign savings are current account deficit; it’s synonymous.
The solution, in my view, is to limit indebtedness. Since what caused the current budget payment crisis in the first place? It’s very sim- ple: the country got indebted. If a country starts to have a very large current account deficit, sooner or later creditors will lose confidence and stop renewing the debt. And suspension of the foreign debt causes the crisis. Normally, devaluation of the currency is the response to it.
What’s interesting about this question is that neoclassical economists, as hostile to budget deficits as they might be, have nothing against current account deficits. In their view, this is about investing savings, which is a wonderful thing: rich countries invest in developing countries. And they are not the only ones to make that mistake. I believe that most economists, conventional economists in general, believe that capital-rich countries are supposed to transfer their capital to capital-poor countries. This might seem obvious but in fact, it is not. In my papers I develop the argument why these current account defi- cits are bad for the economy. I’m not going to present the full argument here, you can read it in The Journal of Post-Keynesian Economics. But I will describe the problem as a process in three stages:
The final stage of this process is the actual budget payment crisis.
The stage before is a period of financial fragility, when the country is heavily dependent on foreign creditors and on the IMF, and their leaders adopt the confidence-building attitude: « we must do everything that the creditors tell us to do ». In the stage before, we have a high rate of substi- tution of domestic savings by foreign savings. Why is that? Because when you have a current account debt, the exchange rate appreciates.
So what should we do about it? I suggest we should do what the Europeans did about the budget deficit. The European Union established the rule for all its member countries, saying that 3 percent deficit was maximum. Sometimes you can go beyond that; but in general 3 percent is the maximum. This is a good idea. We can discuss whether the limit is too low or too high, but all in all I think that this level is reasonable.
The same thing should be done with current account deficits. This should be discussed seriously, then we’ll see if we arrive at 3 percent or 2 percent – the important thing is to have a rule.I am perfectly aware of the fact that the idea is both new and old. Actually, it is about 10 years old. Since it is, roughly speaking, ten years ago that developing countries began to make current account surpluses.
My friend James Galbraith had an explanation for the U.S. current account deficit. I agree with him. But I don’t think this is the main reason, yet alone the only reason. The main reason is that deve- loping countries learned that current account deficits are disastrous. And those who really learned the lesson were the Asian countries, the four Asian countries that run into a major financial crisis in 1997 precisely because they were running high current account deficits.
I think that in the future, it is the developed economies - the United States but also Europe and Japan - rather that the developing countries, that will have to worry about current account deficit. And I suggest that the idea that the market is able to control that, to adjust global financial indebtedness, is absurd. We need regulation to solve that problem and this should be put on the agenda.
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