The discussion on global rebalancing is at a crossroads, and much of what will shape policy options moving forward will have to be taken up in roundtables that include more countries than the two usual suspects, China and the US.
Global Rebalancing 1.0
When the issue of global rebalancing first emerged, it was focused squarely on the trade imbalance between China and the US. However, the global economic turbulence of 2009-2010 and the subsequent economic fragility and uncertainty enveloping much of the global economy, has begun to underscore how broad this issue really is. Analysts like Stephen Roach of Yale University and Yiping Huang of Peking University have also noted how China has taken steps to contribute to possible rebalancing. China’s currency has appreciated by some 31% against the US dollar since 2005. And it has experienced a decline in its trade surplus in recent years.
Nevertheless, the consumption share of GDP in China is still low (and even declined according to recent statistics). Further, the US still has a current-account deficit amounting to about 3.1% of GDP. In 2011, the US maintained a trade deficit with at least 91 countries, most of which are in the developing world.
The strategy of bashing China and curbing US consumption (which remains significantly depressed despite mild signs of economic recovery) seems to have done little to rectify the situation. Today, the global economy seems more unbalanced than ever – and on top of this, new risks, such as the European debt crisis, are dragging down the global economy. As global capital moves about in a very unpredictable way, new economic imbalances are potentially being fed.
Broader and more fundamental changes in the global economy could facilitate a more sustained and orderly rebalancing process – one that is also much more politically feasible in both China and the US. Rapid economic growth in a number of developing countries and socio-economic advancement of large swaths of their populations, are among the forces of change. As parts of the industrialised north ages and enters a period of economic fragility, some parts of the emerging south could play a role in global rebalancing.
In a recent special issue of the Journal of Asian Business, co-published by the University of Michigan’s Center for International Business Education and Research (CBER) and the Asian Institute of Management Policy Center, we tried to shed light on some of the main channels through which the process of global rebalancing is possibly taking shape. There are four main messages for policymakers.
- First, international value chains suggest that rebalancing is not just between any two countries.
Many countries in the Asian region are part of a complex manufacturing chain. Some export intermediate goods to an end-product assembly hub country – typically China –which in turn exports final goods to industrialised countries and other markets. For countries like South Korea, Singapore, Malaysia, and the Philippines, vertical integration is a key factor behind their collective export competitiveness. A sustained reduction in trade imbalances involving final assembly hubs like China, therefore, requires an exchange rate adjustment across a number of Asian economies linked through the value chain. Otherwise, exchange rate adjustments by China alone could be effectively undone by accompanying adjustments in its intermediate trading partners’ exchange rates.
- Second, China has many consumers, but so do other rising economic powers.
Asia will account for a large share in the rising global middle class. Soon this army of consumers will demonstrate an even stronger thirst for globally traded products. While China will account for much of this emerging middle class, countries such as India, Indonesia, Thailand, Philippines, Vietnam, Pakistan, and Malaysia will also account for large shares. Projections show that by 2030, expenditures in Asia will reach about US$35 trillion – at least 50% larger than the US$21 trillion projected for OECD countries for that year.
- Third, sending FDI may be just as strategic as receiving FDI.
One aspect of global rebalancing is the increase in FDI sent by developing countries to other developing countries. A good example is FDI from the BRICs (Brazil, Russia, India, and China) to the LICs (low income countries), particularly Africa. This is fuelled by abundant foreign reserves, high demand for natural resources and commodities, rising domestic labour costs, and greater appetite for risk in the BRICs, and improved business climate in Africa. In principle, south-south FDI can help in facilitating global rebalancing by lowering emerging market economies’ lending to the US (i.e. the purchase of US treasuries and accumulation of reserves), and increasing the potential for Africa to help satisfy part of the emerging south’s demand for both manufactured goods and raw materials.
- Fourth, an ageing world will increasingly rely more on mobile youth.
A final avenue for rebalancing focuses on the often overlooked potential for intra-Asian migration flows (and their eventual implications on remittances). Migrants’ destinations are now shifting from industrial countries to fast-growing Asian economies such as Singapore, Malaysia, and Thailand. Consequently, the flow of remittances is beginning to shift from north-south to south-south, and this could help ease the current-account imbalances in some industrial countries. Asia is now second only to Europe as the global host for most international migrants. Asia has also exhibited the highest growth in migrant stocks and accounts for close to one-third of the total global migrant stock.
Toward a more sustained and politically feasible global rebalancing
Perhaps a more orderly and sustained global rebalancing is likely to be synchronous with the continued growth and development of more countries in the world. The developing world is now home to the world’s youngest workers and consumers, the main source for raw materials and commodities for manufacturing, and the main hub for many of the world’s international value chains. 'Global rebalancing' in this sense is also a product of a more balanced economic development process – one which brings in more countries (and larger segments of their respective populations) into higher standards of living. While this should be welcomed, it will also usher in new opportunities and challenges. The possible solutions and strategies are unlikely to be merely bilateral. The type of rebalancing that will bring broader gains across countries is the one that will be more likely shaped by industrial and developing countries cooperating for mutual and sustained gains.
Claessens, Stijn, Simon J Evenett, and Bernard Hoekman (eds.) (2010), “Rebalancing the global economy: A primer for policymakers”, A VoxEU.org Publication, 23 June.
Huang, Yiping (2012), “China’s economic rebalancing is already underway”, VoxEU.org, 17 February.
Lim, Linda and Ronald U Mendoza (eds.) (2012), Journal of Asian Business, Special Issue on “An Asian Lens on Global Rebalancing”, Asian Institute of Management and University of Michigan, 2012.
Roach, Stephen (2012), “America’s Renminbi Fixation”, Project Syndicate.