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Article1 - A 1 We asked the M's Kenneth 110ng to...

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Unformatted text preview: A 1_.___ __ We asked the M's Kenneth 110ng to aurveythechallenge sfacing tlreglobalfinarrcial‘system at thestartof the not century SOWIMES I spend my nights re-re’adt ' '- . __ 3 _' _: :. ' ability of governments to borrow. even at in g how Englishman John Maynard Keynes and American Harry Dexter White calmly traded ideas for reshaping the international financial system. even as the second world war exploded around them. That puts today’s chal- lenges into perspectivé—useful for those of us who sit. as i now do. at the Intema— tional Monetary Fund. attempting to im- plement Keynes‘s and White's vision as it has evolved over the past (So-some years. Taking a pause to look ahead, here are six issues that seem particularly salient over the coming decades. 1. Current-account imbalances We at the nor have not been a cheer: leader for burgeoning current-account im- balances. especially when they start to ‘ look unsustainable. Are we wrong to worry so much about this? Rapid current- account reversals are ofien accompanied by sharp and potentially disruptive ad- justments in exchange rates or. worse. patterns of growth. But at the same time. if we begin to think ahead. it becomes ob- vious that thereal challenge is not to re- duce cunent-aoeount imbalances but to find ways tosustatn bigger ones. albeit properly directed - Isolationists in industrialised coun- tries should stop and look at their popula- tions’ advancing age structure. As the dependency ratio explodes later this cen- tury. who is going to provide goods and services for all the retirees? There are many elements to a solution. not least al- lowmpanded immigration from the developing world. with its much younger population. Regardless. one desirable ele- ment has to be for the industrialised countries to save abroad by running large current-account surpluses vis-d-vis the developing world. These cumulated sur- pluses. while facilitating much-needed in- vestment in poorer countries right now. could later be drawn down as the baby- boomers stop working. As discussed in our World Economic Outlook of May 2001. the resulting pat tern of current-account balances could see industrialised countries accumulating overseas wealth amounting to 50% of their one by 2030, Then the process wtmld reverse. with the industrialised countries draWing down their wealth by running sustained current-account defi- cits of 3-495 'of one. Right now. the system cannot easily tolerate such giant debt accumulation. We have to make it work better. Expanding trade would help sup: port'deeper capital-market integration. Better procedures to govern international lending contracts are also essential. a. Government debt Unfortunately. though globalisation raises the benefits of re—channelling global savings. it also sets constraints on govemments' capacity to raise the reve- nues needed to manage exceptionally large debt-tO-GDP ratios. As factors of pro- duction become more mobile. they be- come more difficult to tax. Companies can ever more readily move production to countries where tax rates are lower. As global investment op- tions expand. taxing wealth-holders has become harder too. Even labour cannot be relied on to remain at home. Indeed. countries that fail to achieve ofl’setting ef- ficiencies (for example. by keeping after- tax rates of return competitive through above-average productivity growth) may find it increasingly dilficult to borrow as the 213i century rolls on. Otherwise. if a government allows its debts to rise too far. there will be an exodus of capital and labour that strains the ability to repay of the investors and workers who remain. Exacerbating this will be the diminished home. without indexing debt to major currencies. Indexation also pushes down levels of sustainable debt. as it increases vulnerability to exchange-rate adjust- ments that might otherwise be desirable. Fortunately. in addition to productiv- ity gains, governments still have many ways to make their commitment to future debt repayments more credible. Improv- ing the efficiency of national tax systems is one. Until we have better answers. though. some governments may be well- advised to be more prudent. at the very least running surpluses during times of economic booms. so as to have some bor- rowing capacity lefi when it is most needed. Certainly this should be one of the lessons from Argentina. whose gov- ernment ran deficits during the boom years of the 19905. 3. Exchange rates Perhaps economic historians will look back on today's patchwork global ex~ change-rate arrangements as a latter-day Tower of Babel. But what other system is there? With freely flowing capital. a fixed exchange rate has the life expectancy of a Hollywood marriage. And. on the whole. the historical experience of countries that try to sustain rigidly fixed rates indefi- nitely via capital controls is not a pretty one. Unless monetary and fiscal policy are slavishly consistent with the require- ments of fixity. a parallel market soon flourishes. with. in effect. a floating rate. Typically. the parallel premium grows the capital controls break down. and the official rate itself has to move. During post-war history. a great many so-called fixed exchange-rate regimes have in reality been "back-door" floats via dual and parallel markets. Then again. » ...
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