Poor funding of rich seen as unsustainable, risk By Stella Dawson and Natsuko Waki
34 minutes ago
Massive flows of capital from the emerging to the developed world are unsustainable and risk damaging both poor and rich countries, some of the world's top finance officials said on Saturday.
Speaking at the World Economic Forum in Davos, European Central Bank President Jean-Claude Trichet said that the current global investment pattern was "profoundly abnormal" and in no country's interest.
"It is not sustainable in the long run that the emerging world would finance the industrial world. It doesn't correspond to the interest of the emerging world, neither to the interest of the industrialised world," he said.
In a similar vein, Indian Finance Minister Palaniappan Chidambaram said countries like his, one of the emerging stars on the global economic scene, were under threat.
"Global imbalances are deepening and that has serious consequences for developing countries like India," he said.
The United States is currently seeing huge inflows of capital from the developing world, notably China, that are financing its current account deficit, bolstering the dollar and keeping long-term interest rates low through U.S. bond purchases.
The U.S. absorbs roughly 70 percent of excess global savings. The danger to the world economy is that when the inflows eventually slow or dry up, there could be sharp economic and market dislocations worldwide.
"There are potential triggers that could create serious consequences for the global economy. The first is a southward movement of the dollar, the second is an unexpected increase in U.S. interest rates ... Thirdly, (a spiral in) energy prices... will lead to inflationary expectations," Chidambaram said.
Former U.S. Treasury Secretary Larry Summers warned the problems were worsening and time could be running out to fix them. But if policymakers delayed further, he said, "the correction must be that much larger."
CHANGE COMING?
U.S. Deputy Treasury Secretary Robert Kimmitt said his country needed to play its part by relying less on foreign capital. "The U.S. needs to increase savings, starting with a reduction of the budget deficit," he said.
Higher savings would slow U.S. growth, though, and fourth quarter GDP data released on Friday showed national output surprisingly weak at 1.1 percent as businesses pulled back on investment. Kimmitt called this "anomalous" and not indicative of a broader slowdown coming in the U.S. economy.
He also called again on China to let the yuan currency strengthen. "China needs to move its currency to be driven by underlying market forces soon."
The growing significance on the world economic stage of countries such as China and India has been a major theme this week at Davos.
U.S. officials such as Kimmitt have been keen to say that they are not expecting any immediate change in the flow of funds from China in particular, and that U.S. financial markets are robust enough to handle a change.
There are some concerns on the bond market, however, that China is losing some of its appetite for Treasuries.
India's Chidambaram, meanwhile, said that he expected flows from China would change as local consumption grew.
"I think the direction of exports will change. A country like China will be forced to stimulate domestic demand ... I'm not judgmental about China. The people of developing countries have to have a higher consumption of goods and services," he said.
The other part of the equation for solving global imbalance is for Europe and Japan to quicken their growth.
Trichet, however, said the European Union had limited pulling power when its current account was roughly in balance and its potential growth rate low -- about 2 percent against 3.5 percent in the U.S.
Still, he renewed his call for governments to work harder on loosening Europe's rigid labor rules and regulated price structures to lift productivity and raise growth prospects.
As for Japan, the world's No. 2 economy, a policy chief of the ruling Liberal Democratic Party said his country was poised to shake off falling prices and a decade of stagnation. He said Japan targeted a 4-5 percent nominal economic growth.
"The Japanese economy seems to be stagnating versus rapid growth in China, but its growth is ready to take off. Japan is coming out of deflation," said Hidenao Nakagawa, who is chairman of the LDP's Policy Research Council.
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