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Understanding the Global Imbalances

Apr 18-2013   



By NING Jing

 

On December 26th, 2007, upon invitation from China Center for Economic Research (CCER) at Peking University, Professor Richard N. Cooper of Harvard University delivered an academic lecture on the topic of “Understanding the Global Imbalances” at Zhifuxuan of CCER, as a part of its lecture series on economic theories and policies. 

In Professor Cooper’s opinion, there are two reasons for current concern with national savings and investment. One is the controversy in all the developed nations over public pension or pension in general; the other is the severe global imbalance of current accounts, that is, the discrepancy between national savings and domestic investment. Especially for the United States, family savings seemed to have dropped to zero in 2005.

First of all, Professor Cooper displayed to the audience a table of U.S. current account deficits during 1995 and 2007, the changes of the total domestic investments and total savings of the United States during 1995 and 2004, and the capital flow in the international balance of payments of the United States during 2000 and 2005. These data point to the changes of domestic investment and private savings as the direct cause for the deterioration of U.S. current accounts. Since the foreign exchange market for the U.S. dollar is not subject to planned and systematic regulation by the U.S. government and the U.S. dollar has an inverse floating rate with other currencies, huge amounts of foreign investment have caused the extraordinary current account deficits of the United States.

Professor Cooper reminded the audience of the investment decrease in other developed countries and regions, such as Japan, Germany and the “Four Asian Tigers”. Statistics shows that most regions except Germany (together with Britain) have had a higher rate of real investment than that of the United States. Nonetheless, even in Germany and Britain, domestic investment has drastically dropped in recent years. By contrast, investment has risen rapidly in the developing countries of Asia. Remarkably, in China, investment accounts for over 40% of the GDP. Both Chinese government and some foreign analysts regard such investment level as too high. Among developing countries, China is the only case of having excessive investment. However, since investment still lags behind savings in terms of growth, the rapid economic growth allows consumption to expand in spite of higher rates of savings.

Leaving out statistical errors, the current account balance (net foreign investment) is the difference between domestic investment and national savings. Therefore, when national savings exceeds domestic investment (or when personal savings exceeds the sum of investment and government deficit), it means investing overseas, namely, net inflow of investment in foreign countries. Then, why do the world’s main economies want to invest overseas in large amounts? Professor Cooper believes that one reason is the trend of population development. Though birth rate varies from country to country, it has dropped in all developed nations, and has dropped in many developing nations, too. One typical example is China, which launched its one-child policy in 1979. Though people live longer now, the trend is that the population has been dwindling. Among developed nations, the United States enjoys an obvious advantage in expected population growth, especially that of young people. In a fully globalized world economy, without considering residential preference, it is estimated that approximately 30% of the savings from the rest of the world will be invested in the United States, while 70% of U.S. savings will be invested overseas.

Many people regard the high level of U.S. current account deficit as unsustainable. If they mean the recent trend of the deficit is unsustainable, certainly they are right, for U.S. current account deficit as a percentage of U.S. GDP cannot grow unlimitedly. Nonetheless, the deficit has kept rising during the past 10 years (except the temporary pause in 2001). So, if they mean the large deficit cannot sustain, that is incorrect and also impossible. The population trend in Japan, Europe and East Asia may lead to current account surpluses during many years and establishment of external assets to provide for the aging population decades later. During this process, the central banks naturally will regulate the domestic depositors. For example, the central bank in Japan will take related regulative measures because Japanese depositors behave too conservatively and cannot meet the needs of the country, and China does not grant the freedom to its domestic depositors to invest overseas.

Professor Cooper believes that U.S. economy is full of life and rich with innovative spirit. The United States has a population structure obviously different from those of other developed nations, and its birth rate has not seen any substantial drop. Besides, the United States is expected to receive large numbers of immigrants, who will be largely young people. In this respect, though the United States is rich and politically mature, it can still be called a young and vigorously growing country. Especially, the country has an innovative financial sector that can continue to produce new products to satisfy the needs of different investment portfolios. In the globalized market, the United States enjoys comparative advantage in some aspects, such as creating merchantable securities and exchanging low-risk equity for high-risk assets. All depositors in the world want to invest a small but growing part of their savings in the United States. Consequently, the U.S. current account deficit may stay high in upcoming years.

After Professor Cooper’s speech, Professor YU Miaojie and Professor LU Feng of CCER respectively shared their views of the issue discussed by Professor Cooper. The audience also had discussion with Professor Cooper after the lecture.

 

 

Professor Richard N. Cooper graduated from London School of Economics and Political Science with an MSc in economics in 1958, and received his Ph.D. in economics from Harvard University in 1962. He has been teaching with the Economics Department of Harvard University since 1981. His academic research has been very fruitful, with a focus on economic growth of transition economies and developing countries, international trade, international finance, and macroeconomic policies. His representative works include Boom, Crisis, and Adjustment and The Macroeconomic Policy and Adjustment in Korea, 1970-1990. Professor Cooper is a renowned expert in international economics, and a fellow with American Academy of Arts and Sciences. He currently also works as Chairman of the Advisory Committee of the Institute of International Economics of the United States.

Understanding the Global Imbalances

Apr 18-2013   



By NING Jing

 

On December 26th, 2007, upon invitation from China Center for Economic Research (CCER) at Peking University, Professor Richard N. Cooper of Harvard University delivered an academic lecture on the topic of “Understanding the Global Imbalances” at Zhifuxuan of CCER, as a part of its lecture series on economic theories and policies. 

In Professor Cooper’s opinion, there are two reasons for current concern with national savings and investment. One is the controversy in all the developed nations over public pension or pension in general; the other is the severe global imbalance of current accounts, that is, the discrepancy between national savings and domestic investment. Especially for the United States, family savings seemed to have dropped to zero in 2005.

First of all, Professor Cooper displayed to the audience a table of U.S. current account deficits during 1995 and 2007, the changes of the total domestic investments and total savings of the United States during 1995 and 2004, and the capital flow in the international balance of payments of the United States during 2000 and 2005. These data point to the changes of domestic investment and private savings as the direct cause for the deterioration of U.S. current accounts. Since the foreign exchange market for the U.S. dollar is not subject to planned and systematic regulation by the U.S. government and the U.S. dollar has an inverse floating rate with other currencies, huge amounts of foreign investment have caused the extraordinary current account deficits of the United States.

Professor Cooper reminded the audience of the investment decrease in other developed countries and regions, such as Japan, Germany and the “Four Asian Tigers”. Statistics shows that most regions except Germany (together with Britain) have had a higher rate of real investment than that of the United States. Nonetheless, even in Germany and Britain, domestic investment has drastically dropped in recent years. By contrast, investment has risen rapidly in the developing countries of Asia. Remarkably, in China, investment accounts for over 40% of the GDP. Both Chinese government and some foreign analysts regard such investment level as too high. Among developing countries, China is the only case of having excessive investment. However, since investment still lags behind savings in terms of growth, the rapid economic growth allows consumption to expand in spite of higher rates of savings.

Leaving out statistical errors, the current account balance (net foreign investment) is the difference between domestic investment and national savings. Therefore, when national savings exceeds domestic investment (or when personal savings exceeds the sum of investment and government deficit), it means investing overseas, namely, net inflow of investment in foreign countries. Then, why do the world’s main economies want to invest overseas in large amounts? Professor Cooper believes that one reason is the trend of population development. Though birth rate varies from country to country, it has dropped in all developed nations, and has dropped in many developing nations, too. One typical example is China, which launched its one-child policy in 1979. Though people live longer now, the trend is that the population has been dwindling. Among developed nations, the United States enjoys an obvious advantage in expected population growth, especially that of young people. In a fully globalized world economy, without considering residential preference, it is estimated that approximately 30% of the savings from the rest of the world will be invested in the United States, while 70% of U.S. savings will be invested overseas.

Many people regard the high level of U.S. current account deficit as unsustainable. If they mean the recent trend of the deficit is unsustainable, certainly they are right, for U.S. current account deficit as a percentage of U.S. GDP cannot grow unlimitedly. Nonetheless, the deficit has kept rising during the past 10 years (except the temporary pause in 2001). So, if they mean the large deficit cannot sustain, that is incorrect and also impossible. The population trend in Japan, Europe and East Asia may lead to current account surpluses during many years and establishment of external assets to provide for the aging population decades later. During this process, the central banks naturally will regulate the domestic depositors. For example, the central bank in Japan will take related regulative measures because Japanese depositors behave too conservatively and cannot meet the needs of the country, and China does not grant the freedom to its domestic depositors to invest overseas.

Professor Cooper believes that U.S. economy is full of life and rich with innovative spirit. The United States has a population structure obviously different from those of other developed nations, and its birth rate has not seen any substantial drop. Besides, the United States is expected to receive large numbers of immigrants, who will be largely young people. In this respect, though the United States is rich and politically mature, it can still be called a young and vigorously growing country. Especially, the country has an innovative financial sector that can continue to produce new products to satisfy the needs of different investment portfolios. In the globalized market, the United States enjoys comparative advantage in some aspects, such as creating merchantable securities and exchanging low-risk equity for high-risk assets. All depositors in the world want to invest a small but growing part of their savings in the United States. Consequently, the U.S. current account deficit may stay high in upcoming years.

After Professor Cooper’s speech, Professor YU Miaojie and Professor LU Feng of CCER respectively shared their views of the issue discussed by Professor Cooper. The audience also had discussion with Professor Cooper after the lecture.

 

 

Professor Richard N. Cooper graduated from London School of Economics and Political Science with an MSc in economics in 1958, and received his Ph.D. in economics from Harvard University in 1962. He has been teaching with the Economics Department of Harvard University since 1981. His academic research has been very fruitful, with a focus on economic growth of transition economies and developing countries, international trade, international finance, and macroeconomic policies. His representative works include Boom, Crisis, and Adjustment and The Macroeconomic Policy and Adjustment in Korea, 1970-1990. Professor Cooper is a renowned expert in international economics, and a fellow with American Academy of Arts and Sciences. He currently also works as Chairman of the Advisory Committee of the Institute of International Economics of the United States.