In a recent speech on "Asia and the Global Financial Crisis," Fed Chairman Ben Bernanke made this point about trade:
Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asia's commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves. In many respects, that model has served Asia well, contributing to the rapid growth rates in the region over the past decade. In fact, it bears repeating that evidence from the world over shows trade openness to be an important source of economic growth. However, too great a reliance on external demand can also pose problems. In particular, trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term.
He specifically points to Asian policies that "artificially enhance incentives for domestic saving and the production of export goods" as a source of the trade imbalances. His solution to these imbalances is:
The United States must increase its national saving rate. Although we should deploy, as best we can, tools to increase private saving, the most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time. For their part, to achieve balanced and sustainable growth, the authorities in surplus countries, including most Asian economies, must act to narrow the gap between saving and investment and to raise domestic demand. In large part, such actions should focus on boosting consumption. Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not necessarily straightforward. One potentially effective strategy is to reduce households' precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education. Of course, such measures are likely to improve welfare and productivity as well as to contribute to more balanced, robust, and sustainable economic growth.
Basically, then, he supports two changes to the status quo: In the U.S., people and the government should save more, whereas in Asia people should spend more (with governments taking action that will encourage them to do so).
I'm skeptical of the conventional wisdom on this one. Is it realistic to expect people in different countries to have the same views on the consumption/savings mix? Among other things, cultures and financial situations differ widely. As a result, people will choose to consume and save in different amounts, and I don't see any inherent problem with that. Perhaps the U.S. should be saving more, or perhaps Asia should be saving less, or perhaps they are both saving what is appropriate for them. I'm not sure there is a right answer on this one, and I think it should be up to individual countries (the people and the governments) to make a choice. Going a step further, I'm not even sure harmonization of these policies is desirable. It might be useful to let countries take different approaches, to see the results over time and in different situations.
The specific problem Bernanke identifies is "ever-increasing and unsustainable imbalances in trade and capital flows." Narrowing the gap between savings rates is supposed to address these imbalances. To me, though, the main (although probably not the only) source of this problem is intervention in currency markets. If governments take action to influence their currency's value, thereby putting it at something other than the market rate (either higher or lower), there will almost certainly be imbalances.
All of this leads to my final point, which is that it might be more useful for policy-makers to be talking about exchange rates instead of different savings/consumption mixes. Bernanke did make the following point about Asian currencies:
The reversal in capital flows also caused rapid exchange rate depreciation in some countries, particularly Korea, Indonesia, and Malaysia. The Korean won depreciated 40 percent against the dollar from the beginning of 2008 through its trough in March of this year, and it has only partially recovered. Over the same period, the Indonesian rupiah fell 22 percent against the dollar.
However, the point was made in a different context and it was not emphasized much. As a general matter, there does not seem to be much of an effort to address the policy issues involved, aside from occasional tough talk by one side or the other.
