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| The Race to the Bottom |
| Asian economies focus on sustaining U.S. deficit instead of eliminating poverty |
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Ranjit Goswami (ranjit)  |
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Published 2006-10-16 11:22 (KST) |
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The emerging economic superpower China may already have or soon will have a
foreign exchange reserve of US$1 trillion, with its highest trade surpluses with the U.S., where the trade deficit remain at its highest level in months.
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FROM THE SECTION |
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| For the month of August, the U.S. trade deficit touched $69.9 billion -- a record high. China's trade surplus, on the other hand, was at $15.3 billion for the month of September (against a record high of $18.8 billion in August) and has thereby reached $109.85 billion so far in 2006, already breaking the record of $101.9 billion set in 2005.
And of the nearly $70 billion U.S. trade deficit for the month of August, China alone accounted for $22 billion. Just as China is breaking last year's record in nine months, the U.S. too is likely to break last year's total deficit ($717 billion) as the equivalent deficit of $457 billion in the first eight months of 2005 is already surpassed with a deficit of $522.8 billion in
2006.
The annualized deficit for 2006 is expected to be $784 billion, more than the size of the Indian economy (and that of 169 other countries).
The U.S. trade deficit with China alone in 2005 was $202 billion. The equivalent figure this year is 13.5 percent more than that of last year. If the trend continues, this year it would be close to $230 billion. That's more than the GDP size of 152 economies of the world, and one-third the size of the Indian economy.
The voices discussing the sustainability of the U.S. deficit over the years have gone from whispering to speaking loudly. The bottom line is it has not only sustained, but it has done so beyond any sustenance and continues to grow.
Equity inflows gave way to debt inflows, and then as private purchases of U.S. assets gave way to foreign central bank purchases, these early warnings
continued to echo, but effectively remained unnecessary concerns as the developing world raced ahead in the competition to provide goods for dollars to the U.S. economy.
Following this scale of comparison, how wrong is it for India and China to be compared often in global discussions? India's forex reserve is $167 billion, a paltry sum when compared to that of China and Japan.
It's another matter that the gift is also equivalent to 10 percent of the Chinese economy.
The more important question is where do China and Japan stand in their forex reserves, as per their latest official figures?
China's forex reserves ballooned to $988 billion at the end of September -- the highest in history for any nation anywhere and an increase of around 30 percent from a year ago.
Going by the latest release, Chinese reserves are increasing by $30 million an hour. At this rate, by the middle of the current month it's expected to touch $1 trillion.
Japan and South Korea take up the second and third positions -- their respective scores being $881.27 billion and $228.2 billion respectively. So in 2006, in all likelihood two economies will touch a trillion dollars in forex reserves, both from Asia. .
It makes one wonder why Asian economies need to hold so much in forex reserves. The largest two economies, controlling around 60 percent of the global economy and 70 percent of global trade -- the European Union and the U.S. -- do not maintain any significant forex reserves.
Surprisingly E.U.-U.S. trade accounts for less than 22 percent of E.U. trade, but results in 47 percent of the EU's World Trade Organization disputes.
The U.S. prints dollars and does not hold any other currency in any significant amounts; and the European Union prints Euro (linked to gold to some extent) and again doesn't maintain significant amounts of other currency reserves.
And it's clear that the two largest and richest economies of the world, each accounting to more than one-fourth of global GDP, increasingly prefer not to trade with each other.
In contrast to that, Asian economies, accounting for around 20 percent of the global economy and 30 percent of global trade, hold almost $3 trillion in forex reserves.
And Asia is home to the largest number of people in the world, almost 60 percent of the global population, out of which 800 million people live on less than a dollar a day.
So two major economies accounting for 70 percent of trade don't hold significant forex reserves, and Asia, a diverse emerging economy accounting for 30 percent of global trade, holds $3 trillion in reserves.
This presents a paradox where money flows in from poor to rich amidst present global financial imbalances. The race to the bottom continues unabated, although production- and market-wise, Asia has come up faster than the rest of the world.
Many think that this will be the century of Asian economies. Is it at all feasible that going forward sometime in the future, the U.S. and E.U. will hold Chinese yuan, Japanese yen, South Korean won and Indian rupees to trade with Asian trading partners?
This sounds like monetary fiction! Many science fiction stories have come true with massive changes in technology and global geopolitics. However, the chances of the U.S. paying China in yuan to import from China, or Japan importing from the U.S. against yen payments look remote, at least in our lifetime, unless the fundamentals of the present monetary systems change globally.
That won't be in the interest of the U.S. or the European Union. And it's not in the interest of Japan or China or South Korea or India, as long as the race to the bottom continues.
The competition is to export as a domestic market, in spite of a large population with a lack of purchasing power.
And global bodies that monitor global monetary mechanisms, like the IMF, won't like that monetary fiction to come true either. They acknowledge the fall of the U.S. dollar to be the biggest financial risk the world faces today.
And they would do everything to stop that from happening, thereby supporting and sustaining the flow of money from poor to the rich, and thereby maintaining global financial balances amidst all imbalances, and increasing that imbalance.
We were talking about the chances of the yuan and yen gaining global currency status. The yen already has it, to some extent. Before we talk of that global science fiction happening, can we expect a local monetary fiction like these four Asian economies trading amongst themselves in lieu of their own currencies, or against a common currency?
Unlikely again, as they continue competing amongst themselves in the race to the bottom. The one that holds the highest number of dollars ranks first in this race to the bottom, and the others try to play catch-up.
China leads that race today. China with 1.3 billion people has a per capita income of $1700. However income disparity in socialist China is now found to be more than in its major capitalist trading partner, the U.S.
It may be because of that that China's ruling Communist party now plans to unveil a policy drive to ease volatile social inequality. Using
the internationally accepted poverty line of $1 day, China has around 10 percent of its population living below the poverty line, against its own estimate of 2 percent, with a benchmark poverty line of $85/annum income per capita.
How much this $1 trillion of China's forex reserve, or the bigger $3 trillion in overall Asian forex reserves, can do for the poor in China, in Asia and in the larger world, is not difficult to gauge.
Grameen Bank of Bangladesh, joint recipient of this year's Nobel Peace Prize along with its founder, Prof. Muhammad Yunus, has lent $5.1 billion to 5.3 million borrowers. That's less than $1000 per borrower. True, the borrowers were all poor and with no collateral, unlike the collateral that Americans have when they borrow against "fiat" money with a promise to repay. The rate of default for Grameen Bank of Bangladesh is less than 5 percent.
The U.S. defaulted once, back in 1971, when the dollar was pegged against gold. The question of further default does not come into free-floating currency markets as the value is now in the credibility and trust that the U.S. economy (and Federal Reserve) commands from its global peers.
Studies by the World Bank indicate that within five years, about half of Grameen Bank's two million borrowers manage to pull themselves up over the poverty line. There are around 1.1 billion people living on less than a dollar a day, and around 1.7 billion people living on less than $2 a day. That's a Purchasing Power Parity estimate to inflate the income in dollar in poor countries. In absolute terms, around half of the people of our world, nearly 3 billion in numbers, live on less than $2 a day.
$3 trillion looks more than adequate to pull at least half of all existing poor people above the poverty line in five years, following the Grameen Bank of Bangladesh model. And with that trend, in our lifetime, we may see a world free of poverty.
The truth is that's not the way our present world operates. Countries, markets, and policymakers would rather see ballooning forex reserves and a fierce race to the bottom, thereby sustaining U.S. credibility and borrowing, than a poverty-free world.
The $5.1 billion of Grameen Bank of Bangladesh, in that sense, has proved to have made some real differences, unlike the $1 trillion forex reserves of China, which continues to fuel that race to the bottom to maintain one's export competitiveness.
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©2006 OhmyNews
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Ranjit Goswami is a research scholar with the Indian Institute of Technology (IIT), Kharagpur, India; and is the author of the book "Wondering Man, Money & Go(l)d'". |
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