A book that analyses how the ballooning foreign debt problem of the United States and the problem of increasing global economic imbalances are related, how these problems should be addressed and by whom.

Contributing authors provide deep insights and practical policy suggestions of what can be done to lessen the vulnerability of developing countries and contribute to a resolution of the US debt and global imbalances problems.

1 Should Developing Countries Support the US Dollar?
By Way of Introduction
Jan Joost Teunissen

One of the advantages of being innocent and curious is that you wonder why things are as they are and then, by searching for answers, increase your knowledge. Obviously, you can be innocent in some areas and wise in others. For example, you may not know how to repair a bike while your understanding of fellow human beings is highly developed. Innocence may turn into wisdom if it prompts you to deeply examine an issue. This is possible for many fields of human understanding, and it is certainly possible for one of the pressing issues of these days, the problems of US debt and global economic imbalances – the topic of this book.

The US debt problem is currently an issue of intense discussion. However, it was an issue of intense debate as well in the 1960s and early 1970s as I discovered some 24 years ago.

In 1982, I spent half a year in Latin America and in my meetings with economists the debt problems of Latin American countries were one of the topics we discussed – at the time an increasingly hot issue, and a few months after I arrived the debt crisis broke out in August 1982. ...

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Edited by Jan Joost Teunissen and Age Akkerman
ISBN-10: 90-74208-28-2
ISBN-13: 978-90-74208-28-4
Copyright: Forum on Debt and Development (FONDAD), 2006.
Cover painting: Aafke Steenhuis

Contents
Acknowledgements ix
Notes on the Contributors x
Abbreviations xv
1 Should Developing Countries Support the US Dollar?
By Way of Introduction 1
Jan Joost Teunissen
The History of the US Debt Problem 3
The Financing of US Deficits by Developing Countries 10
About this Book and the Next Volume 12
2 Global Imbalances and Emerging Markets 14
Barry Eichengreen and Yung Chul Park
1 The Likelihood of a Disorderly Correction 16
2 The Impact on Emerging Markets 20
3 What Countries Can Do 27
4 Conclusion 40
3 Global Imbalances and Latin America: A Comment on
Eichengreen and Park 45
Barbara Stallings
1 The “Upbeat Model” 46
2 Non-Asian Emerging Market Countries 47
3 Politics of Policy Recommendations 51
4 Conclusions 52
4 The Dilemmas and Dangers of the Build-Up of US Debt:
Proposals for Policy Responses 53
Jane D’Arista and Stephany Griffith-Jones
1 US Debt and Global Imbalances 58
2 Risks in Failing to Address the US Foreign Debt Problem 71
3 How Should the Problem Be Addressed and By Whom? 77
4 Conclusions 83
5 Currency Asymmetry, Global Imbalances, and Rethinking of
the International Currency System 87
Fan Gang
1 China’s Trade Has Been Mostly Balanced in the Past 28 Years 88
2 China’s Trade Imbalance With the US and the New Supply
Chain in Asia 90
3 Where Did China’s Large Foreign Exchange Reserve Come
From? 93
4 National Savings and Global Imbalance 94
5 The “Currency Asymmetry” and the Persistent Tendency
of US Dollar Devaluation 96
6 Effective and Real Exchange Rate: What Is Developing
Countries’ Responsibility for Global Imbalance? 98
7 Concluding Remarks 101
6 China’s Macroeconomic Imbalances: The Liquidity Tango
Mechanism
Wing Thye Woo 106
1 Systemic Inflationary Tendency: The Liquidity Tango
Until 1995 110
2 Suspending the Liquidity Tango: Current Account Surpluses
in 1994-2005 113
3 The SOBs Are Undermining the State’s Fiscal Position 119
4 Freeing the Interest Rate and the Exchange Rate to Address
Macroeconomic Imbalances? 122
5 Fixing the Banking System to Facilitate Macroeconomic
Management 126
6 Conclusion 128
7 How Effective Is Monetary Policy in China? A Comment on
Woo’s “Inflationary Tango” 131
Zdenek Drábek
1 The Model of “Inflationary Tango” 133
2 Questions About the Response Functions of Chinese
Economic Agents 136
3 Policy Implications 138
8 Asian Monetary Coordination and Global Imbalances 141
Yonghyup Oh
1 Asia’s Crisis and the Call for Monetary Cooperation 142
2 Investing Abroad or At Home? 143
3 Hurdles to Monetary Cooperation 144
4 Concluding Remarks 147
9 Understanding Imbalances in a Globalised International
Economic System 149
Jan A. Kregel
1 Why the Current Imbalances Are Unlike Any Other 151
2 Analysing Regional Imbalances Through Regional Policy
Choices 159
3 The Imbalances Are Likely to Persist Unless Regional Policies
Change 167
4 Are There Medium-Term Forces that Can Undermine
Policies? 168
10 Policy Recommendations for the US, Europe and Asia:
By Way of Epilogue 174
Jan Joost Teunissen
The Responsibility of the United States 175
Is Europe Powerless? 177
The Possibilities for Asia 178
Concluding Remarks 181

Notes on the Contributors

Jane D’Arista is director of Programs for the Financial Markets Center (a US-based Center that provides research and education resources to citizen organisations, policymakers, scholars and journalists interested in central banks and the financial sector) and a research associate of the Economic Policy Institute (a Washington-based Institute that aims to broaden the discussion about economic policy to include the interests of low- and middle-income workers).

She has written on the history of US monetary policy and financial regulation, international and domestic monetary systems and capital flows to emerging economies. She has taught in graduate programmes in economics at the New School University and the University of Utah and, from 1988 to 1999, in a programme in international finance at Boston University School of Law that she helped create and administer.

Before that, she served for 20 years as a staff economist for the US Congress, first as a staff member of the House Banking Committee and then as an international analyst at the Congressional Budget Office.

Zdenek Drábek (1945) is senior counselor, Economic Research and Analysis, at the World Trade Organization. He is chairman of the Board of the Joint Vienna Institute, a training institute of the IMF, World Bank, BIS, OECD, EBRD and WTO. He served as the principal adviser to the governor of the Central Bank and as Plenipotentiary in the Federal Ministry of Economy in Czechoslovakia.

He was the chief negotiator for the Czechoslovak Government of the Europe Agreement with the EU and the Uruguay Round Agreements in GATT. He was senior economist at the World Bank from 1983 to 1990, and chairman of the Economics Department at the University of Buckingham in England.

He has published widely on topics related to international finance and trade. His most recent book is Can Regional Integration Arrangements Enforce Trade Discipline? The Story of EU Enlargement (2005).

Barry Eichengreen is the George C. Pardee and Helen N. Pardee professor of economics and professor of political science at the University of California, Berkeley, where he has taught since 1987.

He is also research associate of the National Bureau of Economic Research (Cambridge, MA) and research fellow of the Centre for Economic Policy Research (London, England). In 1997-98 he was senior policy advisor at the IMF. He is a fellow of the American Academy of Arts and Sciences (class of 1997).

He is the chairman of the Bellagio Group of academics and economic officials. He has held Guggenheim and Fulbright Fellowships and has been a fellow of the Center for Advanced Study in the Behavioral Sciences (Palo Alto) and the Institute for Advanced Study (Berlin). He has published widely on the history and current operation of the international monetary and financial system.

His books include Global Imbalances and the Lessons of Bretton Woods (2006) and The European Economy since 1945: Coordinated Capitalism and Beyond (2006).

Fan Gang (1953) is director of the National Institute of Economic Research, China Reform Foundation (NERI-China), Beijing; professor of economics at Peking University and the Chinese Academy of Social Sciences (CASS), president of China Development Institute (Shenzhen) and a member of China’s central bank Monetary Policy Committee.

He was visiting fellow of the National Bureau of Economic Research and Harvard University, US, 1985-87; chief editor, Jingji Yianjiu (Economic Research Journal), 1992-93; and deputy director of Institute of Economics, CASS, 1994-95.

He is consultant to various departments of Chinese central and provincial governments and member of various advisory committees. He is guest professor of a number of universities and graduate schools and consultant to the World Bank, UNDP, ESCAP, and OECD. He has published widely in Chinese and English academic journals and books.

His major research interests are macroeconomics and institutional economics, currently “economics of transition”.

Stephany Griffith-Jones (1947) is professorial fellow at the Institute of Development Studies at Sussex University and holds the position of deputy director of International Finance at the Commonwealth Secretariat.

She started her career in 1970 at the Central Bank of Chile. Before joining the Institute of Development Studies, she worked at Barclays Bank International in the UK. She has acted as senior consultant to governments in Eastern Europe and Latin America and to many international agencies, including the World Bank, the Inter-American Development Bank, the EU and UNCTAD.

She worked at the Department of Economic and Social Affairs of the UN (UN-DESA), coordinating with José Antonio Ocampo and Jan Kregel the World Economic and Social Survey, on Financing for Development. She has written widely on international finance and macroeconomic policies, especially in relation to Latin American and East European economies.

One of her recent books is From Capital Surges to Drought: Seeking Stability for Emerging Economies (coauthored by Ricardo Ffrench-Davis, 2004).

Jan A. Kregel (1944) is chief of the Policy Analysis and Development Branch of the Financing for Development Office in the Department of Economic and Social Affairs of the UN (UN-DESA) in New York.

He joined the UN in 1998 as a high level expert in International Finance and Macroeconomics for UNCTAD until 2001 and, then, as a senior interregional adviser for the Trade and Development Report of UNCTAD until 2004. He is a member of the Scientific Advisory Boards of the Italian International Economic Center, Rome, and the Istituto per la Ricerca Sociale, Milan.

He is a visiting professor of the Center for Full Employment and Price Stability at the University of Missouri Kansas City. He was professor in the Department of Economics of the Università degli Studi di Bologna and in the Johns Hopkins University Paul Nitze School of Advanced International Studies where he also served as associate director of its Bologna Center from 1987-90. He has held positions in universities in the UK, the US, the Netherlands, Belgium, France, Germany and Mexico. Among his publications are a series of books in the field of post-Keynesian economic theory.

Yonghyup Oh (1963) is head of the International Macroeconomics Team, Department of International Macroeconomics and Finance of the Korea Institute for International Economic Policy (KIEP).

He worked for Korea Investment Trust, Korea Long Term Credit Bank for several years and for Seoul Metropolitan Government before joining KIEP. He has been advisor and consultant to Korea Ministry of Finance, Parliament of Korea, Korea International Trade Association, Seoul Metropolitan Government, and private sector organisations such as Korea Asset Management Corporation.

He was researcher at the Centre for Economic Performance at the London School of Economics and at the economic research centre DELTA in Paris. He lectures at Seoul National University, and has published in journals such as European Economic Review and Review of International Economics.

Yung Chul Park (1939) is research professor and director of the Center for International Commerce and Finance at the Graduate School of International Studies, Seoul National University. He currently serves as co-chairman of the Public Fund Oversight Committee of the Korean government.

He was a member of the National Economic Advisory Council (2003-04), ambassador for international economy and trade, Ministry of Foreign Affairs and Trade (2001-02), and chairman of the board, the Korea Exchange Bank (1999-01). He previously served as the chief economic adviser to the President of Korea (1987-88), as president of the Korea Development Institute (1986-87), as president of the Korea Institute of Finance (1992-98), and as a member of the Central Bank of Korea’s Monetary Board (1984-86). He also worked for the IMF (1968-74).

He has written and edited several books, including Economic Liberalization and Integration in East Asia (2006), and A New Financial Structure for East Asia (2006).

Barbara Stallings is William R. Rhodes research professor and director at the Watson Institute for International Studies of Brown University. From 1993-2002 she was director of the Economic Development Division at ECLAC in Santiago, Chile. Before joining ECLAC, she was professor of political economy at the University of Wisconsin-Madison for 15 years.

She was also a visiting professor and researcher at Harvard, Yale and Columbia universities in the United States and at several research centres in Latin America and Japan. She holds doctorates in economics (Cambridge University, UK) and in political science (Stanford University, US).

She is a specialist in development economics and international finance and has published widely in academic journals and books. She has directed a project on the domestic financial sector in Latin America and East Asia, which resulted in a book, co-authored by her and Rogerio Studart, Finance for Development: Latin America in Comparative Perspective (2006).

Jan Joost Teunissen (1948) is director of the Forum on Debt and Development (FONDAD). He started his career in 1973 as a social scientist and freelance journalist in Chile. Seeing his plan to work in Chile’s agrarian reform and rural development aborted by the coup d’état of 11 September 1973, he engaged himself in activities aimed at the return of democracy in Chile. He focused on economic boycott as a political instrument to bring about regime change in Chile and other dictatorships.

In his work on international economic and political issues he forged links with academics, politicians, journalists and high-level policymakers in various parts of the world. In the Netherlands he stimulated discussions on the origins and solutions to the international debt crisis. Supported by economists like Jan Tinbergen, Robert Triffin, Johannes Witteveen and Jan Pronk he established FONDAD in 1987. He has co-authored books and articles on finance and development issues.

Wing Thye Woo (1954) is professor of economics, Brookings Institution, University of California at Davis, Central University of Finance and Economics in Beijing, and director of the East Asia Programme within the Earth Institute at Columbia University. In 1992-93, he was a member of a Consultant Team to China’s Ministry of Finance that helped to design tax and exchange rate reforms. From 1994 to 1996, he led an international team to study the reform experiences of centrally-planned economies.

In 1997-99 he directed the Harvard Institute for International Development project “Asian Financial Crisis” for the 1999 Davos meeting of the World Economic Forum. He was a special advisor to the US Treasury in 1997-98, and was appointed in 2005 to be an advisor to Prime Minister Badawi of Malaysia.

He founded the Asian Economic Panel (AEP) as a joint venture of Columbia University, Keio University, and the Korea Institute for International Economic Policy. AEP is a forum of about 50 leading specialists on Asian economies which meets twice a year to discuss Asian economic issues; selected papers from the meetings are published in the Asian Economic Papers.

Visit Forum on Debt and Development (FONDAD) Website

FONDAD is an independent policy research centre and forum for international discussion established in the Netherlands. Supported by a worldwide network of experts, it provides policy-oriented research on a range of North-South problems, with particular emphasis on international financial issues.

Through research, seminars and publications, FONDAD aims to provide factual background information and practical strategies for policymakers and other interested groups in industrial, developing and transition countries.

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