Published on The Economist, by R.A. in Washington, July 26, 2010.
WITH a return to global growth, we have observed a resumption of many of the patterns that prevailed before the recession trade crash. Trade surpluses and deficits have been widening out once more, and that has meant a corresponding increase in the foreign exchange reserves accumulated by many emerging markets. In a common telling of the pre-crisis world, emerging markets sought large surpluses in part because they were the flip-side of export-oriented growth (a proven path to development) and in part to insure against the financial crises that battered industrialising countries in the late 1990s. Never again would emerging economies be held prisoner by panicky lenders in developed nations. But those surpluses gave way to a “global savings glut”—a giant pool of credit that was recycled to developed nations to preserve consumption there, and which ultimately fueled dangerous, leveraged financial activity.
Today, reserve growth is therefore considered by many (though not necessarily by the surplus economies that weathered the downturn well) to be problematic. They represent barriers to global rebalancing and the potential for new financial misadventures. But emerging markets will surely argue that they remain unable to trust the developed world to provide liquidity in a crisis.
So this week we have also asked our guest network of economists the following question: what will it take to convince emerging markets to halt reserve growth?
Ricardo Caballero says … //
… Harold James argues that … //
… Anyway, do click through. The discussion will continue through the week. (full text).