A great article by Martin Wolf in the Financial Times asks: “Why
is so much capital flowing uphill, from the poor countries to the rich
ones, instead of from the rich to the poor? The question is of great
practical importance. The answer should suggest both how long the
present pattern of global capital flows or current account “imbalances”
is likely to last and how it may end.”

Wolf argues that currency intervention, with the aim of exchange rate
targeting, has allowed emerging economies (principally in Asia and
including China) to continue exporting by keeping exchange rates low
despite large current account surpluses and net inflows of private
capital. He accuses these countries of “modern mercantilism.” “So long
as exports remain competitive and trade balances strong, the need to
promote domestic demand, thereby reducing the surplus of savings over
investment, is diminished. Net exports support demand instead.”

Wolf warns that the trends cannot continue, particularly when it
involves a country the size of China manipulating trade – a correction
is due and the longer it’s delayed the greater it will be. Emerging
market economies need to adjust and stop fighting the market’s need to
adjust. He concludes that of all these countries, China, in particular,
must take the responsibility that accompanies its new position as an
economic powerhouse, otherwise the eventual adjustment could be even
more severe.

Read Henry’s thoughts on the global economy here.

Peter Fray

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