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Council Special Report No. 44

March 2009

Steven Dunaway

Global Imbalances

and the FinancialCrisis



Global Imbalances

and the Financial Crisis



Council Special Report No. 44March 2009

Steven Dunaway

Global Imbalancesand the Financial Crisis



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Frerd ii Ackedgmes ix

Council Special Report 1Introduction 3Three Pitalls in the International Finanical System 7Global Imbalances and the Crisis 13The False Hope o Decoupling 19Better IMF Surveillance 24Conclusion 29

Edes 31 A e Ar 33 Adisry Cmmiee 34CGS Adisry Cmmiee 36 CGS Missi Saeme 38IIGG Missi Saeme 39

Contents



vii

As the economic crisis has spread rom nancial markets to real econo-mies in countries around the world, governments have understandably

ocused on short-term measures to contain the damage. Crating stim-ulus packages and nancial bailouts to address immediate problems hasor many reasons been a priority or policymakers.

In this Council Special Report, however, Steven Dunaway arguesthat policymakers must go beyond these steps and tackle one o theroot causes o today’s crisis: imbalances between savings and invest-ment in major countries. The report analyzes the nature o these imbal-ances, which occur when some countries, such as the United States, run

large current account (essentially trade) decits while others, such asChina, maintain large surpluses. Dunaway identies three eatures o the international nancial system that have allowed the imbalances topersist, eatures that involve both foating and managed exchange ratesas well as the issuance o reserve assets. In particular, he notes that theUnited States’ status as an issuer o such assets has enabled it to nancea current account decit. The report then prescribes a variety o stepsto address global imbalances. Beyond stimulus packages around the

world, it urges measures to raise savings (principally government sav-ings) in the United States, reorm labor and product markets in Europeand Japan to increase competition and fexibility, and boost domesticconsumption in China. Finally, the report advocates improving Inter-national Monetary Fund (IMF) surveillance o member states’ eco-nomic policies by reducing the role o the Fund’s executive board anddepoliticizing the selection o its senior management.

Ga Imaaces ad e Fiacia Crisis is a timely work that oersthoughtul analysis and recommendations. It makes an important and

sober case that without action to deal with global imbalances, theseimbalances will balloon again and imperil uture economic growth.

Foreword



viii

And while such institutions as the IMF and the Group o 20 (G20) havesignicant roles to play, Dunaway contends that the ultimate respon-sibility or tackling imbalances rests with national governments. Thecentral question is whether governments are up to this challenge.

Richard N. HaassPresideCouncil on Foreign RelationsMarch 2009

Foreword



ix

I am grateul to the members o the report’s advisory committee: ChairSebastian Mallaby, Peter Ackerman, Timothy Dees Adams, James L.

Bacchus, Richard Bookstaber, Jason E. Bordo, Jonathan A. Chanis,Charles Collyns, Stephen C. Freidheim, Joseph Gagnon, Maurice R.Greenberg, Daniel E. Grossman, Andrew Gundlach, James A. Harmon,Carla A. Hills, Brett E. House, Karen H. Johnson, Peter Johnson, Jona-than Kirshner, Anne O. Krueger, Roger M. Kubarych, J. Welby Leaman,Flynt L. Leverett, Robert K. Liton, Clay Lowery, Michael Mandelbaum,Edward E. Matthews, Laurence H. Meyer, Nigel Nagarajan, Stewart M.Patrick, Michael Prell, Charles Prince, Douglas Rediker, Burton Roth-

berg, Kermit Schoenholtz, Brad W. Setser, Alan M. Silberstein, Rich-ard Sylla, G. Richard Thoman, and Adam J. Treanor, as well as HenryH. Arnhold and Edwin Truman. Their comments and suggestionshelped to signicantly sharpen and strengthen the report, but I aloneam responsible or its contents and the views expressed.

I thank Sebastian Mallaby, director o CFR’s Maurice R. GreenbergCenter or Geoeconomic Studies, or giving me the opportunity towrite this report and or his invaluable guidance and assistance in its

preparation. My special thanks go to Keiko Honjo and Vivek Arora ortheir insightul comments that helped to shape the analysis and argu-ments in the report.

I also thank CFR President Richard N. Haass or his comments. Inaddition, or their eorts in the production and dissemination o thisreport, I am grateul to Patricia Dor and Lia Norton in Publicationsand Nidhi Sinha in Communications and Marketing. This publicationis part o CFR’s Program on International Institutions and Global Gov-ernance and has been made possible by the generous support o the

Robina Foundation.

Steven Dunaway

Acknowledgments



Cci Specia Repr



3

Introduction

The current economic and nancial crisis has brought about a sig-nicant change in global economic governance as the international

orum or discussions on the crisis has shited rom the small groupo advanced countries in the Group o Seven (G7) to the Group o Twenty (G20), a broader group including important emerging marketcountries. The G20 summit held in Washington, DC, on November15, 2008, dealt with the immediate concerns ostered by the crisis andocused on both macroeconomic policy actions needed to supportglobal growth and ideas or implementing nancial market reorms.Follow-up G20 summits are expected, starting with a gathering in the

United Kingdom in April 2009. However, or these discussions to havea substantial impact, the agenda will have to be broadened beyondeconomic stimulus and nancial market regulation. I not, global poli-cymakers will miss a critical chance to make the world economy andnancial markets more stable, as then U.S. treasury secretary HenryM. Paulson Jr. pointed out:

I we only address particular regulatory issues—as critical as they

are—without addressing the global imbalances that ueled recentexcesses, we will have missed an opportunity to dramaticallyimprove the oundation or global markets and economic vitalitygoing orward. The pressure rom global imbalances will simplybuild up again until it nds another outlet.

Accurate though his comments were, Secretary Paulson did not goar enough. Global imbalances—meaning imbalances between savingsand investment in the major world economies refected in large and

growing current account imbalances—did indeed play a major role increating the current crisis. But missing in the public debate thus ar is a



4 Global Imbalances and the Financial Crisis

discussion about the basic eatures o the international nancial systemthat acilitated the growth o these imbalances and allowed countriesto delay dealing with them. Without eorts to mitigate the potentialeects o these eatures, it will be dicult to deal with the imbalances.As Paulson correctly observed, the imbalances and their attendant riskswill emerge again once the current crisis is resolved.

Since the Bretton Woods system was established ater World War II,three o its eatures have worked at times to delay adjustment in currentaccount imbalances. One is that a country that issues reserve assets cannance current account decits or an extended period. The second isthat a country acing upward pressure on the value o its currency can

manage its exchange rate to resist such pressure and delay adjustmentin its balance o payments or an extended period. A third eature thatcan provide incentives to delay adjustment emerged as a consequenceo the shit to fexible exchange rates that began in the 1970s. For coun-tries with foating exchange rates, a depreciating currency can provide asheltering eect that can diminish pressures or structural adjustment.Rather than simply cushioning one-o shocks, as proponents o foat-ing rates envisage, currency depreciation can also enable policymakers

to ignore enduring structural challenges.The United States has taken advantage o its position as the primary

issuer o reserve assets to nance a growing current account decitduring the 2000s. East Asian emerging market economies in general,and China in particular, have taken advantage o the second eature o the system. They have resisted upward pressure on their currencies andrun large current account surpluses. Japan and Europe have made use o the third eature. Weaknesses in the value o the yen and the euro in the

late 1990s and early 2000s contributed to the slow pace and inadequacyo structural reorms in labor and product markets, slowing economicgrowth and contributing to global imbalances.

Rather than ocus narrowly on economic stimulus and nancialregulation, the heads o state involved in the G20 process must con-ront global imbalances. They need to start by stressing that actionstaken now to cushion the global recession should be designed withan eye toward the imperative o unwinding the imbalances. The crisisshould not be used as an excuse to pursue policies that will add to imbal-

ances over time or to delay needed policy actions—including structuralreorms—that can begin to reduce imbalances. Already the policies that



5Introduction

some countries are putting in place show worrisome tendencies andsome policy changes are being ignored.

This Council Special Report does not pretend that tackling imbal-ances is easy. Moreover, it does not suggest any major overhaul o theworld’s nancial system because, despite its aults, the current systemis ar more conducive to sound and stable growth than any o its pre-decessors. The issuer o a reserve currency, or example, can nance acurrent account decit by taking advantage o other countries’ willing-ness to hold its assets, but the global system would not unction anybetter without reserve currencies. Floating exchange rates can at timesshelter an economy rom the need to reorm product and labor mar-

kets, but they also make countries and the world economy more resil-ient to shocks. The system’s ability to deliver sound and stable growth,however, depends on the willingness o countries to play by the rules.The system unctions well when all countries pursue sustainable mac-roeconomic policies. The trouble comes when the system’s faws dis-guise the costs o bad policies and cloud judgment as to which policiesare sustainable.

The International Monetary Fund (IMF) was established to oversee

the world’s nancial system and, through its surveillance o membercountries’ economic policies, has an important role to play in mitigat-ing the system’s faws. The IMF cannot compel member countries tochange their economic policies, however; it can only persuade. To beeective in this task, IMF surveillance has to provide countries withcandid assessments o their policies and clear advice on needed change.The surveillance process also has to bring international pressure tobear when countries persist with policies that are in neither their best

interests nor those o the world. The IMF’s track record in this regardhas not been good in recent years. To improve surveillance, this reportsuggests eliminating the IMF executive board’s direct role in the pro-cess and enhancing the eectiveness o IMF management by selectingthe institution’s top executives solely on the basis o merit.

In the end, a solution to the problem o global imbalances rests withthe major economies. Governments must demonstrate the politicalwill to choose policies that may entail risks in the short run but thatare in the medium run best or their own countries, as well as or the

rest o the world. The imbalances cannot last indenitely. I the majoreconomies ail to adopt appropriate policies, then adjustment will be




orced on them, and everyone will have to settle or slower growth anda less stable world economy. It is sometimes argued that stricter nan-cial regulation and tighter monetary policy might over time contain thenancial excesses that global imbalances help produce. But these aresecond-best policies and would achieve this objective only by slowingworld economic growth.



7

Three Pitalls in theInternational Financial System

The problem o global current account imbalances has been discussedat length or a number o years. Recognition o the problem is wide-

spread even among the authorities o the major countries contribut-ing to it. There is even agreement on the policy changes each countryneeds to make to deal with the problem and acknowledgment that thesechanges are in each country’s and in the world’s best interests. How-ever, little progress has been made in dealing with the situation. In theUnited States, politicians have ound it dicult to raise national sav-ings in a responsible manner, particularly through tax and expenditurepolicy changes. In Europe and Japan, politicians have been reluctant

to tackle the thorny issues o structural changes in product and labormarkets. In China, the leadership’s attachment to the status quo in eco-nomic policy is quite strong; current policies have been successul indelivering rapid growth and development, so China’s government isreluctant to make anything more than gradual changes. With these atti-tudes among the leaders o the major economies, it is not surprisingthat global imbalances have emerged. What is not readily apparent iswhy it was possible or global imbalances to grow unchecked or so long

without triggering a correction. In large part, the answer lies in threeeatures o the international nancial system that allowed countries todelay adjustment.

Normally, a current account imbalance triggers orces that encour-age adjustment and maintain the imbalance at a sustainable level. Coun-tries with decits ace increasing pressures in obtaining nancing. Thisosters adjustment through upward pressure on domestic interest rates,downward pressure on the real exchange rate, and slowing domesticeconomic activity. Surplus countries ace similar pressures in the oppo-

site direction, with rising economic activity and appreciation o the realexchange rate the main orces that prompt balance-o-payments adjust-ment. That global imbalances have grown and remain unchecked points




to eatures o the international nancial system that have worked todelay adjustment.

One such eature, which has existed since the Bretton Woods systemwas established, is the role played by countries that provide reserveassets. This is an important eature that gives needed scope or reserveassets in the system to expand as the world economy and internationaltrade grow. But it can also enable a country that provides reserve assetsto delay adjustment when its external position becomes unsustainablebecause o macroeconomic policies or economic shocks. Such a coun-try can nance a decit in its external position rather easily or sometime by issuing assets in its domestic currency.

Accordingly, the United States, which is the primary provider o reserve assets to the system, has been able to nance current accountdecits or long periods. Ater 2001, rising U.S. current account de-cits largely refected expansionary scal policy in the United States andbooming consumption growth. Financing was in large part providedby oreign governments. The cost to the United States or this nanc-ing was relatively low because o the premium oreign governmentswere willing to pay to obtain presumably risk-ree U.S. government

securities. One distinct advantage the United States has is the breadthand liquidity o its government securities markets. This is a particu-larly important consideration or investments by countries in ocialreserve assets. The denition o a reserve asset stresses that such anasset should be highly liquid and that the volatility o its value shouldbe low. However, ultimately there is a limit to the willingness o othercountries to hold U.S. assets. This limit depends on how close otherpotential reserve assets are to being substitutes or U.S. dollar assets.

But until the limit is reached, the availability o cheap oreign nancingallows the United States to put o painul measures to boost nationalsavings. As Figures 1 and 2 show, between 1990 and the onset o thenancial crisis in 2007, the United States was able to double its nationaldebt in dollar terms without being penalized by a diminishing appetiteor the debt. On the contrary, investors accepted lower yields on U.S.government securities.

Recall that the second eature o the international system is that coun-tries with balance-o-payments surpluses that manage their exchange

rates can resist upward pressure on their currencies or an extendedperiod. Similarly, decit countries acing downward pressure on theirexchange rates can deend the rate and nance their decits only as long



9

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.

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%

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%

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%

F IG uRE . u. S. G o v ERnMEnt DEb t ( $ t RIllIo nS)

Srce: Council o Economic Advisers, Ecmic Repr e Preside, 2008.

F IG uRE . Y IElDS o n t En- Y EA R u. S. t RE A SuRY b o nDS( P ERCEnt )

Srce: Council o Economic Advisers, Ecmic Repr e Preside, 2008.




as they have ocial reserves or are willing to use their reserve assets. Countries acing upward pressure on their rates, however, have nosuch reserve constraint, given that the rest o the world is demandingtheir currencies. They can hold their exchange rates by intervening inthe market and selling their own currencies. They can then attempt to“sterilize” this exchange market intervention through domestic mon-etary policy actions. The intention is to avoid a rise in infation thatwould otherwise induce a real appreciation o their currencies.

There are limits, however, to how long sterilized intervention willwork. In particular, the cost o such intervention in terms o higherdomestic interest rates will eventually take its toll on the nances o the

central bank and have consequences or the real economy, but theseadverse eects may go unnoticed or quite some time. To diminishsome o these consequences, sterilized intervention can be supportedby capital controls and administrative controls over domestic nan-cial markets (e.g., moral suasion or window guidance to control creditgrowth). Although the eectiveness o capital and administrative con-trols will diminish over time, such measures can succeed or a while.

Imposing capital and administrative controls is not without cost,

given the distortions they create and the repression o the nancialsystem that tends to occur. Moreover, maintaining an undervaluedexchange rate imposes large costs on the real economy. The distortionin the value o the exchange rate will create serious misallocations o resources in the export- and import-substituting sectors o the econ-omy. The longer an undervaluation o the currency is maintained, thegreater the misallocations created and the more dicult the readjust-ment the economy must undergo to unwind the distortion.

Among the emerging economies in East Asia, China most exploitedthis faw in the international nancial system during the 2000s. Tomaintain an increasingly undervalued exchange rate, particularlybecause productivity growth in China exceeded that in the rest o theworld, China had to amass a stunning amount o ocial reserves,with nearly $1.5 trillion o these reserves accumulating in the threeand a hal years ater the country’s exchange rate regime was changedin July 2005. China’s exchange rate policy also infuenced those o other East Asian countries in that they sought to limit appreciation o

their currencies in response to competitive pressure rom China, andthese countries probably built ocial reserves to levels higher thanthey ever intended.



11Three Pitalls in the International Financial System

China’s investment-driven growth model, with its heavy relianceon exports, has delivered rapid growth and development. As a result,the government is reluctant to do more than make gradual changes toit. But maintaining an undervalued exchange rate imposes growingcosts on the economy. In particular, it creates serious overallocations o resources to export- and import-substituting industries. This will haveto be sorted out; the more the adjustment is delayed, the greater thedistortion becomes and the more costly the process. Moreover, whenthe inevitable currency appreciation comes, the country will encountera substantial loss on the oreign exchange reserves it has accumulatedwhile trying to keep its currency cheap. The longer the country accu-

mulates excess reserves, the more costly these portolio losses are.Maintaining an undervalued exchange rate also stunts the develop-

ment o China’s nancial sector. Eorts to get its banking system tooperate on a sound commercial basis are undermined by the govern-ment’s heavy reliance on window guidance to control credit expansionand establish lending priorities. Window guidance has been an impor-tant part o China’s sterilization eorts in response to concerns thatupward pressure on domestic interest rates would induce increasing

infows o oreign money as capital controls have become more porous.In addition, currency undervaluation makes oreign nancing lookmore attractive than domestic nancing. The resulting spur to oreignborrowing urther stunts the domestic nancial sector. The buildup inoreign liabilities by Chinese enterprises may go unreported as com-panies seek to avoid capital controls, but it could eventually make thecountry vulnerable to a nancial shock. However, these problems donot occur immediately or are not apparent, so it is easy or policymak-

ers to discount them.Another eature o the international nancial system that mayencourage delay in external adjustment arises as an inadvertent con-sequence o the shit to foating exchange rates. A depreciating cur-rency can, as mentioned earlier, provide a sheltering eect and thusslow adjustment to adverse economic shocks arising rom structuralchanges. Specically, currency depreciation can reduce pressure on acountry’s external position, providing an opportunity to more graduallymake policy changes—especially reorms in the structure o a country’s

economy—that may be needed to deal with the consequences o such ashock. Because currency depreciation initially has a positive eect oneconomic growth, the tendency is to overlook the longer-term negative




consequences. Moreover, slower initial adjustment can also contributeto depreciation pressures on a country’s exchange rate that can persistor some time, providing additional incentive to delay adjustment.

Liberalization o trade during the 1990s and the rise o newly indus-trializing countries, particularly China, was a major competitive shockto advanced economies. It had especially strong eects on Europeaneconomies, with their rigid product and labor markets, though Japanwas also aected. Depreciating currencies in the late 1990s took thepressure o Europe and Japan to push structural reorms. In Europe inparticular, labor market reorms were badly needed but politically di-cult to implement. However, by delaying reorm, European countries

set themselves up or a sharp slowdown in growth when the euro beganto appreciate in the 2000s. The impact o that appreciation was initiallyoset because strong demand rom the Middle East and China boostedexports o the major European economies, principally Germany andFrance, but this demand evaporated when the Middle East and Chinaslowed. Now acing a major recession, European countries are suer-ing the consequence o their earlier decision to delay needed reorms.Economic recovery in the euro area may well be slow.



13

Global Imbalances and the Crisis

Most explanations o the current economic and nancial crisis ocus onnancial causes. The standard account runs along the ollowing lines:

relatively low interest rates worldwide or much o the 2000s droveinvestors to seek higher yields, and relative stability in nancial mar-kets, refecting the low cost o unds and solid economic growth, ledto signicant underpricing o risk. Lending standards were weakenedand leverage increased. The rise in leverage sharpened the exposure toliquidity risk or nancial institutions as they depended increasinglyon wholesale markets or unding and these unds became increas-ingly short term. New, complex nancial products obuscated risks and

contributed to serious mispricing. Risk controls ailed and good old-ashioned raud also created signicant losses. All o this combined toprecipitate unprecedented turmoil in global nancial markets begin-ning in mid-2007.

But missing is a discussion o how the seeds o the crisis were sownby the economic policies in those major countries that ostered globalimbalances and by the eatures o the international nancial system thatacilitated the growth o those imbalances. Substantial imbalances in

savings and investment emerged ater 2000, and were refected in grow-ing current account imbalances within major world economies. RisingU.S. decits and increasing surpluses in emerging East Asian econo-mies (especially China) and oil-exporting countries in the Middle Eastdeveloped. In turn, the savings and investment imbalances gave rise tothe so-called savings glut in developing countries and spawned sizablenet fows o capital rom developing to advanced countries, with theUnited States being the primary recipient o these fows. The savingsglut helped to reduce world interest rates. At the same time, the sub-

stantial rise in demand, especially by East Asian and Middle Easterneconomies, or ocial reserve assets crowded out private demand orsuch high-quality, low-risk assets. Consequently, a scramble by private




investors or other higher-yielding but relatively low-risk assets con-tributed to the nancial excesses that nally culminated in the presentturmoil in world nancial markets.

The statement o the November 2008 G20 summit hints at the rolethat imbalances played: “Major underlying actors to the current situ-ation were, among others, inconsistent and insuciently coordinatedmacroeconomic policies, inadequate structural reorms, which ledto unsustainable global macroeconomic outcomes. These develop-ments, together, contributed to excesses and ultimately resulted insevere market disruptions.” The term “unsustainable global macro-economic outcomes” appears to be a rather oblique reerence to global

imbalances.

The rise in global imbalances during the 2000s was driven by acombination o actors with mutually reinorcing eects. Signicantchanges took place in savings and investment behavior in major coun-tries. In the United States, national savings declined as the scal positionshited rom a surplus to a substantial decit and as household savingsell, resulting in a dramatic rise in the current account decit (Figure 3).The decline in household savings in part refected relatively low inter-

est rates and increased availability o nancing related to housing thatsparked a boom in consumption and residential investment.

Consumption-ueled growth in the United States ostered economicrecoveries in Japan and Europe on the back o higher exports. Particu-larly in Europe, corporate prots rose. But problems in the structureso these countries’ economies—especially rigidities in product andlabor markets—limited investment opportunities. The combination o high corporate savings and sluggish investment led to rising national

savings and external surpluses (Figure 4).Savings and investment imbalances and current account surpluseso developing countries also rose sharply (Figure 4). In emergingeconomies in East Asia other than China, savings increased. Moreimportant, the increases in the external surpluses o these countriesrefected a decline relative to GDP in investment—especially in struc-tures—ollowing the excesses in such investment that occurred in thebuildup to the Asian nancial crisis o 1997–98. External surplusesalso refected policy decisions in many o these countries to rebuild

ocial reserves, which had been decimated during the nancial crisis.The years ater 2000 also showed a dramatic rise in the savings and



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F IG uRE . u. S. CuRREn t A CCo unt DEF ICIt (PERCEntAGE oF woR lD GDP)

F IG uRE . EuRo A REA A nD JA PA n CuRR Ent A CCo unt SuRP luSES ( P ERCEnt AG E o F wo RlD G DP )




investment imbalance in China. Despite a very strong investment per-ormance, Chinese savings rose even more dramatically. The scalposition (government savings) improved and corporate savings posteda sharp rise. In East Asia generally, external surpluses put upward pres-sure on exchange rates, but this pressure was mitigated by substantialsterilized currency intervention, delaying adjustment. Ater 2002, cur-rent account surpluses o Middle East oil-exporting countries beganto rise as strong global demand and concerns about the security o oilsupplies drove up prices.

The substantial savings by East Asian emerging economies andMiddle East oil-exporting countries were refected in large net capital

outfows, which made their way to the United States. With the desiredlevel o savings in the world exceeding desired investment at the interestrates prevailing at the time, the glut o global savings drove down realrates o interest and set o a boom in asset prices.

At this point, the cycle began to eed on itsel. With expanded avail-ability o credit and lower interest rates, U.S. households used debt tosustain consumption and uel a housing boom. Rising U.S. demandstimulated additional growth in the rest o the world, adding to current

account surpluses, especially in East Asian emerging market economies.

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Foreign ocial assets in the United States Net private capital infows

F IG uRE . nEt CA P It A l InF lo wS t o t h E unIt ED St A t ES(u.S. $ bIllIonS)

Srce: Bureau o Economic Analysis, 2008.

Global Imbalances and the Crisis

Among these countries, China’s current account surplus skyrocketedand ocial reserves rose to record levels. Competitive pressures romChina also created pressure on other East Asian countries to limit theappreciation o their currencies against the U.S. dollar, boosting exter-nal surpluses and reserve accumulation in these countries. The currentaccount surpluses o oil-exporting countries in the Middle East alsorose because increasing worldwide demand continued to push up oilprices. In turn, through net capital fows, developing countries’ externalsurpluses were unneled back to the United States. This nancing thenhelped und a continuation o the consumption and housing boom anda steady rise in asset prices.

To a signicant extent, the strong preerence or U.S. dollar assetsthat emerged refected the pivotal role the dollar plays as a reserve cur-rency in the international nancial system. Consequently, the UnitedStates was able to nance its growing external decits relatively easilyand delay needed adjustments in domestic savings and in its balanceo payments (refecting the rst eature o the international nancialsystem). However, there was also a net fow o private capital into theUnited States, as shown in Figure 6. This refected the sense that U.S.

markets were better regulated, had better governance, and were moresecure than markets in emerging economies. Moreover, in the rst




part o the 2000s economic growth was aster in the United States andreturns on nancial assets were perceived as being higher than in otheradvanced countries. As a result, a sel-reinorcing eect set in. As capi-tal infows to the United States boosted asset prices and returns, addi-tional fows o capital were stimulated.

Few analysts dispute the existence o the imbalances or their contri-bution to asset price infation. But with the benet o hindsight, manycommentators have argued that the United States should have usedmonetary policy to blunt the eects o capital infows, thereby avertingthe crisis. It is asserted that the Federal Reserve permitted loose mone-tary conditions to prevail or too long, allowing the buildup o too much

liquidity in the nancial system. The Fed is a convenient scapegoat, butwhat these commentaries suggest is that it could have used monetarypolicy alone to deal with global imbalances. They ail to recognize thatmonetary policy is a blunt instrument. With the infows o capital, theyield curve in the United States was relatively fat through much o the2000s, suggesting that a decision to hike short-term policy rates mightnot have ully ed through into long-term rates. Indeed, senior Fed o-cials had commented on the unusual diculties being encountered in

trying to use monetary policy to infuence long-term interest rates.Then chairman Alan Greenspan oten spoke o an interest rate conun-drum, and then deputy chairman Ben Bernanke oered the savingsglut as an explanation or the low level o long-term interest rates thatappeared hard or the Fed to control.

To be sure, the fat yield curve did not imply that the Fed could notbring about an increase in long-term interest rates. Monetary policycertainly could have been used to limit the eect o the infows o

capital to the United States and prevented some o the excesses thatoccurred. However, to be successul, there would have had to be a sub-stantial tightening o monetary policy. Such aggressive use o monetarypolicy to deal with this problem would have inficted a high cost on theU.S. economy and, in turn, the rest o the world. Granted, the costsinficted by the current economic and nancial crisis are quite high, butthe relevant question is whether other policy alternatives would havebeen better placed than monetary policy in dealing with the situationat a much lower cost. Obviously, dealing more aggressively with global

imbalances would have been the best policy response.



19

In the past couple o years, a view has emerged that the problem o global imbalances would diminish over time as growth in the rest o the

world—particularly in Europe and East Asia—was seen to decouplerom growth in the United States. In conjunction, it was also arguedthat other countries—especially China—were stepping up to becomeengines to sustain world growth. It was thereore argued that globalimbalances could be sel-correcting and that there was time or moregradual changes in economic policies in the major countries. That therecession in the United States has had a more severe than expectedimpact on the rest o the world has exposed these propositions as

myths and dashed hopes that a permanent correction in global imbal-ances could be achieved without a severe disruption in world growth.Now there is a clear need or policy actions to deal with the problem,and global imbalances should no longer be considered a medium-termproblem that can be dealt with gradually.

The decoupling and new-engines-o-growth myths stemmed rom asimplistic analysis o national accounts data. The data or Europe andEast Asian countries indicated that domestic demand, not net exports,

was increasingly the major contributor to economic growth, hence theview that growth in these economies had decoupled rom growth else-where. The new engines myth was derived rom an analysis o worldGDP data, which showed that other countries’ contributions to worldGDP growth were rising relative to the contribution o the UnitedStates. Indeed, China’s contribution to world growth exceeded that o the United States in 2007.

The basic problem with the analysis underlying the decouplingmyth was that it ocused solely on the proximate sources o growth.

No attempt was made to try to determine whether domestic demandgrowth was sel-sustaining or whether it was generated as the knock-on (or multiplier) eect arising rom the income derived rom exports.

The False Hope o Decoupling




Similarly, in the new-engines-o-growth myth, the suggestion thatChina was becoming a growth engine or the world economy did notactor in whether China was actually generating demand or the rest o the world. China certainly was, to some extent, doing so or the rest o Asia. However, the engine ultimately driving China’s import demandwas China’s exports. That the two propositions were in the end justmyths became abundantly clear as the United States slipped into reces-sion. The nancial turmoil may have added to the slowdown in the resto the world, but it is the loss o stimulus derived rom U.S. demand thathas been the major actor in slowing economic growth, particularly inEast Asia.

In one common view, current economic diculties make it hard inthe near term to deal with global imbalances, owing to concerns aboutnegative short-run eects on growth and employment. But ignoringimbalances and alling back on old policies to crank up growth will serveonly to exacerbate the imbalances when the world economy recovers,making them an even bigger problem and creating an economic envi-ronment that ultimately may be less stable. The challenge or heads o state is to ormulate policies that both cushion the economic downturn

in the near term and address global imbalances at a reasonable pace.The United States nds itsel in a somewhat ironic position. For

years, economists have called or actions to boost national savings inorder to reduce the current account decit. Now, substantial scal stim-ulus is needed to save the U.S. economy rom a sharp downward spiral.But it has to be implemented with an eye to the need to consolidate theU.S. scal position over the medium term. To maximize its eect, a pre-mium should be placed on spending that provides a direct stimulus to

the economy without permanently raising expenditures.Beyond the questions o stimulus design, the United States will haveto increase national savings in the medium term, and the most ecientway to do so is to raise government savings. Eorts will have to includereorming the tax system. Reorms o spending programs can providesome savings, but given large and growing demands, spending con-straints will not achieve the needed increase in government savings.In the end, there will have to be tax increases. One option is to restorethe top marginal income tax rates o the 1990s when the cuts enacted

during the Bush administration expire in 2010. A substantial amounto revenue could thus be raised without creating signicant disincen-tives or work and investment, judging by the high rates o growth



21The False Hope o Decoupling

during the 1990s. Simpliying both the personal and corporate incometax code could also boost eciency, improve equity, and at the sametime raise revenue.

In Europe and Japan, medium- and longer-term demands on govern-ment resources present challenges but should not block near-term scalaction. The short-term to medium-term trade-o in these countries issimilar to that in the United States. Signicant scal stimulus now couldprevent an economic recession rom turning into a depression. Accord-ingly, or the European countries, substantial fexibility should be usedin adherence to the objectives in the Stability and Growth Pact. It is alsoimportant or the euro-area countries that looser monetary policy sup-

ports scal stimulus.Stimulus in the short term will help soten the downturns in Europe

and Japan, but structural reorms in labor and product markets areneeded to reinorce these eorts and lay the basis or more balancedand sustainable growth over the medium term. To break out o the cycleo relatively slow growth and heavy dependence on exports, Europe andJapan must boost competition in product markets by removing barri-ers to entry and by improving business opportunities. Labor market

reorm is particularly critical in Europe. It must enhance competitive-ness by increasing labor fexibility and mobility, reducing employmentprotection, and better aligning wages with labor market supply anddemand. In both Europe and Japan, it is also essential to boost labororce participation to oset the eects o aging.

Europe and Japan will be tempted to put o structural reorms outo concerns to preserve employment. But both have delayed struc-tural reorm or too long. Each time these economies ace shocks, they

put o adjustment. The tendency to delay reorms out o concern orshort-term employment is becoming sel-reinorcing and, in particular,is condemning Europe to slower and slower growth. Near-term lossesin employment resulting rom labor and product market reorms arelikely to be more than made up because such reorms will oster morerapid growth when economic recovery takes hold.

East Asian emerging economies also have room to provide scalstimulus to help oset the impact o the global slowdown, and theyshould move ahead quickly. How China responds is particularly impor-

tant to the world economy. China has already announced a large scalpackage and has taken steps to ease monetary and credit conditions.However, some o China’s actions may serve simply to reinorce the




country’s dependence on investment-driven growth and exports. Thegovernment has taken steps to sustain export growth, including increas-ing value-added tax (VAT) rebates or many categories o exports andby eectively repegging China’s renminbi to the U.S. dollar. Sucheorts to sustain export growth are likely to cause diculties in otherEast Asian economies and could provoke protectionist responses inadvanced countries.

The Chinese authorities must deliver a stimulus that promotesdomestic consumption. The government needs to continue improv-ing critical social services, especially education, health care, and pen-sions. Reducing the uncertainties surrounding the provision o these

services will substantially diminish households’ strong precautionarysavings motive and give households the condence to raise consump-tion. These are areas where signicant short-term stimulus couldbe provided. Nevertheless, although the Chinese authorities haveacknowledged the need to bolster social services, economic stimulusplans thus ar appear to be predominantly oriented toward sustaininginvestment and export growth.

The Chinese authorities are aware that signicant changes in policies

are imperative to sustaining rapid growth over the medium term. Theyhave publicly stated that the economy needs to be rebalanced away romits heavy dependence on investment and exports toward consumption. To do so requires removing price distortions and other policy changesto eliminate ineciencies and incentives avoring investment over con-sumption. Distortions exist in such areas as energy, other utilities, andland, but a major problem is the low cost o capital. Capital costs needto be raised signicantly, and that cannot be done without permitting

more fexibility and a more rapid rate o appreciation o the exchangerate. The ceiling imposed on interest rates paid on savings deposits is amajor actor behind the low cost o capital, keeping the bank lendingrate low and holding down the opportunity cost or enterprises’ use o their retained earnings or investment. This ceiling needs to be lited.In turn, a higher cost o capital and a stronger currency will help curbinvestment in the export- and import-substituting sectors. Real house-hold incomes would be boosted by a rise in both the exchange rate andbank deposit rates. Consumption would rise, particularly because,

with a strong precautionary motive or savings, a greater proportion o an increase in household interest income rom a rise in deposit rates ismore likely to be spent than saved.



23The False Hope o Decoupling

Financial market reorm is also needed to improve the intermedia-tion o savings in China. Liting the cap on deposit rates would not onlyhelp push up the cost o capital, it would also increase competition in thebanking sector and provide incentives or banks to expand credit to newcustomers. Greater access to credit would reduce the incentives o bothrms and households to hold large savings. Bond and equity marketsmust be developed to provide alternative sources o nancing or rmsand a much broader array o assets or households to invest in. Small-and medium-sized rms have had to rely largely on retained earnings orthe assets o their owners to nance investment. Consumers also havehad limited access to credit. Better credit access and higher-yielding

assets to invest in would reduce household savings and raise householdincomes over time, boosting consumption.



24

Better IMF Surveillance

An important part o dealing with global imbalances (and trying todiminish the prospect o a similar situation arising again) entails nd-

ing ways to mitigate the potential eects o the eatures in the interna-tional nancial system that can permit countries to delay adjustmentto external imbalances. There are no easy or hard-and-ast solutions tothese problems.

The U.S. dollar’s status as a reserve currency is not likely to change inthe near uture. Even in the midst o the current nancial crisis, moneyis pouring into the United States, which is seen as a sae haven despitethe act that the crisis originated in U.S. nancial markets. U.S. Trea-

sury securities remain the world’s premier risk-ree asset. Accordingly,the United States is likely to remain the dominant provider o reserveassets, and when the global economy recovers rom the current down-turn, a steady underlying demand or oreign ocial holdings o U.S.dollar assets will continue. And just as the United States will be able touse this advantage to put o adjustment, so countries acing upwardpressure on their currencies will be able to delay adjustments in theirexternal surpluses. Likewise, it is not easible to diminish the sheltering

eect that exchange rate depreciation may have and how it may delayadjustment to structural shocks in countries with foating exchangerates. Nor would it be desirable, because foating rates undoubtedlymake countries more resilient to temporary shocks and serve to stabi-lize the system overall.

Bilateral pressure has not been eective in inducing countries—especially the major countries—to make necessary policy adjustments.Such pressure is oten seen as being motivated by sel-interest and there-ore biased. Ad hoc groups o countries have been no more successul.

The same question concerning motives can apply, and there are usuallymembers o the group that are reluctant to rmly judge the behavior o one country, lest their own policies attract scrutiny.



25Better IMF Surveillance

The designers o the international nancial system recognized theneed or an impartial body to enorce the rules o the system, to fexiblyrespond to its potential faws, and to change the system as the globaleconomy evolves. This is a primary goal o the International MonetaryFund. In particular, the IMF’s articles o agreement require the organi-zation to promote the smooth unctioning o the international nancialsystem by conducting surveillance o the economic policies o membercountries. As mentioned earlier, however, the IMF cannot compelmember countries to change their economic policies; it can only urgethem to make needed changes. The persistence o global imbalancessuggests that the IMF has ailed in the execution o its surveillance man-

date, especially with regard to its larger, systemically important mem-bers, which have been the main players in the global imbalances saga.

One approach advocated to improve IMF perormance is to makethe rules governing surveillance more specic, particularly with regardto exchange rate policy. The articles o agreement establish the obliga-tions o IMF member countries and the general principles on which theinstitution’s surveillance unction is based. Rules or applying theseprinciples are specied in decisions by the IMF’s executive board, and

the application o these decisions is laid out in guidance notes romIMF management to the institution’s sta. It is argued that these deci-sions and guidance notes should be more specic in identiying policyactions, the value and behavior o exchange rates, the size o exter-nal imbalances, and other relevant variables that would make it morestraightorward and automatic to determine whether member coun-tries are violating their obligations.

Although in principle this approach may sound good, in practice it is

dicult to implement. Countries’ economic situations are not alwaysblack and white, and their policy actions may not be easily judged asconorming to, or violating, their IMF obligations beyond a reasonabledoubt. Moreover, possible indicators o inappropriate policy actionsmay be subject to considerable variance in interpretation, and theirmeasurement may also be imprecise. It is dicult, or example, to mea-sure the value o a country’s equilibrium real eective exchange rate todetermine whether its currency is signicantly over- or undervalued.Attempts to apply specic rules will likely result in numerous excep-

tions being made to ensure that countries are not unairly held or vio-lating IMF obligations. The larger the number o exceptional cases (andthe number will be large as countries strongly argue why they should be



27Better IMF Surveillance

with the articles o agreement) and holding IMF management respon-sible or the eective execution o surveillance. To carry out its respon-sibilities eectively, IMF management, including the managing directorand the deputy managing directors, needs to be selected in an openprocess solely on the basis o the candidates’ qualications and compe-tence. The current selection process is relatively closed and tends to bedominated by political considerations.

A question naturally arises as to whether earlier adoption o thesereorms in IMF governance would have changed the course o eventsthat led to the current crisis. It is dicult to argue convincingly that thecrisis would have been averted, but improving the IMF’s surveillance

eorts could have made a material dierence to its severity and dura-tion. Although governments are not in the habit o publicly recogniz-ing the salutary eect o IMF pressure, there have been many occasionswhen IMF surveillance has helped change countries’ economic policiesor the better. The Canadian authorities have acknowledged the impor-tant role IMF surveillance played in policy decisions o the mid-1990sthat resulted in the elimination o scal decits, as have the U.S. author-ities in regard to support or its scal consolidation in the second hal o

the 1990s and the Chinese in regard to the restructuring and recapital-ization o China’s largest state-owned banks since 2003.

Given this track record, tougher surveillance o the major countriescould have ostered policy changes that would have slowed the growthin global imbalances. The United States could have been pressed moreorceully on the need to increase national savings and reduce its cycli-cally adjusted scal decit. This could have strengthened the hand o those arguing or policy changes. For Europe, greater emphasis could

have been placed on the signicant losses in competitiveness that euro-area economies experienced during the 2000s as the euro appreciated,which would have reinorced the argument or liberalization o laborand product markets. Such changes could have been easier to achievein more prosperous times. Similarly, prosperous times could have pro-vided a better opportunity or changes in economic policies in China.In particular, earlier and stronger pressure might have helped build aconsensus or a signicantly aster change in China’s exchange rateand had a measurable impact on China’s external imbalance. That the

annual IMF surveillance consultation with China has not in act takenplace since 2006 points to missed opportunities to infuence the coun-try’s economic policies.




In the end, whether IMF surveillance would have materially alteredthe current crisis depends on how the surveillance would have been con-ducted had the reorms suggested here been adopted. This is a mattero speculation. But improving surveillance is at least an important rststep toward strengthening the global system. There is no reason not toattempt it.



29

Conclusion

The G20 has emerged as the main group or discussions on the globaleconomy and reorms o the international nancial system. The

group’s November 2008 summit made a reasonable start, despite itshasty organization. Understandably, the summit ocused on actions toarrest the slide in economic activity and get growth restarted. It alsoseized on the proximate cause o the economic and nancial crisis—signicant ailures in the supervision and regulation o the nancialsector in advanced countries—and proposed a credible action plan tobegin to address these ailures. But the problem o global imbalanceswas largely ignored.

I the G20 is to prevent similar crises in the uture, it will have toreckon with global imbalances and the eatures in the internationalnancial system that acilitated their growth. I nothing is done, theimbalances will simply build up again as the world economy recovers,and in time they will become a major contributing actor to the nextglobal crisis. Diplomacy through the G20 process is an importantopportunity to make the world economy more sound. The reorms o the IMF proposed in this report would help strengthen surveillance and

encourage the policy adjustments needed to unwind imbalances.Yet in the end it must be recognized that solutions lie not withany international gathering but with governments. The internationalsystem has allowed governments to build up huge balance-o-pay-ments imbalances; the international system will continue to allowthem to do so. But the past year or so o crisis demonstrates the di-erence between doing what may be politically expedient and doingwhat is sound economic policy. I country authorities do not learntheir lessons rom the current economic and nancial crisis, they will

nd themselves reliving it.



31

. That global imbalances were only indirectly reerred to and not explicitly mentioned inthe G20 summit’s statement does not bode well or getting the necessary internationalcooperation to nally deal with this problem. “Remarks by Secretary Henry M. Paul-

son, Jr., on the Financial Rescue Package and Economic Update,” U.S. Treasury pressrelease, November 12, 2008.

. The International Monetary Fund has written at length about the problem o globalimbalances since the early 2000s. See wrd Ecmic ok, International Mon-etary Fund, various issues.

. In the report on the multilateral consultation with major members held by the IMF inlate 2006 and early 2007, the view o the participating countries was that “the [global]imbalances were seen as a undamentally medium-term problem that requiredmedium-term solutions. There was general agreement that a correction in globalimbalances would eventually be necessary, but with the U.S. current account decitstill being relatively easily nanced, most saw the immediate risks as low; the greatest

concern was that imbalances could add to protectionist pressures, on both the currentand capital account. Thus the policy strategy should be gradualist in nature, consis-tent with and supportive o the necessary adjustment in the private sector, and aimingto build condence that a credible and consistent strategy to reduce imbalances wasbeing pursued.” Sa Repr e Miaera Csai Ga Imaaces iCia, e Er Area, Japa, Sadi Araia, ad e uied Saes, International MonetaryFund, June 2007.

. The actors driving the rise in decits ater 2001 were sharply dierent rom those thathad contributed to sizable U.S. current account decits in the second hal o the 1990s.At that time, changes in inormation technology and their application in productiveprocesses raised returns on investment in the United States and prompted substantialinfows o private capital.

. baace Paymes Maa, 5th ed. (rev.), International Monetary Fund.. In the Bretton Woods system, gold was a substitute or the U.S. dollar as a reserve

asset. The system basically collapsed when demands or gold in exchange or dollarsrose sharply, especially because the French government was less willing to hold dollarassets and the United States was reluctant to continue selling its gold stock at the priceat which the dollar was pegged to gold.

. Using oreign exchange controls can extend the period, but the resulting impact onthe real economy can be rather harsh, and such actions directed at current accounttransactions can invite retaliation by other countries.

. The so-called iron trinity argument suggests that by instituting capital controls, a coun-try trying to peg its exchange rate is able to pursue an independent monetary policy.. Capital controls can be seen as being equivalent to a tax on international capital move-

ments. When potential returns are high enough, investors will be willing to incur

Endnotes



32 Endnotes

additional costs to evade the controls; the higher the potential return, the greater theincentive or investors to evade.

. See, or example, Richard G. Harris, te ne Ecmy ad e Excage Rae Regime,

Center or International Economic Studies, Adelaide University, March 2001.. Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Decit,”

Homer Jones Lecture, April 14, 2005, and “Global Imbalances: Recent Developmentsand Prospects,” Bundesbank Lecture, September 11, 2007.

. “Statement rom the G-20 Summit on Financial Markets and the World Economy,”November 15, 2008.

. It is not readily apparent why global imbalances were not directly cited as a root causeo the current crisis. The strange phrasing, along with what appears to be a typograph-ical error in the list o underlying actors and a missing reerence to the role playedby exchange rate policies, would suggest that there was opposition rom the Chineseauthorities to the inclusion o a reerence to global imbalances in the communiqué.

. See Brad W. Setser, Sereig wea ad Sereig Per: te Sraegic Cseqeces America Ideedess, Council Special Report No. 37 (New York: Council on For-eign Relations Press, 2008).

. See “Testimony o Chairman Alan Greenspan,” te Federa Resere bard’s Semi-aa Meary Picy Repr e Cgress, delivered beore the Committee onBanking, Housing, and Urban Aairs, U.S. Senate, February 16, 2005.

. In act, the slowing in China’s export growth has been accompanied by an even greaterslowdown in the growth o China’s imports. As a result, China’s net exports are likelyto rise in 2008 and probably again in 2009.

. As an example o improving equity while raising revenue, the elimination o the inher-itance tax could be made permanent, but equity in the tax system would be improved

and revenue would be raised i the markup basis or pricing o inherited equities werechanged. Currently, inherited stock is valued at the price when inherited instead o at the original purchase price. Hence, capital gains taxes on these securities can beavoided by people who inherit stocks but not by those who purchase and later sell stockor a gain. Eliminating the markup and valuing inherited stock at the original purchaseprice would put all stock transactions on the same basis or tax purposes.

. Since mid-July 2008, the value o the Chinese renminbi against the U.S. dollar hasbeen largely unchanged, ater the currency appreciated roughly 7 percent in the rsthal o the year.

. Chinese premier Wen Jiabao in his address to the National People’s Congress in March2007 said that “the biggest problem in China’s economy is that growth is unstable, un-balanced, uncoordinated, and unsustainable.”

. Speakers at the October 2008 Per Jacobsson Roundtable on the Role and Governanceo the IMF were particularly vocal on the ailures in surveillance. Former IMF chie economist Raghuram Rajan summed up the panel’s assessment with the statement:“What I think we are missing in these moments is the presence o a strong interna-tional, independent voice which stands or the world economy and ghts or the worldeconomy. And it is a loss that the Fund is not perorming that role.”

. Similar recommendations are made in a report on governance o the IMF issued by theIMF’s Independent Evaluation Oce (Gerace e Ieraia Meary Fd:

A Eaai, Report o the Independent Evaluation Oce o the IMF, 2008). In re-

sponse to that report, the IMF’s managing director appointed a committee o eminentpersons to review IMF governance and make recommendation or changes. The com-mittee’s report is expected to be delivered in spring 2009.



33

Steven Dunaway is an adjunct senior ellow or international econom-ics at the Council on Foreign Relations. Previously, he was a deputy

director o the Asia and Pacic department at the International Mon-etary Fund. From November 2001 until December 2008, he was pri-marily responsible or directing the IMF’s country work on China andheaded the IMF’s consultation missions with the Chinese government.This was Dr. Dunaway’s second assignment on China while with theIMF; in the late 1980s, he was desk ocer or China. Beore his assign-ment in the Asia and Pacic department, Dunaway was head o theNorth American division in the IMF’s Western Hemisphere depart-

ment. In that capacity, he directed the IMF’s consultations missionswith the United States and Canada.

During his twenty-ve-year career at the IMF, Dunaway had a widevariety o other country assignments ranging rom such countries asAustralia and New Zealand to Indonesia and the Philippines. In addi-tion, during the mid-1990s, he directed the IMF’s research on privatecapital fows to developing countries and handled IMF support orBrady debt deals or Ecuador, Panama, and Peru.

Beore coming to the IMF, Dunaway worked or ten years at theBureau o Economic Analysis in the U.S. Department o Commerce,doing analysis and orecasting o U.S. international transactions. Heholds undergraduate and graduate degrees in economics rom the Uni-versities o Louisville and Cincinnati, and received his PhD in econom-ics rom George Washington University.

About the Author



34

Advisory Committee orGa Imaaces ad e Fiacia Crisis

Peter AckermanRckpr Capia, Ic.

Timothy Dees Adamste lidsey Grp

James L. BacchusGreeerg trarig, llP

Richard Bookstaber

Jason E. Bordo brkigs Isii

Jonathan A. Chanisne tide Asse Maageme, llC

Charles CollynsIeraia Meary Fd

Stephen C. FreidheimCyrs Capia Parers

Joseph Gagnonbard Gerrs e Federa Resere Sysem

Maurice R. GreenbergC.v. Sarr & C., Ic.

Daniel E. Grossman

Andrew Gundlach Ard ad S. beicreder hdigs, Ic.

James A. Harmon

harm & C.

Carla A. Hillshis & Cmpay

Brett E. HouseCmia uiersiy

Karen H. JohnsonCsig Ecmis

Peter JohnsonRckeeer Famiy & Assciaes

Jonathan KirshnerCre uiersiy

Anne O. Krueger Js hpkis uiersiy

Roger M. KubarychCci Freig Reais

J. Welby Leamanu.S. Deparme e treasry

Flynt L. Leverettne America Fdai adPesyaia Sae uiersiy

Robert K. Litonbrad tecgies ld.

Clay Loweryte Ger Park Grp

Sebastian MallabyCci Freig Reais

Michael Mandelbaum Js hpkis uiersiy

Edward E. MatthewsC.v. Sarr & C., Ic.



36

Roger C. AltmanEercre Parers, Ic.

Richard H. ClaridaCmia uiersiy

Richard N. Cooperharard uiersiy

Steven A. DenningGeera Aaic llC

Daniel W. DreznerFecer Sc la ad Dipmacy

Nicholas Eberstadt America Eerprise Isie r Pic Picy Researc

Barry J. Eichengreenuiersiy Cairia, berkeey

Jessica P. EinhornPa h. nize Sc

Adaced Ieraia Sdies

Martin S. Feldsteinnaia brea Ecmic Researc

Joseph H. FlomSkadde, Arps, Sae, Meager & Fm llP

Kristin J. Forbes Massacses Isie tecgy

Jerey A. Frankel

harard uiersiy

Stephen C. FreidheimCyrs Capia Parers

Aaron L. Friedbergwdr wis Sc

Pic ad Ieraia Aairs

James D. GrantGra’s Ieres Rae oserer

Maurice R. GreenbergC. v. Sarr & C., Ic.

David D. HaleDaid hae Ga Ecmics

Amy M. Jae James A. baker III Isie r Pic Picy

Jim KolbeGerma Marsa Fd e uied Saes

Marc Lasry Aee Capia Grp

Robert E. LitanEig Mari Kama Fdai

Michael Mandelbaum Js hpkis uiersiy

Donald B. Marronligyear Capia

Kathleen R. McNamaraGerge uiersiy

Joseph S. Nyeharard uiersiy

E. S. O’Neal

Charles O. PrinceScse Grp

Maurice R. Greenberg Center

or Geoeconomic StudiesAdvisory Committee



37Maurice R. Greenberg Center or Geoeconomic Studies Advisory Committee

Jerey A. Rosenlazard

John G. Ruggieharard Keedy Sc

Faryar Shirzadte Gdma Sacs Grp, Ic.

Joan E. SperoFdai Ceer

Fareed Zakarianeseek Ieraia

Daniel B. ZwirnD. b. Zir & C., lP



38

Mission Statement o the

Maurice R. Greenberg Centeror Geoeconomic Studies

Founded in 2000, the Maurice R. Greenberg Center or GeoeconomicStudies (CGS) at the Council on Foreign Relations (CFR) works to

promote a better understanding among policymakers, academic spe-cialists, and the interested public o how economic and political orcesinteract to infuence world aairs. Globalization is ast erasing theboundaries that have traditionally separated economics rom oreignpolicy and national security issues. The growing integration o nationaleconomies is increasingly constraining the policy options that govern-ment leaders can consider, while government decisions are shaping thepace and course o global economic interactions. It is essential that poli-

cymakers and the public have access to rigorous analysis rom an inde-pendent, nonpartisan source so that they can better comprehend ourinterconnected world and the oreign policy choices acing the UnitedStates and other governments.

The center pursues its aims through

Research carried out by CFR ellows and adjunct ellows o out-–standing merit and expertise in economics and oreign policy, dis-

seminated through books, articles, and other mass media;Meetings in New York, Washington, DC, and other select American–cities where the world’s most important economic policymakers andscholars address critical issues in a discussion or debate ormat, allinvolving direct interaction with CFR members;

Sponsorship o roundtables and Independent Task Forces whose–aims are to inorm and help to set the public oreign policy agenda inareas in which an economic component is integral; and

Training o the next generation o policymakers, who will require–fuency in the workings o markets as well as the mechanics o inter-national relations.



39

Mission Statement o the

Program on International Institutionsand Global Governance

The Program on International Institutions and Global Governance(IIGG) at the Council on Foreign Relations (CFR) aims to identiy the

institutional requirements or eective multilateral cooperation in thetwenty-rst century. The program is motivated by recognition thatthe architecture o global governance—largely refecting the worldas it existed in 1945—has not kept pace with undamental changes inthe international system. These shits include the spread o transna-tional challenges, the rise o new powers, and the mounting infuenceo nonstate actors. Existing multilateral arrangements thus provide aninadequate oundation or addressing many o today’s most pressing

threats and opportunities and or advancing U.S. national and broaderglobal interests.

Given these trends, U.S. policymakers and other interested actorsrequire rigorous, independent analysis o current structures o multilat-eral cooperation, and o the promises and pitalls o alternative institu-tional arrangements. The IIGG program meets these needs by analyzingthe strengths and weaknesses o existing multilateral institutions andproposing reorms tailored to new international circumstances.

The IIGG ullls its mandate by

Engaging CFR ellows in research on improving existing and–building new rameworks to address specic global challenges—including climate change, the prolieration o weapons o massdestruction, transnational terrorism, and global health—and dis-seminating the research through books, articles, Council SpecialReports, and other outlets;

Bringing together infuential oreign policymakers, scholars, and– CFR members to debate the merits o international regimes andrameworks at meetings in New York, Washington, DC, and otherselect cities;



40 IIGG Mission Statement

Hosting roundtable series whose objectives are to inorm the oreign–policy community o today’s international governance challengesand breed inventive solutions to strengthen the world’s multilateralbodies; and

Providing a state-o-the-art Web presence as a resource to the wider–oreign policy community on issues related to the uture o globalgovernance.



41

Erasia Eergy SecriyJerey Manko; CSR No. 43, February 2009

Preparig r Sdde Cage i nr KreaPaul B. Stares and Joel S. Wit; CSR No. 42, January 2009A Center or Preventive Action Report

Aerig Crisis i ukraieSteven Pier; CSR No. 41, January 2009A Center or Preventive Action Report

Cg: Secrig Peace, Ssaiig PrgressAnthony W. Gambino; CSR No. 40, October 2008

A Center or Preventive Action Report

Deerrig Sae Spsrsip ncear terrrismMichael A. Levi; CSR No. 39, September 2008

Cia, Space weaps, ad u.S. SecriyBruce W. MacDonald; CSR No. 38, September 2008

Sereig wea ad Sereig Per: te Sraegic Cseqeces America IdeedessBrad W. Setser; CSR No. 37, September 2008A Maurice R. Greenberg Center or Geoeconomic Studies Report

Secrig Pakisa’s tria beDaniel Markey; CSR No. 36, July 2008 (Web-only release) and August 2008A Center or Preventive Action Report

Aidig trasers trreAshley S. Deeks; CSR No. 35, June 2008

Ga FDI Picy: Crrecig a Preciis DriDavid M. Marchick and Matthew J. Slaughter; CSR No. 34, June 2008A Maurice R. Greenberg Center or Geoeconomic Studies Report

Deaig i Damascs: Seekig a Greaer Rer u.S.-Syria ReaisMona Yacoubian and Scott Lasensky; CSR No. 33, June 2008A Center or Preventive Action Report

Council Special ReportsPised y e Cci Freig Reais



42 Council Special Reports

Cimae Cage ad naia Secriy: A Ageda r AciJoshua W. Busby; CSR No. 32, November 2007A Maurice R. Greenberg Center or Geoeconomic Studies Report

Paig r Ps-Mgae ZimaeMichelle D. Gavin; CSR No. 31, October 2007A Center or Preventive Action Report

te Case r wage IsraceRobert J. LaLonde; CSR No. 30, September 2007A Maurice R. Greenberg Center or Geoeconomic Studies Report

Rerm e Ieraia Meary FdPeter B. Kenen; CSR No. 29, May 2007

A Maurice R. Greenberg Center or Geoeconomic Studies Report

ncear Eergy: baacig bees ad RisksCharles D. Ferguson; CSR No. 28, April 2007

nigeria: Eecis ad Ciig CaegesRobert I. Rotberg; CSR No. 27, April 2007A Center or Preventive Action Report

te Ecmic lgic Iega ImmigraiGordon H. Hanson; CSR No. 26, April 2007

A Maurice R. Greenberg Center or Geoeconomic Studies Report

te uied Saes ad e wto Dispe Seeme SysemRobert Z. Lawrence; CSR No. 25, March 2007A Maurice R. Greenberg Center or Geoeconomic Studies Report

biia e brikEduardo A. Gamarra; CSR No. 24, February 2007A Center or Preventive Action Report

Aer e Srge: te Case r u.S. Miiary Disegageme rm IraqSteven N. Simon; CSR No. 23, February 2007

Darr ad beyd: wa Is needed Pree Mass ArciiesLee Feinstein; CSR No. 22, January 2007

Aidig Cfic i e hr Arica: u.S. Picy tard Eipia ad ErireaTerrence Lyons; CSR No. 21, December 2006A Center or Preventive Action Report

liig i hg: u.S. Picy tard hg Cáez’s veezea

Richard Lapper; CSR No. 20, November 2006A Center or Preventive Action Report



43Council Special Reports

Rermig u.S. Pae Picy: Geig e Iceies RigKeith E. Maskus; CSR No. 19, November 2006A Maurice R. Greenberg Center or Geoeconomic Studies Report

Freig Iesme ad naia Secriy: Geig e baace RigAlan P. Larson, David M. Marchick; CSR No. 18, July 2006A Maurice R. Greenberg Center or Geoeconomic Studies Report

Caeges r a Pseeci Mexic: Isses r u.S. PicyPamela K. Starr; CSR No. 17, June 2006 (Web-only release) and November 2006

u.S.-Idia ncear Cperai: A Sraegy r Mig FrardMichael A. Levi and Charles D. Ferguson; CSR No. 16, June 2006

Geeraig Mmem r a ne Era i u.S.-trkey ReaisSteven A. Cook and Elizabeth Sherwood-Randall; CSR No. 15, June 2006

Peace i Papa: wideig a wid oppriyBlair A. King; CSR No. 14, March 2006A Center or Preventive Action Report

negeced Deese: Miizig e Priae Secr Sppr hmead SecriyStephen E. Flynn and Daniel B. Prieto; CSR No. 13, March 2006

Agaisa’s ucerai trasii Frm trmi nrmacy

Barnett R. Rubin; CSR No. 12, March 2006A Center or Preventive Action Report

Preeig Caasrpic ncear terrrismCharles D. Ferguson; CSR No. 11, March 2006

Geig Seris A e ti DecisMenzie D. Chinn; CSR No. 10, September 2005A Maurice R. Greenberg Center or Geoeconomic Studies Report

b Sides e Aise: A Ca r biparisa Freig PicyNancy E. Roman; CSR No. 9, September 2005

Frge Ierei? wa e uied Saes needs D i e weser bakasAmelia Branczik and William L. Nash; CSR No. 8, June 2005A Center or Preventive Action Report

A ne begiig: Sraegies r a Mre Fri Diage i e Msim wrdCraig Charney and Nicole Yakatan; CSR No. 7, May 2005

Per-Sarig i Iraq

David L. Phillips; CSR No. 6, April 2005A Center or Preventive Action Report



44

Giig Meaig “neer Agai”: Seekig a Eecie Respse e Crisis i Darr ad beydCheryl O. Igiri and Princeton N. Lyman; CSR No. 5, September 2004

Freedm, Prsperiy, ad Secriy: te G8 Parersip i Arica: Sea Isad 2004 ad beydJ. Brian Atwood, Robert S. Browne, and Princeton N. Lyman; CSR No. 4, May 2004

Addressig e hI v/AIDS Pademic: A u.S. Ga AIDS Sraegy r e lg termDaniel M. Fox and Princeton N. Lyman; CSR No. 3, May 2004Cosponsored with the Milbank Memorial Fund

Caeges r a Ps-Eeci PiippiesCatharin E. Dalpino; CSR No. 2, May 2004A Center or Preventive Action Report

Saiiy, Secriy, ad Sereigy i e Repic GergiaDavid L. Phillips; CSR No. 1, January 2004A Center or Preventive Action Report

Council Special Reports

To purchase a printed copy, call the Brookings Institution Press: 800.537.5487.

ne: Council Special Reports are available or download rom CFR’s website, www.cr.org.

For more inormation, contact [email protected].



Council on Foreign Relations

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global imbalances csr44

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