April 17, 2011
The NYT described the problem facing developing and rich countries as they try to reverse imbalances in trade:
“The problem is that developing nations, losing business from their best customers, hope to replace sales by increasing domestic consumption — selling to the same customers developed nations are trying to reach.”
Actually this should in principle not be a problem at all. It would mean that people in developing countries have rapid increases in their standard of living. This is what is supposed to happen in the world economy as the developing world catches up to the rich countries.
Due to incredible mismanagement of the world financial system in the wake of the East Asian financial system (i.e. Alan Greenspan, Robert Rubin, Larry Summers saving the world [thanks James]) capital flows reversed course in a big way to go from poor countries to rich countries, especially the United States. The harsh conditions that the IMF imposed on the countries that fell into crisis led developing countries to accumulate massive amounts of currency reserves to avoid ever being in a situation where they would be dependent on the IMF for help.
This reverse flow led to the large imbalances seen today. It is understandable that the developing countries would not want to be in a situation where they are again borrowing heavily from abroad and therefore could need outside assistance at some point, but this is because they cannot count on an international financial system that protects their interests rather than just the interests of rich country banks.
This is all a question of simple accounting identities. These points should have been noted in the article.
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