Dr. Miranda Xafa, the alternate executive director of the International Monetary Fund (IMF), spoke about the imbalances between the U.S. economy and the economies of many developing countries last night.
According to Xafa, the U.S. current account balance, or the dollar value of the country's exports minus the dollar value of its imports, has reached a record deficit of $800 billion. This means that imports have far outpaced exports, while many emerging economies, on the other hand, have current account surpluses.
Junior Felice Matathias, an economics major and member of the European Club, one of the event's sponsoring organizations, said that the real problem is that the United States is consuming too much while emerging economies, such as China, are not consuming enough. "China is saving too much ... right now," he said.
That this problem exists goes "against conventional wisdom," Xafa said, because the financial return from investment in capital is usually high in emerging markets since capital has a higher yield due to its relative scarcity in those countries. In addition, emerging economies are not predicted to run surpluses because they are expected to invest excess resources in their infrastructure.
Developing countries, however, are exporting their capital to the United States, which is "a puzzle," according to Xafa. This capital outflow from emerging countries is one of the many indicators of the imbalances in global current accounts. This leads some to fear stagnation in economic growth and inability to reduce deficit for developed countries.
According to Matathias, this deficit can harm the currency exchange rate. "It's bad because the big deficit can mess up the exchange rates. It can lead [the United States] to recession," he said.
During her speech, Xafa pointed out that although the exchange rate of the dollar has appreciated since the 1980s, the dollar's purchasing power is currently below its average over the last 40 years.
This will hurt not only the United States but the emerging economies that depend on it, Matathias said. "One country's going to be affecting the other one," he said.
One possible explanation that Xafa proposed for these phenomena is the Portfolio Balance Theory, which states that capital flows into the United States due to its high interest rates, and money flows into the United States because of high quality investment opportunities.
According to Xafa, the return on the investment of U.S. assets is also extremely high, since "the U.S. will borrow money at a five percent interest rate but invest for a 15 percent return."
"[The United States] is more of an international creditor," she said.
The imbalances, however, are already in the process of "self-correcting." The U.S. economy is slowing, which will work to reduce current account deficit and help rebalance the growth of the global economy, according to Xafa.
She said that the IMF's focus is facilitating a controlled transition to more balance in current accounts.
"Obviously the imbalances won't continue growing forever. The question is, will there be a crash landing," she said.
For this reason, the IMF has instituted multilateral consultations to promote cooperative strategy.
"They want to create a consensus about actions to address systemic issues. It's useful to address these issues with a common understanding," she said.
One part of these consultations is to award many emerging countries, like China, with more voting power in the IMF.
"[The emerging countries'] voting share in the fund is very small even though their global output is very large. The fund wants to give more votes to emerging markets in proportion to their share of output to promote cooperation," Xafa said.
The talk, which was held in Braker Hall, was well attended, according to European Club President senior Alex Argyros. "I'm excited about the turnout," he said.
The European Club co-sponsored Xafa's lecture along with the Tufts Economics Society and the Economics Graduates Society.
