Summers called for increased national saving in the United States and for further adjustment of the exchange rate against the dollar—particularly through greater flexibility of the exchange rates of key Asian currencies—to reduce the sizable and growing U.S. current account deficit. Addressing a large gathering of policymakers, economists, academics, development experts, journalists, and members of the general public, he said increased national saving and further exchange rate adjustment will work as a remedy when taken together, but not individually.
Placing the U.S. current account deficit within the context of the “very substantial increase in the pattern of global imbalances in general,” Summers emphasized both the scale of the problem and the need to address it in the near, not distant, future. The U.S. current account deficit, he noted, was currently running well in excess of $600 billion at an annual rate, or in the range of 5.5 percent of GDP, and was “without precedent in the American experience.” It represents about 1.25 percent of global GNP, he added—which means that it is larger, relative to the global economy, than any previously recorded national deficit.
The U.S. current account deficit is without precedent in the American experience.
Summers attributed the widening current account deficit—which is the difference between national saving and national investment—to “reduced saving and increased consumption rather than to increased investment.” U.S. net national savings, which have declined sharply in the past five years, were between 1 and 2 percent in 2003. Meanwhile, he said, a number of Asian emerging market economies had substantially increased their reserves and were effectively financing the U.S. current account deficit through central bank intervention. Their objectives were to maintain “competitiveness and a strong traded goods sector, and an exchange rate that does not fluctuate significantly against the dollar.”
A rapidly growing U.S. current account deficit, financed with reliance on the official sector, poses two risks, Summers said. First, it generates incipient protectionist pressures, such as the recent concern in the United States over outsourcing. Second, dependency on “international vendor finance,” especially from countries whose governments intervene to maintain fixed exchange rates to create an “illusory sense of stability,” can lead to vulnerability over the medium term. Though at present this arrangement has its benefits—finance at a low cost for the United States when its saving is low, and strong exports and a competitive traded goods sector for the financing countries—its risks cannot be ignored.
In Summers’ view, addressing the problem of the U.S. current account deficit requires global, not just domestic, consideration. He argued that because the related issues of fixed or quasi-fixed exchange rates and international vendor finance lie outside the Group of Seven (G-7) countries, these matters need to be discussed in global forums. The G-7 countries are unlikely to be “the appropriate grouping for the totality of that reflection,” he said.
In response to a question about the seeming mismatch in the time required to take the two recommended actions—increase national saving, which is time-consuming, and adjusting quasi-fixed exchange rates, which could, in principle, be done immediately—Summers noted that a significant part of the effects of an increase in future saving can happen through the expectation of it occurring. Thus, in the United States in 1993–94, following the passage of a program to reduce the fiscal deficit, there was “a rather discontinuous change in the sense of sustainability” before the measures were implemented. In this way, particularly given the capacity for multiyear budgeting, the expectation of increased future saving “casts a shadow backwards.” On the nature of the exchange rate adjustments, he clarified that because a spectrum of arrangements—from repegging to a managed float—was possible, the timing of the adjustments would depend on a variety of country-specific and global issues.
Andrew Crockett to chair Per Jacobsson Foundation
The Per Jacobsson Foundation has selected Andrew Crockett as its new chair. He will succeed Jacques de Larosière, who has chaired the foundation since November 1999.
Crockett has been President of JPMorgan Chase International since 2003. After working at the Bank of England, he joined the IMF staff in 1972 and rose to the position of Deputy Director of the Research Department. In 1989, he left the IMF to become an Executive Director of the Bank of England. Between 1993 and 2003, Crockett was General Manager of the Bank for International Settlements. He was also the first Chair of the Financial Stability Forum (1999–2003). He has been a director of the Per Jacobsson Foundation since October 1993.
Toward the end of his address, Summers also reflected on the importance of events such as the IMF–World Bank Meetings and the Per Jacobsson lectures. These meetings, he said, allow hundreds of people to talk and argue with hundreds of others about critical issues and what can be done. Such discussions ultimately become part of the process that drives policy.