The following are the key reasons analyzed by our team , as part of our group assignment in macro-economics and also followed by suitable remedies to solve the global imbalances.A timed assignment this was,and more importantly ,the conditions were, google free and limited number of words ( no long stories),and,boy,we did score pretty high.
The major reasons for CA deficit of US are:
- US savings rate are very less.
- Foreign funds financed the difference between US savings and investment.
- Value of dollar decreased vis-a-vis Euro but Asian countries prevented their currencies from rising.
- Slowdown in the economy during 2001-02 leads to decline in CA deficit because of slowing imports.
- Slowdown of economies of major trading partners.
Reasons for high Forex reserves with Developing countries, Japan and the EU
- Exports driver of economic growth
- FII and FDI
- Local demand catered to by local industries
- Depreciation of US$ temporarily arrested by growing forex reserves of developing countries who invested heavily in US T-bills.
Effects of high current account surplus of Non-US countries:
- Inflation due to increased money supply
- Increase in real estate prices leading to possible burst.
- Low return on investments in US Treasury bonds.
USD : the global currency
- USD is the choice currency of international trade , deriving its strength from economic and political clout of US.
- US Fed follows a flexible exchange rate mechanism and avoids interfering in the forex markets.
US Debt:
- The external debt of the US government has risen to more than 25% of the GDP and is growing at an increasing pace.
- This will continue to grow with higher interest payments, even if the trade stabilizes.
Emerging Euro:
- Euro is fast emerging as a long term potential substitute to USD.
- However strength of Euro will depend on the stability and growth of EU.
- ECB follows similar policies as US – Fed. i.e a flexible exchange rate mechanims.But ECB is not agaisnt the idea of defending Euro.
Recovering Japan:
- Japanese economy is showing signs of recovery after slump over the last 5 years.
- JPY is maintained at a flexible market determined rate,however Japanese central bank has interfered in the past ,in 2003, to maintain competitiveness of Japanese exports.
- But Japan has free capital mobility.
China’s growth:
· China pegs its exchange rate artificially ( at 8.28 ) and is hugley undervalued w.r.t to USD.· Reasons for China peg are due to large trade surplus with US, fuelled by export growth ,and usefulness of peg during ASEAN crisis.
India:
India maintains a flexible exchange rate , with intervention by RBI at times.
SUGGESTIONS / GUIDELINES
Recommendations for India and China:
- Diversify trading partners – will minimize risk associated with US as main trade partner. Eg: EU, Australia
- Also expand forex baskets – Maintain reserves in a diverse range of complementary currencies to reduce dollar associated risks.
- Regional treaties and understandings to increase regional trade relationships – promote regional co-operation and development and trade.
- Reduce purchases of dollars and deregulate exchange rate – allow depreciation of US$ by encouraging trade with other strong currency blocks.
- This will help them free of burden of large reserves.
- Greater freedom in monetary policy .
- Allowing more imports into their countries, resulting in a more balanced global economy.
Recommendations for USA:
- US on its part should avoid a narrow focus on exchange rate as the sole reason for trade imbalance.
- US should make an attempt to reduce the cost of doing business and educate and retrian its workers to move into other roles up the value chain.
- US should move towards a gradual increase in interest rate.
- Reduce Fiscal and Current account deficit – by reduced spending
- Increase taxes – reverse the tax breaks.
- Increase interest rates to combat inflation. This will counterbalance depreciation of US currency, and inflationary tendencies in the US economy.
- For reducing the current account deficit the US exports (major EU and Japan) should increase at a faster pace than their import.
- The tight monetary policy of European central bank and restrictive labor and trade regulation in EU are not allowing US exports to grow.
- Permitting more immigration of skilled population will reduce the dependency ratio of the population which will curtail transfers and increase revenues.
BASIX disbursed a loan of Rs.10,000 to Manikyamma, for her Kirana shop at Muchavaram village. The loan was through the SHG - Sarojini Mahila Mandali.
