The Obama administration therefore needs to signal to Beijing that it is unacceptable for China to run such large surpluses and that it urgently needs to do more to generate consumer demand. The new administration must make clear that if Beijing does not do more to support a global recovery, Washington will be forced to radically reshape its trading relationship with China when the crisis is over.
The first appeal to China, however, should be to its own interests as well as to its expressed desire to be a responsible stakeholder in the global economy. Indeed, the overarching message of Obama's international statecraft should be strikingly positive: the United States is not demanding austerity and painful budget cuts, as the Clinton administration did of so many East Asian countries after the 1997-98 crisis. It is asking China to raise the living standards of its workers, spend more on their healthcare and education, and provide a decent pension for older citizens. These things should endear China's leaders to their people and lessen the risk of internal social conflict.
China's leadership, of course, is concerned with creating enough jobs to maintain political stability. Some leaders are reluctant to move away from the strategy of job creation, which has worked over the past decade. Therefore the Obama administration should argue that domestic-generated demand is a more reliable way for China to ensure political stability and job growth than building more factories and financing more exports to a stagnating US and European consumer market.
Obama also needs to make it clear that the reason the United States is pressing China and other Asian economies to raise wages and improve living standards is not so it can reclaim jobs lost to China but to increase global demand so all economies can create more jobs. Higher wages in China and other high-savings Asian economies would increase the purchasing power of Asian workers and augment consumer demand. The US economy would indirectly benefit from those higher wages and living standards because it would increase the demand for US goods and services, especially for labor-saving and efficiency-enhancing technology.
The quickest way for China to raise its living standards is by increasing the value of the yuan against the dollar and other international currencies. A stronger yuan would stem future inflation while reducing the cost of food, energy and other imports for Chinese consumers. Appreciating the value of the yuan would be a first step in a broader realignment of world currencies to help correct global trade imbalances. The best short-run option would be for the surplus economies of Asia to re-peg their currencies by letting them appreciate against the dollar but without abandoning the managed peg. This would set the stage for an important institutional change in the global financial architecture whereby the burden would shift to surplus economies to adjust their currencies and stimulate domestic demand, as Keynes originally envisioned.
Some of the surplus economies will not be able to stimulate consumer demand sufficiently in the short term to reduce their surpluses to acceptable levels. That leaves the alternative--recycle some of those surpluses to stimulate growth and economic development in other countries. The United States, of course, will need access to some of these surpluses to help fund its recovery program, but other surpluses could be redirected to support what should be a second pillar of the new administration's world economic recovery plan--namely, establishing a world economic recovery fund to deal with balance-of-payments crises and to support public works projects in developing economies.
A number of countries--Iceland, Hungary, Pakistan and Ukraine--have suffered serious debt and liquidity problems related to the crisis and have sought money from the International Monetary Fund and other sources. These countries may need more money in the months ahead, while countries in Eastern Europe, Africa, Asia and Latin America may also experience currency-related crises before the world economy is stabilized. The IMF, however, has only $250 billion for managing national debt crises--a mere pittance compared with the rescue plans that the United States, Britain and other G-20 governments have embarked on or those that are needed to deal with the approaching crises in Turkey, the Baltic states and elsewhere.
It is therefore important to shore up the IMF and the World Bank, quickly. The IMF could be a helpful stabilizer in global financial markets if it had access to the sizable reserves of the surplus economies and if it pursued a philosophy more in keeping with the original Keynesian vision of those Bretton Woods organizations. To make this change possible, the Obama administration should offer the surplus economies a new Bretton Woods grand bargain: in return for making outsize contributions to the world economic recovery fund from which the IMF and the World Bank could draw working capital, the United States would support giving these countries a greater say in the running of the IMF and the World Bank.
Previous US administrations blocked efforts to increase the working capital of the IMF and the World Bank because the proposed measures threatened Washington's pre-eminent position in these institutions--as well as its de facto veto, since increasing the allocations of Japan, Germany and other surplus economies in the G-20 would have increased their weighted vote. That has turned out to be shortsighted, because we have been left with cash-strapped and ineffective international institutions. That has put more burden on the Federal Reserve to use US monetary policy as a world crisis stabilizer, which contributed to the buildup of the large asset bubbles of the past decade. It has also left the door open for the big surplus economies to use their sovereign wealth funds to influence the course of world capital markets.
An emergency world economic recovery fund would enable the IMF and the World Bank, along with regional development banks, to carry out a global macroeconomic stimulus program to supplement national fiscal expansion. The IMF could tap the fund to carry out currency stabilization programs and help countries manage balance-of-payments problems. The World Bank and regional development banks could tap the fund to accelerate lending for job-creating public works and social investment in developing countries. Fund money could also be made available to UN projects related to healthcare, education, nutrition and the environment. This increased social and public spending would help stabilize consumption and investment in vulnerable developing and emerging economies, and aid a global economic recovery.
The underlying rationale of such a global stimulus program is that it would be more effective and less potentially inflationary over the longer term than a solely domestic fiscal expansion. Just as important, such a world public-sector program, together with a new system of managing world currencies, would point the way to the institutional reform needed to correct the many failings of the globalization of the Clinton-Bush era.