U.S. Federal Reserve Chairman Ben Bernanke warned on Monday that Asian export-promotion policies and large U.S. budget deficits could refuel global economic imbalances and put efforts to achieve more durable growth at risk if not curbed.
Throwing his weight behind a recent call by leaders of the Group of 20 major powers to rebalance the global economy in the wake of a devastating financial shock, Bernanke said Asian nations, like China, that enjoy large trade surpluses should discourage excess saving and boost consumption.
At the same time, he said the United States needed to increase its saving and substantially reduce federal deficits over time.
To achieve more balanced and durable economic growth and to reduce the risks of financial instability, we must avoid ever-increasing and unsustainable imbalances in trade and capital flows, Bernanke said at a conference on Asia sponsored by the San Francisco Federal Reserve Bank.
He said that while trade imbalances had started to narrow as U.S. households ramped up saving in response to a deep recession that ate at their wealth, he cautioned that the imbalances may resume growing as the global economy recovers and trade volumes rebound.
Policies in Asian countries that encourage exports and saving over consumption are a concern, Bernanke said, repeating a long-standing U.S. complaint.
Trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term, he said.
U.S. officials have long pressed China to allow its yuan currency to appreciate, which would lessen any price advantage Chinese goods may have in global markets. China has vowed to move toward more currency flexibility, but it has kept the yuan on a tight leash.
PRAISE AND PRESSURE
Bernanke praised China and other Asian nations, saying they are looking more seriously at rebalancing than in the past.
But he said the possibility of asset price bubbles emerging in Asia are a concern, and that the risks could be addressed through relaxing currency constraints.
One way to address it would be through some greater exchange rate flexibility, Bernanke said.
However, he also acknowledged the part the United States must play in addressing global imbalances by increasing savings and embarking on a more-sustainable fiscal path.
The performance of the U.S. economy and the dollar, which has fallen 7 percent against a basket of currencies this year, will depend on the government's success in controlling its budget deficit, he said.
The Obama administration said on Friday that the budget shortfall hit a record $1.4 trillion in the fiscal year that ended September 30. At 10 percent of GDP, it was the largest deficit since World War Two.
Our policy-makers recognize that we need to develop a fiscal exit strategy that will involve a trajectory toward sustainability, Bernanke said in response to a question.
That is critically important in order to maintain confidence in our economy and confidence in our currency. I know that is very well understood in Washington, he added.
The Fed chairman said that Asian economies had rebounded strongly from the financial crisis, with annualized growth rates in the double digits expected in China, Hong Kong, Korea, Malaysia, Singapore and Taiwan.
At this point, while risks to the economic outlook certainly remain, Asia appears to be leading the global recovery, Bernanke said.
Countries with the most open economies, such as Singapore, Hong Kong, and Taiwan took the biggest hits as a result of the financial turmoil, he said. China, India, and Indonesia, which are among the least financially open economies, expanded throughout the crisis, he said.
While conceding that greater global integration increases vulnerability to world-wide economic shocks, he voiced concern that Asian nations could draw the wrong lesson and said greater openness would promote stronger growth over the longer term.
Protectionism and the erecting of barriers to capital flows should thus be strongly resisted, he said. Striking a reasonable balance between trade and growth in domestic demand is the best strategy for driving economic expansion.
(Additional reporting by Alister Bull in Washington; Editing by Tim Ahmann and Andrea Ricci)