U.S. Federal Reserve Chairman Ben Bernanke warned on Monday that pursuit of export-led growth by Asian nations could lead to a reemergence of global trade imbalances and undercut efforts to achieve more durable growth.
Throwing his weight behind a call by the Group of 20 nations to rebalance the global economy, Bernanke said Asian nations should put in place policies that 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.
Bernanke said that while trade imbalances had started to narrow as U.S. households ramped up saving in response to a deep recession eating at their wealth, he cautioned that the imbalances may begin to grow anew as the global economy recovers and trade volumes rebound.
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.
Bernanke said that the performance of the dollar and the U.S. economy will depend on the government's success in controlling the country's budget deficit.
Our policymakers recognize that we need to develop a fiscal exit strategy that will involve a trajectory toward sustainability, Bernanke said in response to a question after the speech.
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 said.
The Fed chairman said that Asian economies had rebounded strongly from the 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, he said.
Countries with the most open economies, such as Singapore, Hong Kong, and Taiwan took the biggest hits as a result of the turmoil, he said. China, India, and Indonesia, which are among the least financially open economies, expanded throughout the crisis, Bernanke 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)