Global Imbalances and Bretton Woods II Postulate

Abstract

The growth performance of a group of east Asian economies including China, ever since the end of nineties, has been linked to their buoyant performance on the export front. The period till the 2007-08 financial crisis was witness to burgeoning American current account deficits and huge reserve accumulation by central banks of emerging market economies. The success on the export front of these economies has been based on their real exchange rates being maintained at a depreciated rate. This has been made possible through accumulation of US Treasuries by Asian central banks, thus defending the dollar from depreciation, despite the deteriorating current account. This operational mechanism in the international economy has been theoretically conceptualised by Dooley, Landau and Garber (2003) and christened as Bretton Woods II. It argues that the US current account deficit is here to stay in a quasi-permanent manner with a reasonable amount of stability, inasmuch as the objective of the Asian developing economies is to get more labour out of its traditional sources of employment like agriculture, and they are only too willing to finance the American deficits. The paper intends to revisit this argument, particularly in the light of the change in deficits and surpluses in the world economy. It tries to develop a critique of BWII as a mechanism which could sustain growth and development in the developing world, particularly so, given its assumption that a threshold level of savings ought to be crossed by the countries to get loaded into the periphery. The paper tries to trace the genesis of BWII to the debates which originated in the course of the mid-eighties relating to development assistance in the aftermath of the international debt crisis. Even if the American current account deficit bounces back, would the emerging economies be able to be back in the original position, or, would they be cornered off further gains?