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Annual UN economic report warns about dangers of global trade imbalances

The UN Conference on Trade and Development (UNCTAD), in its annual report released today, characterizes the global economy as one of “relatively fast growth in developing countries, driven by strong global demand originating mainly in the United States and amplified by the rapid expansion of the large Chinese economy.” The report finds little evidence of a looming major financial crisis, comparable to the Asian or Latin American crises of 10 years ago. It notes that many developing countries are now less vulnerable to big shocks because they have stabilized their exchange rates at low levels and are running sizeable current-account surpluses and accumulating large amounts of dollar reserves. That approach poses a problem, however, because it “can only function as long as there is at least one country in the global economy that accepts running the corresponding trade deficit,” the report says. That country, the US, has become overburdened in its role as “global engine for growth.” UNCTAD economists fear that, at some point, American demand will no longer be able to act as a bulwark against worldwide deflation and recession. They add that other key industrial countries have not only failed to play their part, but have actually added to the US’ burden by running up huge surpluses of their own. They say countries like Japan and Germany must increase their domestic demand to prevent a sharp devaluation of the American dollar that could send shocks reverberating throughout the developing world. The report notes that China’s surging domestic demand and imports have played a positive and vital role in spreading and sustaining global growth. To prevent that process from being derailed, its currency, the renminbi, should not be revalued too quickly. UNCTAD economists say that redressing global imbalances requires a responsible multilateral effort rather than pressure on the developing world. “A well-coordinated international macroeconomic approach would considerably enhance the chances of poorer countries being able to preserve and continue recent improvements in their growth performances,” the report notes.

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