June 14 – 16, 2006
Wequassett Inn
Chatham, Massachusetts

Agenda, Papers, and Presentations

Participants' Biographies

“Global imbalances” are currently attracting much attention in policy and financial circles. In most official forecasts the threat of a disorderly correction of these huge imbalances appears as a key risk to the global outlook. While the phrase generally refers to net deficits or surpluses in international trade and investment, when these imbalances are large and persistent, they usually reflect major structural shifts in the distribution of global resources. Frequently cited explanations for today’s historic imbalances range from policy mistakes like ill-advised exchange rate arrangements to a savings glut in Asia juxtaposed with inadequate savings in the United States. Other candidate explanations include the remarkable productivity gains experienced in this country in recent years and the development of large pools of surplus labor released from agriculture and state-controlled enterprises in China, India, and Eastern Europe. Indeed, one of the more basic causal factors, linking others and explaining their current salience, may well be the recent arrival of these giant economies on the global stage. Together China and India—still very poor on a per capita basis—account for almost 40 percent of the world’s population. China is now the world’s second largest economy using purchasing power parity measures, and India is not far behind. 

This conference will gather economists, business leaders, and policymakers from around the world to explore the fundamental structural changes underlying today’s large global imbalances. We’ll consider the pressures and opportunities presented by China’s and India’s recent emergence as important actors in the global economy, and examine how demographic change and the ongoing evolution of the most advanced economies affect international resource flows. Our goal is to gain a better understanding of the required adjustments, the potential correction mechanisms, and the policies most likely to smooth the way.

Please join us as we explore the fundamental structural changes, risks, and opportunities underlying today's large global imbalances.

Reception

Welcome
Cathy E. Minehan
President and Chief Executive Officer
Federal Reserve Bank of Boston

Dinner

Breakfast

Introductory Remarks
Cathy E. Minehan

Lessons from History

This session will review major episodes of external imbalance and subsequent adjustment over the past 150 years to seek perspectives on current developments. Looking for evidence of underlying shifts in the global distribution of labor, capital, and technology like those occurring today, the presenters begin with the mid 19th century when capital and labor released from agriculture, and cottage industry flowed from Europe to the United States and the rest of the New World. Other episodes might include the interwar period, the 1960s when post-WWII reconstruction in Europe and Japan led to the reintegration of the European and Japanese workforces into the global economy, and, possibly, the imbalances of the 1980s, which economists tend to view as caused by policy mistakes. In what ways were the fundamental forces driving these episodes similar to or different from those prevailing today? What were the exchange rate arrangements of the time, and did they contribute to a smooth adjustment? How were internal and external balance restored? What are the lessons for today?

Presenters:

Discussants:

Suzanne Berger Raphael Dorman and Helen Starbuck Professor of Political Science Massachusetts Institute of Technology Comments: Historic Imbalances and Great Debates: Do the Economists See It Coming? Presentation

John F. Helliwell Professor Emeritus of Economics University of British Columbia Comments: Which Marbles?

General Discussion

Labor Market Imbalances

Development, industrialization, and increases in productivity have led to large pools of very inexpensive surplus labor—today in China, India, Eastern Europe, and Brazil, tomorrow in Bangladesh, Nigeria, and other emerging areas. Importantly, a small share but large number of these workers have accumulated considerable human capital. And improved communications allow many of these workers to participate in the world economy without emigrating. How are these pools of surplus labor influencing policy in the home country? What is their short- and long-term impact on areas where labor is relatively scarce? In particular, how is this vast new addition to the world’s supply of skilled and unskilled labor affecting mature economies’ employment, labor compensation, and labor productivity? What is the best policy response from the emerging countries’ points of view? What is the most constructive response in the industrial world?

Presenter:

Discussants:

Surjit S. Bhalla Managing Director Oxus Research and Investments

Alan V. Deardorff John W. Sweetland Professor of International Economics University of Michigan Presentation

General Discussion

Savings/Investment Imbalances

A potential black hole for capital, China devotes an extraordinary 45 percent of its GDP to investment, but, at 50 percent of output, its savings rate is even higher. The “extra” savings fund the U.S. Treasury. With its underemployed, undercapitalized workforce, should China be saving less or investing more? By contrast, the U.S. savings rate is just 14 percent of GDP, its investment rate near 20 percent. Half of its investment buys IT equipment, software, and housing. Is the United States saving too little or investing too much? Why have savings rates in the advanced countries been declining for decades? Do demographic trends, the strength of social safety nets, the degree of financial market development, or the (related) growth in housing and financial wealth explain international differences in household savings rates? How have public policy and corporate spending decisions contributed to these imbalances? Does fiscal policy in the advanced countries encourage consumption? Has fiscal policy in the emerging regions turned too prudent? Does the changing distribution of global savings largely reflect new stages of economic evolution or policy choice?

Presenter:

Richard N. Cooper Maurits C. Boas Professor of International Economics Harvard University Paper: Understanding Global Imbalances

Discussants:

Breakfast

Capital and its Complements

Realizing the productive potential of underemployed labor and developing a natural resource base requires investment in complementary physical capital and the technology it embodies. Yet, capital/labor ratios vary widely across countries. What keeps the marginal product of capital from equilibrating rapidly and smoothly around the globe? What creates a wedge between the marginal product of capital and financial returns to investment? Why are some countries far more productive than others—and for extended periods? What brings these eras to an end? This session will emphasize the role of human capital and technology, agglomeration dynamics, and appropriate financial, social, and political institutions in enabling economies to combine physical resources effectively or in undermining their ability to do so. What are the welfare and policy implications?

Presenter:

Discussants:

Abhijit Banerjee Ford Foundation International Professor of Economics Massachusetts Institute of Technology Presentation

L. Colin Xu Senior Economist Development Research Group World Bank Comments

General Discussion

Adjustment Mechanisms

This session will address the possible adjustment mechanisms, their probability, and their consequences. How will adjustment to the current fundamental imbalances likely occur? What role could exchange rates play and are they likely to do so? Given current interests and constraints, what exchange rate arrangements would be most appropriate in Asia and elsewhere? What are the implications for the international role of the U.S. dollar? Absent any significant change in existing exchange rate arrangements, how is adjustment likely to occur? Ongoing trade and investment flows would eventually produce a new equilibrium, but are such large imbalances indefinitely sustainable? Do all the relevant players have the necessary endurance?

Presenter:

Discussants:

Policy Recommendations: Panel

How are policy mistakes in the emerging and advanced economies aggravating internal imbalances and delaying global adjustment? What policies would be more constructive? Panel members will recommend the most appropriate policy response to the massive global imbalances triggered by China’s and India’s recent emergence as economic powers at a time of major demographic change and ongoing evolution in the post industrial societies. What fiscal, monetary, exchange rate, and education policies should the advanced countries embrace to ensure that the extraordinary opportunities presented by rapid growth in China, India, and other emerging regions are widely shared? How can improved policy in the emerging economies contribute?

Panelists:

Shankar Acharya Member, Board of Governors and Honorary Professor Indian Council for Research on International Economic Relations

Jagdish N. Bhagwati - CANCELLED University Professor, Economics and Law Columbia University

Donald L. Kohn Board Member Board of Governors of the Federal Reserve System Comments

Lawrence H. Summers President Harvard University

General Discussion