By Lawrence Summers For some time now, the large flow of capital from the developing to the industrialised world has been the principal irony of the international financial system. In 2007 this flow will total well over half a trillion dollars, a figure that will be comfortably exceeded by the build-up in reserves and sovereign wealth funds (SWFs) in developing countries. Indeed, Morgan Stanley has estimated on reasonable assumptions that there is now close to $2,500bn (£1,200bn, €1,800bn) in SWFs and that this figure will increase to $5,000bn by 2010 and $12,000bn by 2015. Inevitably, and appropriately, countries possessed of publicly held foreign assets far in excess of anything needed to respond to financial contingencies feel pressure to deploy them strategically or at least to earn higher returns than those available in US Treasury bills or their foreign equivalents. Even without this pressure, SWFs are now growing at a faster pace than the global rate of new issuance of traditional reserve assets.
By Jagdish Bhagwati Everyone knows that “if it ain’t broke, don’t fix it”. But few know that even if it is broke, it still may not be wise to fix it. One could make matters worse. The well-meaning proponents of US immigration reform learnt this lesson the hard way: their efforts finally collapsed in the Senate on June 28 and the nation was left more polarised than ever. What went wrong? Part of the problem lay in some gratuitous mistakes. Congress and the Bush administration invited trouble by embracing euphemisms that both obfuscated the issues and prompted slugfests that further poisoned the atmospherics. Thus, the politicians had to call illegal immigrants “undocumented” when, in fact, their illegality was what really mattered. Then, the amnesty that was offered had to be called a “legalisation” process. The politically correct politician was being asked to “legalise” those who could not be called illegals. But the notion that, simply by misnaming a phenomenon, you could squash opposition was naive. President George W. Bush also joined in, arguing that the amnesty was not an amnesty because there were conditions attached to it. If the president, notorious for his verbal gaffes, had been on the wrong side of the issue, Democrats such as myself would have been skewering him for being linguistically challenged. So we had endless, acrimonious debates on whether the amnesty was really an amnesty. The remainder of this column can be read here (FT.com subscription required). Discussion from our guest economists is free.
By Martin Wolf
In the summer of 1972, as a “young professional” at the World Bank, I went on a mission to South Korea. It was my first experience of something extraordinary: a country that was developing at a breathtaking rate. The country had already enjoyed a decade of economic growth at close to 10 per cent a year. It continued to grow at close to that rate for another quarter of a century.
By Kenneth Rogoff
The Bush administration was beside itself with glee earlier this month when it announced that the fiscal year 2007 federal deficit was set to fall to just over $200bn, or 1.5 per cent of US gross domestic product. Although the continuing deficit hardly makes the US a picture of fiscal prudence, the dollar amount is less than half what it was in 2004.
By Paul De Grauwe
Since the creation of the eurozone in 1999, inflation has been very low (on average 2 per cent a year) and moved very little. The European Central Bank deserves much of the credit for this success.
By Adam Posen Two hundred and thirty-one years ago on Wednesday, the Continental Congress declared American independence. While the US constitution was in place 13 years later, much of the subsequent two centuries have been spent fighting over the locus of economic policymaking. The initial battles between the states and the federal government were of course driven by slavery, but the economic aspects of the dispute over federalism went on independently and far outlasted the civil war. Having a constitution settled nothing in this area. So Wednesday is a good opportunity to take a longer view on the implications of the recent European Union summit agreement for economic decision-making. Often, eurocrats use historical comparisons of European integration with the early years of the US as an excuse: “Look how far we have come in so few decades. What more could you expect?” Yet what the US experience demonstrates is that the question of whether or not the recent agreement leads to something that resembles a constitution matters far less than many think. In the US, the power of the centre relative to local politics in economic policy has varied for more than 200 years, even though there have been few constitutional amendments. The EU’s new agreement leaves the European Commission much too weak vis a vis the member states. The remainder of this column can be read here (FT.com subscription required). Discussion from our guest economists is free.