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. (more…)

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.

What struck me about Korea was the determination of its policy-makers to sustain rapid industrialisation. I saw the construction from scratch of the vast Hyundai shipyard at Ulsan that was soon to join the first rank of ship-builders. That bet itself demonstrated something even more remarkable: Koreans’ belief in their country’s ability to achieve global competitiveness.

For the Koreans, exports were both a tool of development and a test of its success. How different this was from east Africa and India, on which I was to work for the following five years. India was almost as sealed from the world economy as it was possible to be. Its annual growth in income per head had fallen in the 1970s to about 1 per cent a year, while industrial productivity seemed to be declining, despite its desperately low level.

The contrast between South Korea’s success and India’s failure was striking. Both used protection and other tools of industrial policy. Yet the orientation of India’s policies was inward-looking and anti-competitive, while that of South Korea was the opposite. In the literature on development and trade, the Korean strategy came to be called “export promotion”, because its economy did not have an overall bias towards the home market.

The contrast between South Korea and India raised the biggest questions in economics: why have some countries succeeded with development and others failed? Why has Korea jumped from poverty to prosperity in a lifetime? Why did India do badly then, but much better recently?

The broad question is the one Erik Reinert states in his title: How Rich Countries Got Rich… and Why Poor Countries Stay Poor. Reinert is a Norwegian professor who now teaches at Tallinn, Estonia. Ha-Joon Chang, a well-known Korean development economist, teaches at Cambridge. But both give strikingly similar answers to this question.

The remainder of this book review can be read here (FT.com subscription required). Discussion from our guest economists is free.

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.

Publicly, some Democrats are still condemning Bush II profligacy and preaching a return to Clinton I fiscal conservatism. Privately, though, many are starting to question why a 2008 Democratic president should bother improving the government’s balance sheet if the end result is just a bigger pot for a future Republican president to lavish on his or her friends. Certainly the 2000s, even as long-term interest rates normalise, seem to have thrown cold water on the notion that sustained US budget deficits will automatically lead to high interest rates and low growth. Or have they?

First, the good news. Explosive financial globalisation has made US federal budget policy far less important as a determinant of global real interest rates. Instead of interest rates going up sharply, low levels of public and private saving in the US have helped sustain a massive current account deficit. Continuing foreign inflows are probably holding down US real interest rates by at least 1.5 per cent and possibly more.

And let us give credit where credit is due. The Bush administration’s decision to borrow massively, over a period where global long-term interest rates fell massively, was not a bad market call.

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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.

The puzzling thing, however, is that the ECB claims to monitor closely the development of the money stock (in particular of M3, a broad measure of money) and says this monitoring exercise contributes to its success.

That cannot be true. Since the start of the eurozone, average yearly money growth (M3) has been close to 7 per cent while inflation was only 2 per cent, a huge gap. In addition, money growth has been subject to wild fluctuations. From less than 4 per cent in early 2001, it shot up to 8 per cent during much of 2001-03. Then it declined again to less than 5 per cent. In the past few months it has exceeded 10 per cent. During this whole period, inflation has been moving at a steady pace of 2 per cent a year, or a few decimal points lower or higher.

So there has been a great disconnection between inflation and money growth in the eurozone. Inflation has barely budged from its 2 per cent horizontal path while, according to traditional thinking, the “excessive liquidity creation” observed throughout the period should have led to much higher inflation. It did not.

The recent double-digit increases in M3 again prompted warnings that this will inevitably lead to inflation. Maybe. But up to now the facts show that money growth has been irrelevant to explaining inflation in the eurozone.

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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.