Global Imbalances and the Lessons of Bretton Woods

• Author: Graham Hacche
• Position: Deputy Director, IMF External Relations Department
• Pages: 52-53

Page 52

Barry Eichengreen: MIT Press, Cambridge, Massachusetts, 2006, 200 pp., $26 (£16.95) (cloth).

For almost a decade, a major concern about the international economy at the IMF and among many economists elsewhere has been the sustainability of large global payments imbalances: the U.s. current account deficit and the corresponding surpluses of an evolving group of other countries.

But some economists have taken a more relaxed view. A well-known version of this view appeared five years ago, when Michael Dooley and coauthors argued that the imbalances were sustainable for a decade or longer. the situation, they suggested, was like the Bretton Woods (BW) exchange rate system of 1946-71. Again, the United states served as the "core" of a system in which countries at the "periphery"-formerly Europe and Japan, and now mainly emerging market countries in Asia, particularly China-pursued export-led growth by managing their exchange rates at undervalued levels that generated current account surpluses. those countries were content to lend their surpluses, through reserve accumulation, to the core, even at low returns, to subsidize the development of their export sectors and take advantage of the core's deep and liquid financial markets. the authors referred to this as Bretton Woods II (BWII).

Grist for the mill

This argument is grist for the mill of Barry Eichengreen, a leader in the field of international monetary history and its application to current policy analysis. the theme of this compact and engrossing book is that history suggests that, contrary to BWII, the current situation is unlikely to last for long.

The book has four chapters. the first has the same title as the book and compares BW with the current situation. Now, as then, members of the periphery see a collective interest in supporting the U.s. dollar to maintain the value of their reserves and their international competitiveness, but each member has an incentive to reduce its dollar holdings to avoid capital losses threatened by potential dollar depreciation.

One of his lessons, disconcerting in early 2008, is that steeper appreciation of the renminbi would best be undertaken when global growth is strong.

However, Eichengreen notes several differences. Members of the periphery are now more numerous and heterogeneous and less constrained by their collective interest. the euro offers a more attractive alternative reserve asset than existed in the...