Budget Deficits, Protectionism Loom Over Global Economy
Reversal of globalization could add to threat, says Federal Reserve chief
WASHINGTON, DC - 12/08/05 - Continued budget deficits in the US and other countries coupled with a reversal of globalization could threaten the global economy, says outgoing Federal Reserve Chairman Alan Greenspan.
In recent remarks at a side event to last week's meeting of the world'../eWebPhotos/trade1a.jpg" align=left vspace=15 border=0>major finance ministers and central bankers in London, US Central Bank head Greenspan added that worldwide economic imbalances are likely to rise as increasing specialization and division of labor spread globally.
But, he said, if the US contains a rising tide of protectionism and its markets remain flexible, US reliance on foreign finance could be reversed and its budget stabilized.
The finance ministers and bankers represented the Group of Seven (G7) most industrialized economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the US.
Greenspan said economists still do not fully understand the implications of cross-border financial imbalances, such as debt service payments on foreign loans.
"Globalization is changing many or our economic guideposts," he said.
Foreign loans, he said, are funded mainly by exports of goods and services, while domestic debt has a broader base - such as domestic savings -- from which it can be serviced.
The Federal Reserve chief said maintaining economic flexibility "may be the most important initiative" in countering risks of cross-border current account imbalances.
He said relying on market forces to help correct imbalances "is an exceptionally valuable policy asset."
"The impressive performance of the US economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic disruption, offers clear evidence of the benefits of increased market flexibility," he said.
Greenspan said many countries have been relying more and more on the marketplace and reducing their interventions in market outcomes.
These self-corrections have made countries less dependent on macroeconomic policy makers "whose responses often have come too late or have been misguided," he said.
Speaking at the same venue, US Treasury Secretary John Snow said that trade liberalization is "essential to economic growth, poverty reduction" and that "the potential rise of [trade] protectionism is the most significant risk to the global economy."
The most important issue discussed at the G7 meetings, Snow said, was achieving "an ambitious outcome" to the World Trade Organization Doha Development Agenda negotiations by the end of 2006.
Launched in 2001 and stalled almost from the start over politically difficult agricultural trade issues, the negotiations, also known as the Doha Round - are scheduled to begin next week in Hong Kong.
Over the past four years, participants have pressed for conclusion by December 2006, which would give the US time to submit any agreement to Congress before the president's negotiating authority, called trade promotion authority or fast track, expires in mid-2007.
The US submitted an agriculture proposal October 10 that proposes substantial reductions in domestic support payments to farmers and tariffs.
The Hong Kong WTO meeting, Snow said, "will be a critical next step" toward trade liberalization.
US Trade Representative Rob Portman, who also attended the London meeting, made similar comments.
Snow said the finance ministers also encouraged the International Monetary Fund (IMF) "to substantially elevate" exchange-rate issues in its surveillance activities and to enhance its governance and representation structures.
The G7 finance ministers also reaffirmed the commitment to halt the flow of financing for terrorism.
"I further urge our G7 partners and other allies to work with us to take decisive multilateral action against individuals and entities engaged in illicit financing including [weapons of mass destruction] proliferation networks and supporters," said Snow.
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