Economic Recovery Depends on Rebalancing Global Demand

By Merle David Kellerhals Jr. Staff Writer

Washington - To establish a global foundation for growth and avert future economic crises, Treasury Secretary Timothy Geithner says, the major advanced economies must rebalance global demand.

"The financial crisis also showed clearly that previous global economic patterns were unsustainable," he said. "Cooperation through the (Group of 20) will remain essential as we start to unwind extraordinary measures and put in place the broad framework to achieve a strong, sustainable and balanced recovery, and implement profound financial reforms at home and abroad."

The process for creating a more balanced global economy that is less susceptible to expansion and contraction that can destabilize national economies means nations that enjoy large trade surpluses will have to encourage policies to support domestic growth and spending, while countries like the United States with enormous trade and budget deficits must foster expanded savings, Geithner said in testimony to the U.S. Senate Foreign Relations Committee November 17.

After meetings in Washington in November 2008, in London last April and in Pittsburgh in September, the G20 nations developed a set of central objectives designed to support the global economy in recession, speed recovery and sustain growth. The objectives include balancing the global economy to achieve sustainable growth; promoting global financial stability; and developing multilateral solutions to threats posed by food insecurity, fragile states and climate change.

"Emerging markets and economies with large and sustained surpluses will need to shift their growth towards domestic demand and reduce their reliance on exports," Geithner told senators. "Governments around the world will need to accept this basic reality or we will all face slower growth."

Geithner said there is already some evidence of the needed changes taking place in the United States. Private saving has risen and the U.S. current account deficit has fallen from more than 6.5 percent of the gross domestic product in late 2005 to about 3 percent of GDP today, he said.

And Geithner told senators that open trade and investment policies are important to ensuring future economic growth and sustainability. "Trade will be critical to creating U.S. jobs and ensuring economic dynamism and vibrancy," he said. G20 nations have pledged to keep markets open, avoid protectionist barriers and not retreat into financial protectionism.

One aspect cited by many nations as a primary factor in the economic crisis was lax regulation of the financial sector - banking, mortgage lending and investment firms.

"We have agreed on a strategy to put in place stronger constraints on risk-taking across the financial system, to bring appropriate oversight to key institutions, products and markets, such as the over-the-counter derivative markets, to reform the securities markets, and to provide the tools necessary to wind down firms that fail," Geithner testified.

"But as we saw during the financial crisis, in a world of global capital markets, even the strongest regulatory standards can be circumvented by lax oversight in other financial centers," he said. "That is why we are pursuing a vigorous agenda of regulatory reform internationally in parallel with our agenda at home."

ADVANCING ENERGY AND CLIMATE SECURITY

A third priority of the United States and its G20 partners is forging multilateral solutions to global threats, and that has been the focus of the leaders' summits in London and again in Pittsburgh. The G20 leaders meet next year in June in Toronto.

In fighting global poverty and hunger, the G20 nations have supported multilateral development banks. "They serve as the first responders for the global poor and provide a high return on U.S. development dollars," Geithner said. "We estimate that for every dollar that the United States invests in the World Bank as paid-in capital, $26 of aid are delivered."

Geithner said U.S. measures to advance energy and climate security are only part of the solution, because global agreement with significant action by all major economies is needed. That includes, he said, financial support for developing countries to reduce their greenhouse gas emissions and create new markets for clean energy technologies.

"Climate finance there will need to be scaled up significantly, but we must do so in a way that is efficient and leverages U.S. investments in the arena of climate," Geithner said. "The World Bank will specifically have a central role in contributing to financing the transition to a green economy by assisting countries in integrating climate-change concerns into their core strategies."

ENDS