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Does the United States' need to borrow undercut the needs of others?
That was the argument of a front page article in the New York Times on March 9, reporting that the global flight to dollar-denominated US government securities had contributed to a sharp reduction in the external financing for developing countries. The article strongly implied that emerging-market countries were struggling to gain access to lenders, and that their difficulties had exacerbated the ongoing financial crisis.
It is true that the global financial crisis first manifested itself in the emerging world as a sharp and disruptive withdrawal ("sudden stop") of external financing, leading to sharp drops in currencies and other asset prices. It is also true that the lack of financing continues to be a problem in some parts of the world (think Hungary, Russia, Latvia, and Ukraine).
But it is no longer appropriate to characterize the lack of external financing as the binding constraint in all the emerging markets. Asia, in particular, seems to be an exception. There it is the collapse in trade rather than the shortfall of financing that seems to be the real problem.
How can we know this? To be sure, we can never easily disentangle the problems emanating from the trade channel from those caused by inadequate finance. But we can intelligently speculate. If the seizing up of finance were the binding constraint, we should expect to see a sharp rise in interest rates. We do see high rates in some parts of the world, notably Eastern Europe and Latin America. But all over emerging Asia, we see sharp declines in short-term market and policy interest rates. These declines are on the face of it more consistent with falling demand for financial resources than an inadequate supply of such resources. For example, a lot has been made of the drying up of trade finance. But since the volume of trade is plummeting, it would be surprising if the demand for trade finance did not also drop.
Distinguishing the finance factor from the trade factor is not just hair-splitting. Appropriate policy responses ride on this distinction. A diagnosis that identifies finance as a constraint naturally leads to calls for increasing the provision of public resources by the International Monetary Fund (IMF), the World Bank, and other regional development banks. But if the trade channel is more important, calls to increase public resources need to be more carefully assessed while a coordinated global stimulus to revive demand becomes more urgent.
Many of us at the Peterson Institute for International Economics have called for IMF resources to the tune of $1 trillion or more. This number is consistent with the analysis that Asia's problem is trade rather than financing. Even with emerging Asia taken out of the list of potential borrowers, large parts of emerging Europe remain potential users of IMF resources, for macroeconomic reasons as well as the need to address problems in their financial sectors. And one cannot rule out the possibility that some advanced European countries might need assistance as well. In short, $1 trillion might be necessary just to sort out the problems in Brussels' backyard.
