I.M.F. WARNS WEALTHY NATIONS ON DEBT / THE NEW YORK TIMES ( VERY HIGHLY RECOMMENDED READING )

March 21, 2010

I.M.F. Warns Wealthy Nations on Debt

By SEWELL CHAN and KEITH BRADSHER

BEIJING — The global economic crisis has left “deep scars” in the fiscal balances of the world’s advanced economies, which should begin to rein in spending next year as the recovery continues, the No.2 official at the International Monetary Fund said Sunday in Beijing.

In a speech at the China Development Forum in Beijing, the I.M.F. official, John Lipsky, who is the deputy managing director, offered a grim prognosis for the world’s wealthiest countries, which are at a level of indebtedness not seen since the aftermath of World War II.

For the United States, “a higher public savings rate will be required to ensure long-term fiscal sustainability,” Mr. Lipsky said.

The United States and other industrialized countries, as well as some developing countries, have been putting pressure on the I.M.F. to criticize China for its large-scale intervention in currency markets to hold down the value of the renminbi against the dollar. But Mr. Lipsky refrained from chastising China in his speech, which Chinese officials would have found particularly offensive if he had done so in Beijing.

The I.M.F.’s staff concluded in a report last summer that the renminbi was “substantially undervalued, ” and that this was contributing to China’s large trade surpluses in recent years. But China has blocked the release of that report, a prerogative of the I.M.F.’s member countries, although most allow the release of the I.M.F. staff’s reports on their economies.

The Chinese commerce minister, Chen Deming, said Sunday at the same conference that China might run a trade deficit in March, after years of surpluses, said Xinhua, the official news agency.

A trade deficit for the current month would be a public relations bonanza for Chinese officials in pushing back against U.S. pressures for revaluation of the renminbi. China typically announces its monthly trade during the 9th to 12th day of the next month. If it follows that schedule next month, the trade surplus will be released shortly before the April 15 deadline mandated by the U.S. Congress to declare whether any foreign country, including China, manipulates the value of its currency.

Western economists have predicted that most, if not all, of China’s trade surplus would evaporate in March, but they have described this as a fluke of the calendar. Virtually all Chinese export factories closed for the last two weeks of February in observance of the Lunar New Year, which was unusually late this year, and many struggled to reopen at full capacity because many migrant workers were slow to return after the holidays.

The flow of goods to export ports slowed in March as a result, even as imports continued.

Mr. Chen also said that China would not sit back if the United States declared China a currency manipulator and imposed sanctions, Xinhua reported.

The Commerce Ministry tends to represent the views of exporters. Like the Commerce Department in the United States, the ministry does not have the authority to engage in international currency negotiations. But unlike Commerce Department officials in the United States, who have a strict policy of not commenting on currency issues, Commerce Ministry officials in China have been outspoken to the domestic Chinese media in recent months in condemning any appreciation of the currency.

This has limited the room to maneuver for officials at the central bank and other agencies in charge of currency issues.

Mr. Lipsky said the average ratio of debt to gross domestic product in advanced economies was expected this year to reach the level that prevailed in 1950. Even assuming that fiscal stimulus programs are withdrawn in the next few years, that ratio is projected to rise to 110 percent by the end of 2014, from 75 percent at the end of 2007.

The ratio is expected to be close to or to exceed 100 percent for five members of the Group of 7 countries — Britain, France, Italy, Japan and the United States — by 2014. Canada and Germany are the other G-7 members.

“Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery,” Mr. Lipsky said. Maintaining public debt at postcrisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually, compared with projections before the crisis, he said.

To reduce debt ratios to the precrisis average of 60 percent by 2030, he said, would require an 8 percentage point swing — to a surplus of about 4 percent of G.D.P. in 2020 from a structural deficit of about 4 percent of G.D.P. in 2010.

The I.M.F. estimates that the discretionary stimulus spending accounts for just 1.5 percent of G.D.P. Mr. Lipsky said advanced economies would have to take other steps, like changes in pensions and health care programs, other cutbacks in spending and higher tax revenues.

While it makes sense for the world’s largest economies to continue stimulus spending through the end of this year, “fiscal consolidation should begin in 2011, if the recovery occurs at the projected pace,” Mr. Lipsky said.

Mr. Lipsky also said that a “global rebalancing of savings patterns” would be needed to sustain the recovery.

The United States and the European Union have become increasingly concerned about China’s accumulation of an estimated $2.5 trillion in foreign reserves, the result of a large current account surplus with the rest of the world as well as actions to hold down the value of China’s currency.

Many economists say China will eventually need to develop its domestic markets and wean its economy away from a dependence on exports.

Mr. Lipsky said that China was taking appropriate steps to shift public spending away from physical infrastructure and toward improvements in education, health and social security programs “that will increase productivity and also directly support consumption by lessening the perceived need for precautionary savings.”

A sustained increase of 1 percent of G.D.P. on health, education and pensions could result in a permanent increase in household consumption of more than 1 percent of G.D.P., Mr. Lipsky said, adding that China should consider increasing household income by shifting the tax burden away from earnings and toward property and capital gains.

Fiscal policy is expected to be a top item on the agenda when leaders of the Group of 20 nations gather for a summit meeting in Toronto in June.

Mr. Lipsky warned governments not to try to inflate their way out of their debts.

“A moderate increase in inflation would have only a limited impact on real debt burdens, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion,” he said.

Sewell Chan reported from Washington.