Please Note: The following information is presented to you as an excerpt from “Truth, Errors, and Lies – Politics and Economics in a Volatile World” (Columbia University Press, 2011) by former Polish Finance Minister, Grzegorz W. Kolodko. All graphs and images have been prepared by me to substantiate the text.
Debits and Credits in the World Economy
Nowhere is it so evident as in international trade and finance that the only truly closed economy is that of the world as a whole. A surplus in one place automatically means a deficit somewhere else. A shortfall in one country is a windfall in another. One country’s debits are another country’s credits. On the scale of the globe as a whole, there is no deficit and there is no surplus, and things will remains that way until we begin making interplanetary loans, which is not likely to happen in the current generation.
CIA World Factbook
The CIA World Fact Book, a highly useful source of information, says that the world is $44.6 trillion in debt (close to the value of world gross product at exchange-rate parity, $46.8 trillion). Even the CIA gets things wrong sometimes. The world is not indebted by this amount, which is rather simply the sum of all the world’s national debt, and this is equal to the aggregate credit of all the world’s countries.
No matter how integrated the world has become, it is far from one big happy family where everybody keeps all their money in the same joint account- and more than one family has spilt over such issues.
The indebtedness of the contemporary world toward future generations is an important issue. The greatest paradox is that it is the poor who extend credit to the rich. Bangladesh and Brazil do not hold their foreign exchange reserves in the currencies of Egypt or Nigeria. Like many other countries, they deposit these reserves in the wealthiest countries, because the banks there are the strongest and most reliable.
Basically, there are no debt-free countries in the world. Everybody owes money to somebody, and first of all to their own societies who support years of debt to cover budget deficits and the cost of serving them. Countries also borrow from domestic and foreign banks. The network of the flow of capital with its intersecting streams of money, securities, debt, assets, liabilities, credit, and debt is extremely complicated.
Aside from Liechtenstein, which has no debt at all, the twenty least-indebted countries are all miniscule island-states, more because no one wants to lend to them than because they don’t want to borrow.
In absolute terms, the leader is the United States, with a debt of more than $10 trillion. This is almost one fourth of the world’s combined national debt. The next four countries on the list all belong to the G-7 rich list: Great Britain, with $8.3 trillion in debt; Germany, with $3.9 trillion; France, with $3.5 trillion; and Italy, with $2 trillion. The other two members of the G-7, Japan and Canada, are not far behind, with $1.5 trillion and $700 billion. They rank eighth and twelfth on the debt list, respectively. Rounding out the top ten debtor countries are The Netherlands, in sixth place, with debts of $1.9 trillion; Spain, in seventh place, with $1.6 trillion; and Ireland, in ninth place, with $1.4 trillion.
The indebtedness of the United States is enormous, but the country’s foreign assets are even greater. Households and the federal government are the most in debt, but the private sector also carries a gigantic burden. This is $33,330 per capita, a little more than two thirds of the $47,300 in Germany but sixteen times the Russian per capita debt. Whereas Russia exports about a third more each year than its total external debt, the United States exports only a tenth of its external debt. If both countries stopped importing, Russia could pay off its debt to the rest of the world in about ten months; it would take the United States ten years.
There are 43 Heavily Indebted Poor Countries (HIPC), of which 33 are from Africa, five from Asia, and five from South and Central America. Although not a matter of crucial importance to the world financial system, it was an unprecedented humanitarian act to remove the debt burdens of the least developed countries. These debts could never have been repaid, but it took ten years of persistent public pressure before the G-7 (along with other creditor countries) and the World Bank agreed to the write-off in 2006.
35 countries have so far received full or partial debt relief. Many were spending more on servicing their debt than they were capable of appropriating for education and healthcare. The program gives them a chance to begin emerging from structural stagnation.
There are enormous transfers from developing to wealthy countries, especially the ones that use government securities to finance their budget deficits, and repayments from poor countries to rich creditors and organizations like the International Monetary Fund and the World Bank. The greatest capital flows are between the richest countries, motsly in the form of direct investment and company mergers and takeovers. Over the ten years fro 1997-2006, the total was more than $8 trillion, with American investments accounting for $1.6 trillion. Interestingly, Belgium and Luxembourg combined to come second at $1.2 trillion – not because the citizens of those countries had so much spare capital to invest, but because those countries are hospital to various holding companies founded to carry out special investment operations, often on a one-time basis.
Neoclassical orthodoxy holds that excess savings from developed countries should be transferred to and invested in developing countries, but the opposite can be true. The most radical exception to the “rule” is the case of China and the US. Through its large trade and current account surplus, China extends credit to the far wealthier American economy, which in turn is mired in a deep, structural double deficit – trade and budget. The heart of the matter is that China, like several other countries in Southeast Asia, deliberately holds down the exchange rate of its currency. This encourages exports, the engine of growth in output, employment, and government revenue.
Foreign exchange reserves are the least effective way of investing a capital surplus. It is least effective for the state and society, who owns the reserves, but it is extremely profitable for the financial intermediaries who trade them. All attempts at constructive criticism of this irrational policy elicit ripostes about the sanctity of the “independence of the central bank” and an aggressive campaign by neoliberal politicians and the media they manipulate, which in turn manipulate public opinion. This is where economics, and particularly the branch of economics known as international finance, turns extremely political.
Saudi Arabia: Many Middle Eastern oil-exporting countries have irrational surpluses, especially Saudi Arabia, where the surplus, which amounts to 25.8 percent, should be regarded as a result of the current business climate in the sense that it will last only as long as the price of oil remains favorable to this monoculture state. Despite their general lack of development, these countries do not know what to do with their capital. As a result, they invest. Recently, a Saudi prince who was formerly his country’s ambassador to the United States had trouble finding a buyer for his $135 million Colorado residence, which was one of his earlier investments.
More than 30% of adult Saudi Arabian women are illiterate. How many children could be taught to read and write for $135 million?
Russia: With a current account surplus equal to 6.8 percent of its GDP, this is another country that has unwarranted reserves. On the one hand, it has much ground to make up in development, which requires significant investment in up-to-date technology and in social capital. On the other hand, Russia is senselessly holding on to $400 billion worth of excessive, unproductive reserves, some of which it holds in a special stabilization fund in case oil prices fall. Prudence alone cannot justify such a level of reserves. Only recently, during President Putin’s second term and under the Medvedev presidency, did a relatively modest proportion of this sum go to developmental purposes. Wisely, the country also paid off a significant part of its external debt, including much that is yet to come.
China: This country presents greater interpretive difficulties. Its gigantic foreign exchange reserves are significantly more than $1 trillion, not counting the approximately $140 billion in Hong Kong, $11 billion in Macao, and $270 billion in Taiwan, which should also be counted in the long term. China continues to have a very high trade surplus and a current account surplus on the order of 10 percent of GDP. Every year, a broad stream of more and more billions flows into the foreign exchange reserves of $1.4 trillion, as much as those of Japan and the Eurozone combined. In 2008, China held one quarter of the world’s foreign exchanges reserves, or 30% when those of Hong Kong, Macao, and Taiwan were added. The question is: Is this rational?
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