Ethiopian Reporter - Amharic Version

8|
Economic
By marTin feldsTein
can nBe... ConT`d
banks, in spite of the overall economic interest (reducing inflation),
had defended their position opposing the credit ceiling. Bankers who
talked to The Reporter at the time, more or less, reflected that cap
stifled their main line of business—deposit mobilization and lending.
In fact some of the banks, especially as the end of credit cap drew close,
were more reluctant even to accept deposit.
Though, it is neither possible to assort that the lift of the credit cap
is a signpost that the bank being caught up between the two worlds,
nor it is know where the balance tilts between these objectives, the fact
that there are tough choices facing the bank every now and then is
apparent, he argues. “This is what necessitating separating two roles,
among other range of reasons, in other economies.”
That being the case, the recent move by the central bank towards a
secondary market structure for the newly emerging security markets is
also inducing the same kind of criticism. According to the plan, a study
which will lay out the market structure for what could be the next capital
market structure is underway. With the state-owned Development
Bank of Ethiopia (DBE) and Commercial Bank of Ethiopia (CBE)
offering the first saving bonds in Ethiopia with interest rates slightly
Eye
www.ethiopianreporter.com
The Reporter | Saturday |April 30, 2011
the G-20’s
Cont`d from
empty
page 9
gestures
The world’s 20 most important finance ministers and 20 most important
central bankers traveled to Washington this month from every part of
the globe to accomplish, predictably, exactly nothing.
The subject of the G-20’s recent meeting was “global imbalances.”
According to the communiqué issued by the group, the meeting focused
on developing a procedure for identifying which G-20 countries have
“persistently large imbalances” and why they have them. This delicate
analytical task was assigned to the International Monetary Fund, which
is to complete its work before the ministers’ next meeting in October.
It hardly takes a team of IMF economists to answer these questions.
Anyone who has taken a first-year undergraduate course in economics
would have no difficulty in identifying the countries with the largest
trade surpluses and deficits. The United States wins first prize with a
trade deficit of more than USD 650 billion in the most recent 12 months.
No other country comes close enough to be awarded second prize.
The broader current-account indicator (which includes trade in services
and net investment income) confirms America’s leading role: its
external deficit is nearly USD 500 billion. No other country has more
than a USD 100 billion current-account deficit.
Even if we look at current-account deficits relative to countries’ GDP,
America’s 3.3 percent ratio exceeds that of almost every other economy.
The three countries with larger deficit-to-GDP ratios have a combined
deficit of less than USD 70 billion – not enough to warrant the G-20’s
attention.
The country with the largest current-account surplus is, no surprise,
China, with a positive balance of more than USD 300 billion. Japan and
Germany are the only other countries whose current-account surpluses
exceed USD 100 billion.
China’s current-account surplus is four percent of its GDP. Several oil
producers have larger relative current-account surpluses that, combined,
exceed China’s in absolute terms. And there are several other European
and Asian countries with higher relative current-account surpluses that
together exceed that of China.
But the G-20’s decision to focus only on member countries that account
for more than five percent of its combined GDP will exclude these
smaller countries from the spotlight. Only China and the US, and
perhaps Germany and Japan, will be at center stage.
So much for the not-so-difficult task of identifying the countries with
big imbalances. But what about the causes of those imbalances?
Every student of economics knows that a country’s current-account
deficit is the difference between its national investment (in business
equipment, structures, and inventories) and its national saving (by
households, businesses, and government). That is not a theory or
an empirical regularity. It is an implication of the national incomeaccounting
definitions.
The US has an enormous current-account deficit because the federal
government’s dissaving (i.e., the fiscal deficit) drags down America’s
above the deposit interest rates and with maturity date of five years and
above. On the other hand, the public enterprises, like Ethiopian Electric
Power Corporation (EEPCo) also issued guaranteed corporate bonds
to the public. Hence all these came to the forefront, secondary market
structure is required is apparent according to the statement from
the NBE. Alemayehu Kebede, corporate communication directorate
director, at the NBE told The Reporter that the study would launch the
secondary markets, where government bonds already issued are going
to be traded. However, economists like Eyob Tesfaye, former director
of government financial institution supervision agency, it is a study
completed a long time ago. In fact, according to him the market should
have went live then as the study was adequately done.
Apart from the duplication of efforts in repeating the same study, what
seems to be a bit worrying for Eyob is that of the question of regulatory
body for the new security market structure. He told The Reporter that
the central bank itself is an active participant of the bond market;
hence, it is not appropriate for the bank to take up the supervisory role
as well. Besides others also question that if it is even possible to do all
these tasks at time.
overall national saving. And the reverse is true for the Chinese, German,
and Japanese current-account surpluses. In each of those countries, the
level of national saving exceeds domestic investment, leaving output to
be exported and funds to be loaned abroad.
So the policy actions needed to reduce the trade and current-account
imbalances are clear enough. The US must raise its national saving
rate by shrinking its budget deficit, which currently stands at nearly 10
percent of GDP. Fortunately, the desirability of doing so is now clear to
every policymaker in Washington and to most of the American public.
It will begin to happen as the massive “fiscal stimulus” enacted in 2009
comes to an end, the political process begins to deliver spending cuts,
and economic growth yields more tax revenue.
When President Barack Obama attends the G-20’s summit of heads of
state in Cannes in November, he will no doubt agree to further reductions
in the US budget deficit. But that will be an empty promise: the US
president has far less control over legislation than government heads in
parliamentary democracies like Britain or in countries like China. And
Obama’s power is even more limited now that his Democratic Party
controls only one house of the US Congress. The history of previous
summits suggests that the president will promise in Cannes only what
he has already proposed at home.
The G-20 ministers and central bankers are, of course, in no position
to change the behavior of either the US or China, whose recently
adopted five-year plan makes clear that it will reduce national saving
by increasing consumer spending and raising government outlays for
services like health care. In other words, China will, for its own domestic
reasons, reduce its current-account surplus.
The same kind of national self-interest that is driving the Chinese to
stimulate domestic spending was at work when the G-20 leaders met
in London in April 2009 and agreed to take steps to stimulate their
economies. That agreement was easy to achieve, since it was in each
country’s interest to expand demand. The G-20 only ratified what was
going to happen anyway. But the G-20 leaders and finance ministers
nonetheless now point with pride to what they “accomplished” in
London.
The same is likely to happen over the next few years as the US reduces its
fiscal deficit and thereby shrinks its current-account deficit while China
reduces its national saving and thereby shrinks its current-account
surplus. The leaders of the G-20 will no doubt claim credit for this
achievement. Perhaps that is why they like to meet.
Ed’s Note: Martin Feldstein, Professor of Economics at Harvard, was
Chairman of President Ronald Reagan’s Council of Economic Advisers
and is former President of the National Bureau for Economic Research.
The article was provided to The Reporter by Project Syndicate the world’s
pre-eminent source of original op-ed commentaries. With a unique
collaboration of distinguished opinion makers from every corner of the
globe Project Syndicate provides incisive perspectives by those who are
shaping politics, economics, science, and culture.
from page 7
With somewhat similar central bank dual natured responsibility with
Ethiopia, the Chinese experience is drawn in bond market. People’s
Bank of China (PBoC) is one playing the central bank role in economy.
PBoC in fact like its counter-part in Ethiopia does hold both regulatory
and monetary policy responsibilities together. The bank gets to decide
both the policy aspect and supervise the financial sector players as a
whole. Though, it also implies that the supervisory role of the bank
entails control over the security market as well, the direct supervision
of the bond and security markets falls under an independent
commission; China Securities Regulatory Commission (CSRC).
Nevertheless, there are also other economists that champion the idea
of tight regulatory system; at least at the early stages of developments.
Michael Melaku is one such person. He told The Reporter that as
bond and security markets is one of the monetary policy instruments
it should not be left unregulated. He feels that until the security
markets gets stronger, there should be a regulation and who is better
positioned to do it but NBE, he argues. Nevertheless, NBE’s regulatory
and monetary management duties seem to remains to be a center of
contention for quite sometime.