If the dollar collapses because of continuous increase in current account deficit in the United States, will it impact the United States more or the rest of the world?
John Williamson, Senior Fellow in the Institute of International Economics, thinks that the rest of the world will be impacted much more than the US, while former RBI Governor Bimal Jalan says that there is no concrete data to prove the argument.
Delivering a lecture on 'What follows the USA as the World's Growth Engine?' in New Delhi on Monday night, Williamson said biggest losers of the dollar collapse would probably not be the United States but the rest of the world.
"This is because there would be offsetting impacts on the demand for American-made goods. A crisis is indeed likely to bring with it a fall in demand in the United States, and that will reduce US output. But offsetting that will be the increase in foreign demand that is generated by the collapse of the US dollar in the exchange markets," he said.
In the rest of the world, in contrast, income and substitution effects will both work to reduce output, Williamson said, adding: "There is a real risk of world recession, except perhaps in the United States."
However, Jalan disputed Williamson's theory, saying: "I don't buy the argument that if the dollar collpases US (will) lose less than the rest of world."
He said there is no concrete data to prove that and it is an argument that requires much more detailed analysis. The lecture was organised by the National Council of Applied Economic Research under the aegis of its India Policy Forum.
Williamson, who suggested a prescription to prevent the dollar's collapse, said the US response to its payments deficit should be accompanied by expenditure stimulant measures in the rest of the world if the world is to escape recession.
He also emphasised the need for dollar depreciation and said the recent 2.1 per cent revaluation of the Chinese currency and the sympathetic moves of a number of other Asian currencies, do not begin to meet the need for a serious adjustment of the dollar against the Asian currencies.
"Most calculations of the needed adjustment have looked for an effective appreciation of the yuan of the order of 20 per cent, and suggested that this is likely to imply bilateral appreciations against the dollar of as much as 40 per cent or more," he said.
On the expenditure stimulation by countries other than the US, Williamson saw the greatest possibility in east Asia and India.
Stating that a country might easily have a strategy of export-led growth combined with a current account deficit and a fast growth rate, he said China has to take a lead in these parameters which would induce other countries in the region and India to follow suit.
He said India is beyond the limits of fiscal prudence and ought not to be encouraged to expand demand through fiscal policy, but even the Indian monetary policy could be relaxed.
However, Jalan said India does not have a developed financial market. Because of the not-so-developed bond market in India, the demand stimulant measures do not work as fast.
He also said that any crisis to be caused by burgeoning US current account deficit requires coordinated global efforts and not just steps by east Asia and India.
