As the world looks to full stabilisation and a rebound from the crisis due to the efforts of governments, it is clear that it is finance rather than the real economy that has benefited more from those efforts. In fact, the turnaround in the financial sector, which was responsible for the crisis in the first instance, has been faster and more noticeable that in the real economy. What is more, as the popular concern about swelling bonuses for financial managers illustrates, the recovery of finance is seeing a return to practices that generated the imbalances that underlay the crisis.

This is not true just at the level of individual institutions or countries, but globally as well. Thus, the financial recovery has resulted in a revival of capital flows to emerging markets since March 2009, even while the flow of credit to the real sector in the developed countries is still limited. Much of these flows are concentrated in Asian emerging markets that have been less adversely affected by the crisis than other countries, and therefore promise quick returns to a financial sector that is yet to write off a large volume of bad assets. The surge is clearly feeding on itself inasmuch as it has generated an asset price boom in recipient countries, encouraging further speculative flows. As the International Monetary Fund’s Regional Economic Outlook released in October reports, “emerging Asia … has especially benefited from equity market inflows, which have not only exceeded those to other regions, but have also returned to levels prevailing before the crisis. External equity and bond issues by emerging Asian economies have also returned to pre-crisis levels, a much stronger rebound than in other regions. Even inflows of syndicated loans have resumed to emerging Asia—unlike elsewhere, primarily reflecting the healthier state of banks in the region.”

This turnaround is worsening an imbalance that was seen as being a medium-term influence that triggered the crisis of 2008: the imbalance in the distribution of global reserves. The surge in capital inflows to Asian emerging markets puts upward pressure on the currencies of these countries, which can ill-afford currency appreciation at a time when they are just recovering from the decline in exports that the recession generated. Such appreciation makes their exports more expensive in foreign currency terms and erodes export competitiveness.

Not surprisingly, central bankers have stepped in to manage exchange rates and stall or dampen appreciation by buying up dollars and adding it to their reserves. According to the IMF, from March through September 2009, emerging Asian countries accumulated US$510 billion in reserves, compared with US$69 billion in emerging Europe and US$17 billion in Latin America. Cumulatively, emerging Asia’s stock of reserves has risen from about US$3.4 trillion at end-August 2008 to about US$3.9 trillion at end-September. This makes the stock of reserves in Asia much higher than in other emerging markets in absolute dollar values and as a share of GDP.

When reserves accumulate rapidly, central banks look for liquid and safe assets. And since the dollar remains the world’s reserve currency and the US the world’s leading political and military power, the flight to safety is biased in favour of dollar denominated assets. In the case of Asia this seems to be true even when the dollar is weak and depreciates. Data from the US Federal Reserve relating to US Government agency bonds held by foreign official institutions shows that while they increased by $119 billion in 2007, in the wake of the crisis they fell by $31 billion in 2008 and by another $31 billion in the first seven months of 2009. However, not only was the contribution of non-oil exporting Asian countries even more significant, it actually continued to be positive even in 2008. Asian holdings of US public bonds increased by $131.6 billion in 2007 and by $32.4 billion in 2008. Even in the first seven months of 2009, total Asian holding of US government bonds remained largely stable, with a small increase of $2.3 billion for Middle Eastern oil exporters and a small decline of $2.5 billion for all other Asian countries.

This reverse flow of capital from developing to developed countries had in the past been held responsible for the excess liquidity, credit and consumption in the US, which was seen as absorbing the excess savings from Asia. Thus a significant part of the blame for the debt-financed consumption that led to the crisis of 2008 was placed at Asia’s door. In particular, it was argued that some Asian countries were using undervalue exchanged rates to generate the trade and current account surpluses that accumulate as reserves and then flow to US.

What the recent Asian experience illustrates is that financial rather trade flows often generate the imbalances reflected in the uneven distribution of global balance of payments surpluses and foreign exchange reserves. If those reserves are seen as contributing to a process that leads to a financial and economic crisis, then the fault possibly lies in the structures created by the financial policies of the developed countries rather than in the exchange rate policies of the developing.