Savings and Investment in a Global Economy.

• Author: Hellerstein, Judith

Americans' disenchantment with their country's trading arrangements has increased along with its trade deficit. Comments made by government officials attributing the deficit to unfair trading practices of other nations, especially Japan, are one example. Some officials have argued that trade deficits are a result of the United States's inability to compete in the global marketplace and have sought to correct the situation by restricting imports or by redirecting U.S. industrial and trade policies to promote the strategic position of U.S. firms in the international economy. But to understand how to reduce the trade deficit, one must first figure out why it exists.

In Savings and Investment in a Global Economy, Barry Bosworth analyzes the causes of the trade imbalances of the 1980s and argues that these imbalances are not the result of microeconomic factors (i.e., unfair trading practices) but rather of macroeconomic changes in savings and investment in the developed world. Through a highly detailed technical and statistical analysis of the economies of 15 industrialized countries, Bosworth demonstrates that changes in domestic savings and investment rates in these countries led to changes in interest rates, exchange rates and trade balances. He explores the reasons why savings and investment rates have declined and whether the recent volatility in exchange rates is cause for concern, or simply an integral part of international adjustment to differing savings and investment rates.

In Bosworth's view, the impact of foreign economic events on its own economic welfare has shown the United States that it can no longer formulate domestic economic policies without examining how these policies affect its relationships with other countries. Although the integration of the global economy has been a goal of American foreign policy, Americans have been slow to recognize the changes caused by this shift towards globalization. An economic policy that only includes trade in goods or services is no longer valid because it fails to include a linkage with financial markets. Domestic policy makers must consider the international economy: for example, exchange rates, current account balances, market capitalization and the movements of capital across borders. Moreover, past policies that had been successful in stabilizing jobs and incomes in a relatively closed economy often have drastically different results in an open global trading system.

The book's prime...