Emerging economies urged to spend surpluses at home

A club of rich states has urged emerging economies to spend their prodigious savings garnered through trade at home, instead of buying up equities and debt in the West.

The call by the Paris-based Organisation for Economic Cooperation and Development comes amid mounting tensions between the US and China over claims that the world’s second largest economy is fuelling global economic imbalances.

'If the emerging countries were to expand their social safety nets and develop their financial markets, their saving propensities would go down and they would no longer depend on financial services provided by the advanced countries,' said Angel Gurria, the OECD secretary-general, in a speech on Wednesday.

He also said deregulation of product markets in nations with current account surpluses – both advanced and emerging – would open up such markets for foreign suppliers and investors.

Touching on the contentious issue of foreign exchange rates, which US lawmakers accuse China of manipulating to boost exports, Gurria pointed out that some appreciation of emerging economies’ currencies is to be expected. He called this a ‘necessary condition for global rebalancing,’ and cautioned that countervailing interventions pose a risk of triggering protectionist responses.

Gurria’s comments accompanied a new economic assessment issued by the OECD ahead of a G20 summit  in South Korea next week.

In the assessment, the OECD cut its forecast for growth in developed countries in 2011, saying the global recovery had slowed in 2010. It also warned that the global economic crisis had brought ‘public deficits and debt to unsustainable levels.’