More specifically, can greater foreign exchange flexibility in certain areas, and particularly the emerging economies, help to restore some balance? In Europe and Japan, we expect an increase in potential output following structural reforms on financial, product and labour markets. Beyond the mechanical effect of a reduction in the growth differential, what would be the impact on capital flows? In the United States, bearing in mind the savings behaviour of private agents, what lever should be used in addition to the tightening of the policy mix to substantially improve the savings-investment balance? Lastly, could international institutions play a bigger role in the management of global imbalances? 2  BIS Review 80/2005  In this third session, Otmar Issing, former Professor at the University of Würzburg and Member of the Executive Board of the European Central Bank, will explore the avenues for finding a way out of the current global imbalances notably by presenting the analyses developed by his institution in the areas of fiscal and foreign exchange policy and structural reform. The last session will focus on the consequences of these developments for international financial stability against the backdrop of the liberalisation, the increase in and redirection of capital flows. The emerging economies have on several occasions borne the brunt of erratic capital flows. The Asian crisis of 1997 thus brought to light the risks associated with the accelerated liberalisation of short-term capital flows, particularly where prudential supervision structures were inadequate. What is the appropriate global financial integration policy for an emerging economy?

The new international division of labour thus affects every stage of the production process; it influences the localisation of added value and raises the question of the financing of the external imbalances of economies that focus on the design and marketing of products rather than their manufacture. The second session will deal with the impact of trends in productivity and competitiveness on international capital allocation and global imbalances. These trends may have contributed to the increase in global imbalances reflected in current account balances, and highlight several paradoxes. The first paradox is that of the US economy, which combines the structural surge in its productivity with a possible loss in competitiveness illustrated by the increase in its external deficit. This paradox is perhaps only apparent if we consider that the improvement in the US’ relative productivity performance is mainly in the non-tradable sector and as compared to the industrialised rather than the emerging economies. In addition, while this pick-up in productivity does boost the profitability of investments, logically, it goes hand in hand with an excess of investment over national savings that calls for increasing foreign capital inflows. However, the predominant nature of capital inflows to the United States changed at the start of the 2000s, switching from mainly purchases of equities and foreign direct investment by the private sector to purchases of government securities by central banks, which are not motivated by the search for increased profitability. This leads us to the second paradox, a twin to the first, i.e.