The Dollar and Development

Abstract

Dick Sabot, an active member of CGD's founding Board of Directors, was finishing this paper when he died suddenly on July 6 of 2005. paper highlights the risks to developing countries posed by the growing U.S. external deficit and describes three possible scenarios. the first, the US trade deficit declines gradually and low-income countries adjust by substituting domestic for external demand. second illustrates a more severe reduction of US imports due to slow economic growth, with a consequent reduction in U.S. imports from China. Developing countries therefore suffer a severe drop in their exports to both big economies. last scenario describes a global financial crisis following a run on the dollar and an increase in U.S. interest rates to attract investment. this scenario, Sabot lays in stark relief the possible implications of the current U.S. macroeconomic imbalance for international development and poverty reduction. CGD President Nancy Birdsall writes in a foreword that Sabot told her he was greatly influenced in his thinking on these issues by a speech by Harvard President (and fellow CGD Board Member) Lawrence Summers and by the analysis of William Cline, a joint CGD-IIE fellow. Cline, who discusses the broader implications of the U.S. twin deficits in a forthcoming book CGD/IIE book, United States as a Debtor Nation, has updated Sabot's paper with his latest findings. The discussion in this paper is sober, measured, and balanced, as well as accessible, Birdsall writes. In his closing paragraphs Dick captured the perspective that the Center tries to bring to the broad policy debates—that policy choices in the rich world and at the global level have tremendous implications for progress against poverty in the developing world.