We recognise that the process to ensure more balanced global growth must be undertaken in an orderly manner. All G20 members agree to address the respective weaknesses of their economies.
• G20 members with sustained, significant external deficits pledge to undertake policies to support private savings and undertake fiscal consolidation while maintaining open markets and strengthening export sectors.
• G20 members with sustained, significant external surpluses pledge to strengthen domestic sources of growth. According to national circumstances this could include increasing investment, reducing financial markets distortions, boosting productivity in service sectors, improving social safety nets, and lifting constraints on demand growth.
G20 Framework for Strong, Sustainable, and Balanced Growth, G20 Pittsburgh Summit, 24/25 September 2009
Such was the concern about the adverse consequences for the world economy of "imbalances" that G20 Leaders, meeting in Pittsburgh in September 2009, adopted a Framework that contained a number of pledges to take action at the national and international level (see text above). This action followed a growing body of expert opinion that took the view that large, persistent current-account imbalances in the major industrialised economies and emerging markets since 2000 had, at the very least, contributed to the global financial crisis witnessed in 2007-8 and to the subsequent Great Recession.
Indeed, second quarter 2010 forecasts from the OECD and IMF suggest that, after contracting during the global economic downturn, worldwide indicators of current-account imbalance are expected to expand through 2012. Global imbalances, it seems, are neither solely crisis-related nor transient. But what are the options for policymakers in the run up to the Canadian G20 meeting and afterwards?
Introducing a new eBook
The purpose of this eBook is to provide policymakers and their advisers with up-to-date, comprehensive analyses of the central facets of global economic imbalances and to identify and evaluate potential national and systemic responses to this challenge. As will become clear, the world economy has experienced substantial current-account surpluses and deficits before, and several of our contributors discuss the contemporary relevance of these episodes. Many contributors focus on important very recent developments, such as the pressures for fiscal retrenchment experienced in Europe during the second quarter of 2010. These developments may well shape how global economic imbalances are tackled in the months and years ahead.
Since expert opinion remains divided on some critical aspects of the rebalancing question, we have not sought to present a single view. Indeed, on some fundamental matters, such as whether imbalances create systemic risks and whether exchange rate movements can remedy imbalances, we have in each case presented at least two leading perspectives, with markedly different policy recommendations. Moreover, given the diversity in national economic circumstances, it would be surprising if a single set of policy prescriptions was valid across the board.
Consequently, then, drawing upon different areas of economic, geopolitical, financial, and historical expertise concerning the international economy, we have assembled cutting-edge analyses of the key questions raised by the challenge of global economic imbalances. Many of our contributors have advanced proposals for reform that could usefully be explored at the national and international level.
The multi-faceted nature of global economic rebalancing
A challenge facing senior officials and analysts is to comprehend the many different dimensions of the rebalancing of the global economy and how they might relate to one another. A first order of business is to define terms. What constitutes an imbalance? How is it measured? Second, causal and normative considerations arise. What factors cause imbalances? Since it is the persistence of these imbalances that is regarded as detrimental to national economies, it is necessary to understand the factors that account for persistent imbalances. Comprehending the different types of harm created by persistent imbalances is a distinct matter, made all the more interesting given claims advanced over the past two years that global economic imbalances contributed to the worldwide financial paralysis and subsequent output collapse in 2008 and 2009, respectively. Ascertaining whether there are systemic costs to global imbalances is a necessary first step in any discussion of potential national, regional, or multilateral responses.
If one is convinced that imbalances are bad for a national economy or systemically, attention then turns to normative prescriptions. While these can and should be informed by conceptual analysis, surely it is helpful to turn to the historical record to examine how previous instances of serious global imbalances have played out. Such evidence plus other considerations can inform an assessment of what public policies must change and whether collective actions are needed. Such an assessment ought to consider the political viability of reform proposals in all of the major affected jurisdictions. Given the constellations of interests often invested around existing sets of national institutions and policies, politically viable reforms may fall far short of the first-best or preferred technocratic option.
Lastly, moving from the national to the systemic level, questions arise as to whether new international rules, conventions or processes are needed to discourage the creation of persistent imbalances in the first place or to correct imbalances when they occur. Such analyses have to take into account the operation of any self-correcting mechanisms at work in the global economy as well as instances where global markets fail to deliver optimal adjustment by leading nations.
The subject matter of this volume
With these considerations in mind, we have organised the contributions to this volume around six questions. Doing so allows authors to focus on different aspects of the global rebalancing challenge, and helps each element of the policy challenge to be appreciated more easily. Of course, decision-makers need to take a comprehensive view of the many facets of global economic imbalances, recognising the connections between the national, regional, and multilateral levels, between the politics and economics of the challenge, as well as drawing from contemporary circumstances and historical experience. The six questions are:
- How large are contemporary current account imbalances? Why do they persist?
- What are the systemic costs of imbalances?
- What are the lessons from previous attempts to rebalance the global economy?
- What would rebalancing entail? Which policies must change? Is collective action needed?
- What is the political viability of proposals to rebalance national economies?
- Are new system-wide accords needed to promote rebalancing or to discourage persistent imbalances?
Implications for policymaking
While the answers to these questions vary and there is no clear consensus, we draw out ten implications for policymaking from the contributions to this book. No doubt, further analysis and deliberation will refine – and possibly contradict – some of the suggested implications. Still, given the high profile attached to global imbalances, it is worth stating them, not least to demonstrate how different facets of the rebalancing challenge relate to one another.
- Many analysts subscribe to the view that the large current-account imbalances of the past decade were, at least in part, a contributing factor to the recent global financial crisis. Even if imbalances do not represent a threat to the operation of an open global economy, they risk undermining public support for such openness.
- While imbalances are typically viewed as a macroeconomic phenomenon, their persistence in recent years suggests that there may be underlying structural features of national economies and the international financial system that influence their magnitude.
- To the extent that such structural features are important causes of national imbalances, the optimal policy mix extends beyond demand management tools. Shifts in expenditure patterns of the magnitude necessary to eliminate some of the current-account imbalances must imply inter-sectoral shifts in resources within economies. This process of reallocation will undoubtedly be affected by supply side measures. And at the international level, governance and other reforms are needed to reduce the incentives of some countries to accumulate foreign exchange reserves beyond what is reasonably needed.
- Making sure imbalance-related policy reforms are not hijacked by vested interests is vital. Deficit countries, for example, should not succumb to a patchwork of industrial policies dressed up as a national reindustrialisation strategy.1 Neither can large imbalances serve as an excuse to impose capital controls beyond what is prudent from a domestic financial stability perspective.
- The fact that certain vested interests benefit from the same structural determinants of imbalances strongly suggests that international exhortation, monitoring, and peer pressure processes alone are unlikely to succeed. The limited success of the IMF's consultation exercise on global imbalances in the middle of the last decade bears out this point.
- Their limited (in principle, zero) financing needs means there is little automatic external pressure on surplus countries to adjust, besides a fear of a low return on foreign savings. A long-standing asymmetry in the international economy is that the market-driven pressures to adjust fall disproportionately on deficit countries.
- While there has been much mention of coordinated action to address global imbalances, to date the substantive basis of any inter-governmental deal, its political viability in each leading jurisdiction, and the trigger needed to bring such deliberations to a close remain elusive. Nor have reforms of the international financial system proceeded far enough to remove the incentives on the part of some countries to accumulate official reserves.
- In the absence of an international accord, policymakers must not succumb to fallacies of composition in assessing national policy options. The allure of deflationary solutions to current-account deficits is far less when major trading partners are all taking similar steps.
- Other policy imperatives – such as fiscal retrenchment brought about by financial market fears regarding the sovereign solvency – can counteract measures to reduce or limit imbalances. Some surplus countries, such as Germany, are cutting their government budget deficits which, everything else equal, will expand their current-account surplus.
- Measures to promote private sector investment and to reduce personal and corporate savings will need to complement any fiscal retrenchment in surplus countries. More generally, governments will have to decide how much priority to attach to reducing imbalances compared to other macroeconomic and structural objectives, such as fiscal retrenchment.
Rebalancing the global economy: a primer for policymaking, edited by Sijn Claessens, Simon Evenett and Bernard Hoekman, is available to download here.
Francois, J and B Hoekman (2010), “Services Trade and Policy”, Journal of Economic Literature, forthcoming (CEPR Discussion Paper 7616).
Gootiiz, S and A Mattoo (2009), “Services in Doha: What's on the Table?”, World Bank Policy Research Working Paper 4903.
1 Followers of the rebalancing debate in the UK and the US, two countries with current accounts that are large shares of their national incomes, will recognise the contemporary resonance of this particular example.