The Global Imbalances from 1996 to 2009:Diagnosis and Prescriptions

Abstract

One of the main global economic concerns before the financial crisis in 2007/2008 was

the emergence of widening global imbalances, which refer to the large and persistent current

account deficits experienced in the United States and the corresponding surpluses mainly in

China, emerging Asia, and oil exporting countries. Not only the pattern and magnitude of the

current account imbalances, but also the direction of global capital flows (from emerging to

advanced countries) is peculiar. Many observers have already discussed different causes and

explanations of global imbalances, e.g. the revived Bretton Woods system hypothesis, the

asset shortage hypothesis, or the global savings glut theory. The main focus of recent debates

lies on the sustainability of those imbalances and whether policy measures aiming on the

reduction of imbalances should be adopted. The debate does not seem to have a clear answer

which everyone agrees with. Some view global imbalances as an equilibrium outcome of

asymmetries in financial development or in world asset demand and supply. For others,

global imbalances are an unsustainable phenomenon which needs to be corrected through

current account adjustment, dollar depreciation and reforms of financial institutions.

This paper analyzes and evaluates the different views on the sustainability of global

imbalances and asks whether a rebalancing mechanism is necessary or not. The key points

which I focus on especially in this paper are as follows. First, I review and analyze the

facts on global imbalances from 1996 to 2009. Second, I discuss viewpoints which suggest

different positions — no-rush-to-rebalancing, rebalancing-is-harmful and rebalancing-isnecessary

— and put them into the context of common theories on the roots of imbalances.

Some of the theories try to explain or justify the sustainability of global imbalances. I argue

that the U.S. current account deficit and foreign surpluses will not disappear automatically

(even if the crisis led to an initial reduction of the imbalances). I further argue that the

possible interaction of current account imbalances with domestic and systemic distortions

bears risks of a global recession and that unless countermeasures to rebalance the global

economy are adopted, current account imbalances are likely to return and increase again.