The Global Economic Imbalances: The Dangers of Not Rebalancing
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Shalendra D. Sharma
Abstract
“Global imbalances” manifest in the large current account deficits and surpluses in the global economy and blamed by many for the global financial crisis of 2008 has become a source of much friction and discord among the G-20 economies. Rebalancing the global economy is essential to mitigating the divisions and promoting a more sustainable economic recovery. How and why did these imbalances emerge in the first place, what explains why rebalancing has proven to be so difficult, and what are the implications of failure? This paper addresses these interrelated issues.
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Bernanke (2005) and Benjamin Bernanke, “U.S. Monetary Policy and International Implications” (speech delivered at the “Challenges of the Global Financial System: Risks and Governance under Evolving Globalization,” A High-Level Seminar sponsored by Bank of Japan-International Monetary Fund, Tokyo, Japan, October 14, 2012). http://www.federalreserve.gov/newsevents/speech/bernanke20121014a.htm; Bernanke (2010).
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For a good overview, see Borio and Disyatat (2011).
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Krugman (2009). Of course, it was Robert Triffin who first identified the problem associated with the “dollar trap.” Labeled as the “Triffin Dilemma,” it argues that any international monetary system that is based on a national currency faces a structural problem – or the “dilemma”. Namely, because the country issuing the international currency (the United States) is in charge of providing global liquidity, it invariably needs to run current account deficits. As a result, its external debt increases, but this in turn also erodes the “credibility” of that “international currency.” This is what happened to the U.S. dollar in the early 1970s forcing President Nixon was forced to end the “gold standard” and the post-war Bretton Woods order. Triffin (1960).
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For a good overview of the SDR, see Kenen (2010).
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In large part, the proliferation of shadow banking in China is the result of “financial repression.” Specifically, Beijing’s tight control of the formal banking system, via which it can maintain low interest rates and provide cheap loans to state-owned enterprises and those with connections, have forced investors, including small depositors to seek yield elsewhere, including shadow banks.
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Kirshner (1997). Also see, Kirshner (2008).
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“Leaders’ Statement: The Pittsburgh Summit,” September 24–25, 2009. http://www.pittsburghsummit.gov/mediacenter/129639.htm.
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Joshi (2010). For details on the agreements reached at Seoul see, The G-20 Seoul Summit, G-20 Seoul Communique: Leaders Declaration, November 11–12, 2010.
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The U. S. suggested that current account surpluses/deficits be capped or limited to 4% of GDP.
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These guidelines are to be developed by the G-20 with assistance from the International Monetary Fund, including finance ministers and central bank governors. The G-20 agreed to meet in mid-2011 to discuss progress. For details, see International Monetary Fund (IMF) (2010).
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Chinese Finance Minister Xie Xuren said that “the G20 should use trade figures rather than current account balances to assess economic distortions… “We think it is not appropriate to use real effective exchange rates and reserves.” Flynn and Neogy (2011).
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United States Treasury, “Report to Congress on International Economic and Exchange Rate Policy,” October 2013. For a good overview, see Aizenman and Sengupta (2011).
©2014 by Walter de Gruyter Berlin / Boston
Articles in the same Issue
- Frontmatter
- Research Article
- The Global Economic Imbalances: The Dangers of Not Rebalancing
- Commentary
- The Imprint of the global
- Documentation
- South–South Cooperation and IBSA: More Trade in Politics
- Book Reviews
- Europe: The Struggle for Supremacy. From 1453 to the Present, by Brendan Simms
- The Power of Currencies and Currencies of Power, edited by Alan Wheatley
- History and Hope: The International Humanitarian Reader, edited by Kevin M. Cahill
Articles in the same Issue
- Frontmatter
- Research Article
- The Global Economic Imbalances: The Dangers of Not Rebalancing
- Commentary
- The Imprint of the global
- Documentation
- South–South Cooperation and IBSA: More Trade in Politics
- Book Reviews
- Europe: The Struggle for Supremacy. From 1453 to the Present, by Brendan Simms
- The Power of Currencies and Currencies of Power, edited by Alan Wheatley
- History and Hope: The International Humanitarian Reader, edited by Kevin M. Cahill
