Rebalancing the World Economy
I call on the surplus countries … to find the political gumption to stimulate
their economies without reigniting the fires of inflation. It must be
recognized that the health of the world economy does not hinge solely on
US budget policy. As US budget and trade deficits decline, other countries
must pick up the slack, particularly on imports from developing countries.
Our focus—and this means all of us—must be on achieving balanced
growth and more open economies.
—President Ronald Reagan, IMF-World Bank Annual Meetings, Washington,
29 September 1987
AS THE WORLD BEGAN EMERGING FROM THE FINANCIAL CRISIS, global imbalances rebounded. In a lopsided pattern whereby the United States and many other nations such as France, India, and UK imported and borrowed, while China, Japan, Germany, and Middle Eastern oil producers exported and lent, imbalances soared in the early 2000s, reaching some 5 percent of world GDP by 2006. That year, US current-account deficit peaked at an unprecedented 6.5 percent of US GDP, a level widely viewed as unsustainable. Confidence in the US economy was expected to erode, and the dollar was deemed to fall. Exasperated by the mass influx of imports, Congress threatened steep tariffs against China. Perpetuating low US real interest rates that, in turn, stoked the housing bubble, the imbalances became one of the main culprits for the Great Crisis. It would also take the crisis to unwind them.
The risks of a world out of balance are several, from bouts of currency wars to trade protectionism and a new global economic crisis sparked by a hard landing in America. The International Monetary Fund (IMF) argues that imbalances are “a major concern for the sustainability of the recovery over the medium term” and that advanced-economy current accounts will “make increasingly negative contributions to growth.”1 The European Central