Causes and Consequences of Global Imbalances

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Causes and Consequences of Global Imbalances: Perspective from Developing Asia CHARLES ADAMS AND DONGHYUN PARK

Global current account imbalances are one of the key macroeconomic imbalances that underlie the global financial crisis. The central objective of this paper is to analyze the causes and consequences of global imbalances from the perspective of developing Asia. More specifically, the paper examines the root causes of the large and persistent current account surpluses that have emerged in the region since the Asian crisis. The paper also explores the consequences of global imbalances for the region, in terms of welfare and economic growth. Based on the analysis, a number of concrete policy directions are recommended that will help Asia rebalance its demand and growth toward domestic sources.

I. INTRODUCTION

Global imbalances or, more precisely, global current account imbalances refer to the large current account deficits and surpluses that have emerged in the world economy during the last ten years. For the most part, the imbalances have been heavily concentrated among a small group of regions and countries, and until recently have displayed an unusually high degree of persistence. The imbalances have centered on the large current account deficits of the United States (US), which peaked at close to 6 percent of gross domestic product (GDP) in 2006, and the corresponding surpluses in the rest of the world, in particular developing Asia, Middle East, and Russia. By definition, a current account deficit (surplus) is equal to negative (positive) net savings. Therefore, it is conceptually useful to view persistent global imbalances as the continuous financing of US consumption with the net savings of the surplus countries. Global imbalances have enabled global aggregate demand to keep pace with the rapid expansion of global aggregate supply due to the integration of the People’s Republic of China (PRC) and India into the world economy. Much of the debate about global imbalances has been framed in terms of their sustainability from the US perspective. More precisely, concerns about sustainability center on whether the US can indefinitely spend more Charles Adams is Visiting Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. Donghyun Park is Senior Economist in the Economics and Research Department, Asian Development Bank (ADB). The authors thank Gemma Estrada of the Economics and Research Department, ADB, for her excellent research assistance. Asian Development Review, vol. 26, no. 1, pp. 19−47 © 2009 Asian Development Bank

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than it produces or, equivalently, rely indefinitely on borrowing from abroad. Those concerns have been amplified by the unprecedented magnitude of the US current account deficit and its growing net foreign indebtedness. Roubini and Setser (2004) gave strikingly prescient warnings of a major global financial crisis in the absence of major adjustments to global imbalances while Bergsten and Williamson (2004) provided an excellent overview of the pessimistic view of the US current account deficit. The underlying fear was that if the US continued to run large deficits, its net foreign liabilities would eventually reach 100 percent of GDP, a figure widely believed to be too large. For example, in a lucid exposition of the issue, Mussa (2004, 114) stated that “There is probably a practical upper limit for US net external liabilities at something less than 100 percent of US GDP and accordingly…. current account deficits of 5 percent or more of US GDP are not indefinitely sustainable.” However, a more sanguine minority view holds that in an era of growing financial globalization and rising US productivity, it may be feasible and even desirable for the US to run very large deficits for, say, a quarter of a century. According to this view, fears about the sustainability of the US deficit are misplaced in a world of growing...
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