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|Global imbalances could be here to stay|
|Saturday, 02 May 2009 09:46|
Recent years have witnessed lots of hullaballoo about so-called global imbalances. It was feared that they would cause a crisis.
Now we have our crisis. The imbalances were not the main cause. And the imbalances could be still with us once we get through the crisis.
What are these global imbalances? In short, the US and some other countries have been consuming more than they are producing. This means that their current accounts are in deficit -- in the case of the US over 6% of GDP in 2006, and close to 5% just last year. Other important deficit culprits are France, Italy, Spain, UK and Australia.
These deficits have to be financed by someone else's surpluses. In recent years it has been the Middle East oil producers, Germany, China, Japan and other Asian tigers. There are several reasons why these countries rack up surpluses. The oil producers are right to hang on to some money to smooth the volatility of oil prices, and to keep some for future generations if oil will run out. Some Asian countries are following post-crisis prudence by building up reserves. Others have seen savings surpluses build up as investment has fallen back. Some argue that surpluses are been generated by Asia's export-led development based on undervalued exchange rates.
All these countries have found friends with US consumers who have only been to happy use these savings on their consumption spending spree. This is why most economists have been worried about a "disorderly adjustment". Financial markets might turn on the US, leading to a crash in the US dollar.
There are other reasons to be concerned. Normally, developing countries should import capital because they should have great investment opportunities. And developed countries (especially with ageing societies) should have plenty of savings to use for these investments. This paradox was identified by US economist Robert Lucas (and is called the "Lucas paradox"). But a major part of the solution to this paradox is for developing countries to create a more investment friendly policy regimes.
The crisis we are in is not the one that the economists predicted. While the global imbalances arguably provided the raw material for the financial crisis, the real cause was ill-conceived financial innovation, reckless behaviour by financial markets and inadequate market regulation and supervision. Although this crisis started in the US, the dollar did not fall out of bed. Rather, the dollar has benefited from the crisis, as investors have rushed to the US safe haven in this time of global confusion. And developing countries with their wealth of investment opportunities have seen international capital dry up.
So looking ahead, where does this leave global imbalances? The IMF predicts that the US current account deficit will remain over 3% of GDP this year and next, notwithstanding the "Great Recession". And the other countries mentioned above will also remain in deficit. The Asian NIEs will see even bigger surpluses, while the Japanese surplus will decline. They do not provide figures for the Chinese or the oil exporter surpluses, but they will clearly remain in surplus, particularly as oil prices rebound with a recovery in demand.
It looks likely that these imbalances will come back in full force as economic recovery becomes very solid after 2010 (beyond the IMF forecast horizon). True, US consumers will have to start saving again, but excessive consumption is part of the American way of life. And while Asian countries will try to develop some home grown growth, Asian enterprises are programmed to export. And at the same time, the US government is building up a monstrous debt.
Even if imbalances are less than in the past, market vulnerabilities could be just as great or even greater, sewing the seeds for our next crisis.
But then again, as other observers have suggested, global investors are happy to invest in the US because it is still the only show in town (see article on Europe as the new financial crisis epicentre).