Addressing global imbalances requires cooperation
Maurice Obstfeld 10 August 2018
The IMF’s 2018 External Sector Report assesses the existing account balances for the 30 largest economies. In this article, Maurice Obstfeld outlines the main element findings of the report.
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The IMF has just released the most recent assessments of the existing account balances for the 30 largest economies inside our 2018 External Sector Report (ESR). These assessments certainly are a key facet of the IMF’s mandate to market international monetary cooperation and help countries build and keep maintaining strong economies. They make an effort to answer the difficult and frequently contentious question of when current account surpluses and deficits work or if they signal risks. Before jumping in to the results, a little bit of background pays to.
To start out, surpluses and deficits in and of themselves do not need to be problematic and could well be appropriate and beneficial. For instance, young, fast-growing economies have to invest to grow – so they often times tap external resources by importing a lot more than they export and borrowing to cover the implied deficit. On the other hand, rich, aging countries might need to save to get ready for when workers retire – so they run surpluses and lend to deficit countries.
Current account balances can, however, become excessive, that’s, bigger than warranted by the economy’s fundamentals and appropriate economic policies. Excessive external imbalances – both deficits and surpluses – pose risks for individual countries, and for the global economy.
Just as over-indebted households can lose usage of credit, economies that borrow an excessive amount of from abroad by running current account deficits that are too big may become susceptible to sudden stops in capital flows which can be destabilizing not merely at country level, but also globally, as proven by the long history of financial crises. Countries with excessive surpluses face different challenges – for instance, the chance of investing their saving abroad when domestic investments can offer higher social returns. Furthermore – and importantly – they could become targets for protectionist measures by trading partners.
The analysis of external imbalances is inherently complex, including since it has to be globally consistent – excess deficits should be matched by excess surpluses. The ESR targets each country’s overall current balance rather than its bilateral trade balances with various trading partners, as the latter mainly reflect the international division of labour instead of macroeconomic factors. Our objective is to alert the membership to the potential risks from these imbalances, and highlight countries’ shared responsibility to handle them within an appropriate manner. This goal is most relevant in today’s conjuncture.
Key findings on excessive imbalances
After narrowing in the aftermath of the global financial meltdown, global current account surpluses and deficits have remained relatively unchanged in the last five years at about 3¼ percent of global GDP. Our analysis indicates that about 40 to 50 percent of the global balances are excessive, and increasingly concentrated in advanced economies.
Higher-than-desirable current account balances prevail in northern Europe – in countries such as for example Germany, holland, and Sweden – aswell as in elements of Asia – in economies like China, Korea, and Singapore. Lower-than-desirable balances remain largely concentrated in the usa and the uk.
The persistence of global imbalances and mounting perceptions of an uneven playing field for trade are fuelling protectionist sentiment. These impulses are misguided. An escalation of protectionist policies would mainly hurt domestic and global growth, without a lot of an impact on current account imbalances, as this year’s report also finds.
Risks later on
As the current configuration of global excess imbalances will not pose an imminent danger, we project that, under planned policies, these imbalances will grow over the medium term, eventually posing a risk to global stability.
The planned fiscal expansion in the usa will likely raise the country’s current account deficit – with mirror-image larger surpluses in all of those other world – and create a faster pace folks monetary policy normalisation. The ensuing tightening of global financial conditions could prove disruptive to emerging and developing economies, especially the more vulnerable ones who’ve already been at the mercy of some pressure.
Simultaneously, limited actions by surplus countries to tackle their imbalances suggest their surpluses will linger. Against the setting of continued concentration of deficits in debtor countries and sustained surpluses in creditor countries, net foreign asset stock positions will continue diverging, increasing the probability of disruptive currency and asset price adjustments later on in indebted countries. Such developments would diminish global growth, also harming the surplus economies.
Due to the risk that foreign lending dries up, deficit countries face greater pressure to balance their international accounts than surplus countries do to balance theirs. However when the adjustment comes, both debtor and creditor countries lose. The adjustment in the aftermath of the global financial meltdown is a not-too-distant reminder of this.
That’s why both surplus and deficit countries must interact to lessen excess global imbalances in a way supportive of global growth and stability.
How exactly to tackle imbalances?
In today’s conjuncture where many countries are near full employment and also have more limited room to manoeuvre within their public budgets, governments have to carefully calibrate their policies to accomplish domestic and external objectives, while rebuilding monetary and fiscal policy buffers. Specifically:
- Countries with lower-than-warranted external current account balances should reduce fiscal deficits and encourage household saving, while monetary normalisation proceeds gradually.
- Where current account balances are greater than warranted, the usage of fiscal space, if available, could be appropriate to lessen excess surpluses.
- Well-tailored structural policies should play a far more prominent role in tackling external imbalances, while boosting domestic potential growth. Generally, reforms that encourage investment and discourage excessive saving – through removing entry barriers or stronger social safety nets – could support external rebalancing excessively surplus countries, while reforms that improve productivity and workers’ skill base work in countries with excess external deficits.
Finally, all countries should work toward reviving trade liberalization efforts while modernising the multilateral trading system – for instance, to market trade in services, where gains from trade liberalization could possibly be substantial. Such efforts may have small effects on excess current account imbalances, however they can have big results on productivity and welfare, while reducing the chance that current account imbalances trigger counterproductive protectionist responses.