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Global Imbalances Essay Sample

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Introduction

The formal definition of the term Global Imbalances has had advances since the 1990s to the early 2000s. Essentially, global imbalances can be defined as the ‘imbalances between savings and investments in the major world economies reflected in large and growing current accounts’ (Dunaway et al 3). The global imbalance is also referred to the global current account imbalance and is the ‘large current account deficits and surpluses that have emerged in the world economy in the last ten years’ (Adams & Park 1).

However, the above definitions have since been challenged as not portraying what the global imbalance implies explicitly. Generally, to understand global imbalance simply as a growing rift between the current account surplus and deficit ‘underpins the early work on global imbalances when the academic and policy community focused mainly on understanding the drivers and sustainability of the US current account deficits’ (Bracke et al 13). The above definitions are challenged of not expressing the balanced or unbalanced extent to which the deficits or surplus can be experienced. Having considered many other points of concern, a more precise definition is given. The global imbalances can thus be termed as ‘the external positions of systematically important economies that reflect the distortions or entail risk for the global economy’ (Bracke et al 13).

The imbalances have been experienced in certain regions of the world and even though they were not seriously received, they have spread out to the international level and are now posing a threat to the global economy. As Adams and Park (1) noted ‘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’. They were later evidenced in the United States, one of the world industrial powers. ‘The imbalances have centered on large current account deficits of the United States (US), which peaked close at 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’ (Adams & Park 1). As a result, the current debate on global imbalance is usually held in the United States Perspective. Adams and Park (1) pointed out that ‘it is conceptually useful to view persistent global imbalances as the continuous financing of the US consumption with the net savings of the surplus countries…concerns abut sustainability center on whether the US can indefinitely spend more than she produces’. A current account deficit refers to the net negative savings whereas a surplus is the net positive savings.

Global imbalances in the US in relation to Asian countries

Global imbalance has been the focal point of various global economic empowerment programs over the recent past. ‘Since the International Monetary Fund (IMF)/ World Bank annual meetings in Dubai in September 2003, the IMF and G7 have repeatedly pointed out to risks from the imbalances and have designed a policy strategy to facilitate a smooth unwinding’ (Bracke et al 8). A new surveillance tools developed by the IMF in 2006 identified Global Imbalance is the first topic that would discussed.

In the recent past, the United States has been the major current account deficit state internationally. Therefore, ‘concerns over global imbalances have been partly attenuated, as the current account imbalance of the main deficit country, the United States, has started to correct in response to the turmoil in the sub-prime mortgage market’ (Bracke et al 8). The imbalances have, however, not been corrected and theorists postulates that they exhibit a form of cycle with one factor leading to the other in turns. Instead, ‘the size of the imbalances remains large and a further widening of external position can be observed across a range of countries including in the main surplus country, China’ (Bracke et al 8).

On the other hand, the analysis global imbalance has had different changing approaches in the recent past. Traditionally, following the large deficit that was experienced in the United States, ‘the initial analysis and discussions centered on the current account deficits of the United States. The attention then broadened to include the developments in the main surplus countries, the Asian economies and the oil-producing nations’ (Bracke et al 8).

Causes and consequences of global imbalances

Before looking into the effects of the global imbalances on the economy of the United States as well as other countries, it is worth understanding some of the factors that greatly contributed to the imbalances in these countries/states. A brief chronology of economic progress from the early 1990s can give an insight of what really transpired in the United States. The local private sector, which spent far much more than it could generate, was greatly responsible for the need to have the country’s economy expand (Izurieta 1). The private sector got weaker and weaker in the subsequent years and attained the peak in 2001 when ‘an incipient recession was neutralized by the fiscal deficit’ (Izurieta 1). The consequences of this was an ‘unprecedented debt accumulation, estimated by the US federal Reserve at about 150% of GDP for the private sector and 45% for the general government’ (Izurieta 1). The extensive lending and spending largely contributed to the deficits and ‘the US moved from a current account surplus of about 1% of GDP in1991 to deficit of above 6% currently’ (Izurieta 1).

The specific causes of post-crisis current account surpluses in the Asian countries remain blurred. However, its effects are evident and worth noting. Firstly, it negatively contributed to the global financial crisis and growth (Adams & Park 20). Besides, the imbalances also subjects the countries to two types of costs, which are ‘the costs arising from the possibility that Asia’s current account surplus is suboptimal and the costs associated with having excessive foreign reserve’ (Adams & Park 20).

The global imbalances and the subsequent financial crisis have different impacts on different states or countries. The response will depend on ‘the country’s linkages to the world economy, its economic condition before the crisis, and the degree to whish it participate in the global market’ (Peters, et al, 2009). The impacts of global imbalances have had substantial negative impact to the economy of the United States. Firstly, the condition of imbalance has continued to worsen in the recent past. It was noted that the US current account deficit ‘doubled from around USD 400 billion in 2000 to over USD 800 billion in 2006’ (Bracke et al 19). Contrary to this, their main counterparts namely China and other oil-producing countries have more than doubled their current account surpluses in the recent past. For instance, Saudi Arabia ‘switched from having the largest deficit as a percentage of the GDP in 1985 to having the largest surplus in 2005’ (Bracke et al 19). Several other improvements have been witnessed in the emerging markets with most of them moving from the large deficit current accounts in the 1980s to large surpluses currently. Others like Japan and Netherlands have maintained large surplus of as high as 9% for quite a long time. 

The effects of Global imbalances in Africa and Latin America

The global imbalances have negative effects beyond the United States and the Asian countries. On the developing countries especially the countries in Africa, the global imbalances, which resulted into the current economic and financial crisis, have been a barrier to the full utilization the continent’s resources. According to a recent Research Brief by the United Nations University, some countries in the region were undergoing a positive economic advancement. The report reveals that ‘some African countries richly endowed with natural resources were recording unprecedented rates of economic growth as a result a price boom generated by the growing demand for raw material and fossil energy from China and India amongst others’ (1). However, the report reveals that after the crisis, ‘the price of oil and many other primary commodity items fell sharply, and reverted to tear pre-boom levels. The prices of most mineral ores, in particular, declined considerably in response to the sluggish in international markets’ (1). The long-term dreams of the resource endowed states of attaining industrial and scientific revolutions based on the exports of raw materials came to an abrupt end. The continent experiences a paradoxical situation of having plenty of resources and being the poorest and least developed continent in the world. The continent relies on foreign exchange earnings from the exports of locally produced goods. The foreign exchange rates, which are greatly affected by the economic and financial crisis resulting from the global imbalances, greatly determine what the continent receives in return. Similar scenarios were witnessed in the Latin American countries.

Conclusion

It is worth noting that most of the developed countries currently exhibit low economic growth rates compared to the developing countries. As Peters, et al (11) observed that ‘many countries including the United States experience negative growth whereas countries like China and India still maintain positive growth in real GDP in 2009’. A significant impact that global imbalance has is that it leads to excessive foreign exchange reserve. The question as to why many countries including the developed ones continue to improve on their current account status while the US deteriorates should be the government’s main task.

On the other hand, what the developing countries need to understand, especially those in Africa and the Latin America, is that they should not continue with their economic dependency principle. The countries have adopted a routine of exporting their products to their former colonial states. Besides, the colonial governments established education systems that could only endow the natives of these countries with limited technical knowledge that could be used to transform the raw products into consumable goods locally thereby calling for export. These systems should be abolished and the governments should embark on inventive and innovative educational systems. 

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