Appendix Global imbalances, reserve currency, and global economic governance

Abstract

There currently is substantial discussion in the press and in the policy community about global economic imbalances. Commonly accepted hypotheses for the root cause of these imbalances are: East Asian economies' export-led growth strategy, the self-insurance motivation for foreign currency reserve accumulation after the East Asian financial crisis, and China's exchange rate policy. These hypotheses are all theoretically plausible. But are they consistent with the empirical evidence? The export-led growth hypothesis The trade surpluses in East Asian economies increased dramatically in recent years (see Figure A1). But the East Asian economies have had export-led growth strategies since the 1960s. In fact, a sustainable export-led growth strategy is not based upon targeting an ever-expanding trade surplus. It is based on integration with international markets. That leads to an expansion of both exports and imports, generating higher quality jobs in the tradable sector. In East Asia this process has been successful in producing rapidly rising living standards and rapidly declining poverty rates over the last few decades. But the East Asian economies' trade accounts were roughly balanced before 2000. As a result, an export-led growth strategy cannot be the main cause for the emergence of large global imbalances in 2000 and thereafter. Self-insurance motivation for foreign currency reserve accumulation After the financial crisis in the late 1990s, emerging market economies in East Asia increased their current account surpluses substantially, and they experienced rising international reserves, as the hypothesis suggests.