Global Rebalancing Research Articles

The Inter-American Development Bank and the Global Financial Crisis: Promoting Productive Development

This paper reviews the response of the Inter-American Development Bank (IDB) to the 'global financial crisis', against the background of its analysis of regional development priorities prior to the crisis. Between 2003 and 2009 the Bank developed a focus on 'productive development': 'industrial' policies for open national economies in an integrated world economy, with an emphasis on productivity-enhancing social and labour-market reforms. Its response to the crisis reflected the fact that as far as Latin America and the Caribbean (LAC) was concerned, it was short-lived, and gave way to a phase of global rebalancing in which conditions for renewed growth were largely benign (with easy access to capital and strong demand for commodities), but at the same time variable in their impact, and fraught with risk. The period between 2008 and 2013 was as much one of opportunity as crisis; production and trade were as significant as finance, though there were financial risks that needed to be managed; and intra-regional variation was as important as 'global' impact. The Bank consistently stressed the need to be ready to restore and maintain the momentum of productive development once the world economy as a whole emerged from the crisis period. In 2013, as the crisis drew to a close, the Bank again highlighted long-running problems of low productivity and domestic savings, and identified the prevalence of informal labour and inefficient firms as the principal obstacles to sustained growth. It argued, therefore, that policy should focus on the reallocation of resources, the elimination of perverse incentives, and the promotion of productivity-enhancing structural reform.

Three Decades of Current Account Adjustments

This paper analyses evidence on macroeconomic adjustments to large changes in current account imbalances – both deficits and surpluses. It studies annual data on key macroeconomic variables for 26 advanced and emerging market economies (EMEs) between 1980 and 2012. We find that large reductions in deficits are associated with lower GDP growth and employment and vice versa. Large reductions in surpluses of EMEs are associated with higher GDP growth and employment than large increases in surpluses. A significant global rebalancing could be achieved if major economies implemented adjustments in line with their own recent experience.

China and global rebalancing: A two-country approach

Based on simulations of an original DGE model of the US and the Chinese economies under various monetary regimes, we show that an overhaul of China's social safety net is capable of reducing global imbalances whatever the exchange-rate regime, provided international capital flows are allowed to react to expected return differentials, which requires some relaxation of capital controls. Exchange-rate flexibility would accelerate the rebalancing, but not make it larger. A monetary reform would fail to rebalance the economy unless the government simultaneously acts to curb NFA accumulation through consumption-enhancing reform or reducing its objective in terms of reserve accumulation.

The Chinese Currency and Global Rebalancing: A Discussion

Perceived to be substantially undervalued, the Chinese currency, the yuan, has attracted much attention in recent years, especially since the recession of 2008–2009. To remedy the situation, a proposal put forward recently by C. Fred Bergsten is noteworthy, for its impressive boldness in calling for drastic US policy actions, and for the potentially far-reaching impacts on the global rebalancing and recovery it may bring about. The purpose of this article is twofold: to assess the underlying analytical validity of this proposal and to explore its implications for the US, China and the rebalancing and recovery of the world economy.

The Persistence of Current Account Balances and its Determinants: The Implications for Global Rebalancing

This paper examines the statistical nature of the persistency of current account balances and its determinants. With the assumption that stationary current account series ensures the long-run budget constraint while countries may experience 'local non-stationarity' in current account balances, the authors examine the dynamics of current account balances across a panel of 70 countries.

The Emergence of Chinese Multinational Companies (CMCs): Reality, Issues and Challenges

The theme of global rebalancing in economic power is now central to international economic analysis, and the issue of the presence and clout o f multinational companies from emerging markets has gained importance, in part because of h ighly publicised cases of acquisitions of (or attempts at acquiring) companies established in more mature markets, in part because of the uncertain role of sovereign funds in the global reshuffling of corporate ownership. The objective of this paper is to analyse the growing p henomenon of multi-nationalization of China’s companies. The paper makes a detailed analysis of 15 key Chine se Multinational Companies (noted CMCs), and looks at their performance (in absolute figures as well as in comparison with international peers), their strategies and the rela tionship with policy / political decisions. The analysis shows that such companies are already large by international standards, are growing very rapidly in size, are moving up in tech nology, and are profitable, notwithstanding a visible downtrend in this profitability over the recent years. They have in general clear internationalisation strategies, even though still at an early stage for most of them. Such internationalization strategies are closely linked to the country’s national or strategic objectives, notably for securing access to natural resources. The influence of political factors and the relation between corporates’ strategies and national objectives remain dominant factors for these CMCs’ development.

The G-20 mutual assessment process--a perspective from IMF staff

In the wake of the financial crisis, G-20 leaders launched a framework to mutually assess their policies to help strengthen the global economy. This article reflects on the experience so far with the Mutual Assessment Process (MAP). It looks at the coordination problem facing G-20 economies with respect to the need for global rebalancing of demand. While a classic ‘coordination failure’ has some appeal, a more compelling case for policy cooperation is based on the role of spillovers and interdependence. In this context, the G-20 MAP—as a coordination vehicle—has the potential to build shared understanding, enhance mutual trust, and galvanize action among members. Simulated gains from collective action are potentially sizeable. However, key conditions that engendered remarkable global cooperation at the height of the crisis are now more diffuse, posing challenges to what the MAP might achieve going forward and providing some initial lessons for international policy coordination.

Rebalancing and structural policies--an Indian perspective

The global economic crisis of 2008–9 followed by the euro area sovereign debt crisis of 2011–12 has revealed the need for global rebalancing. Economies with current account surpluses need to increase domestic demand, while deficit countries need to reduce their deficits by boosting exports through productivity gains. India falls within the deficit category, having suffered both current account and fiscal deficits that have persisted over recent years. A dearth of adequate structural reform underlies India’s macroeconomic imbalances. Analysis reveals that current account surplus economies tend to experience comparative advantage in their goods sector while deficit countries have comparative advantage in the services sector. The question posed is whether liberalizing the services sector would reap dynamic benefits by enhancing services exports and containing India’s deficit. Opening up the services sector could, however, have opposing effects. On the one hand, it would support greater export of services, thereby reducing the current account deficit. On the other, the probable rise in foreign participation would translate to an increase in imports. The paper argues that the former effect is likely to prevail since structural reform in the services sector has the potential to reduce inefficiencies created by trade and capital flow restrictions. Reform would improve resource allocation, increase investment opportunities and enhance economic growth. Further, while the initial phase of foreign entrants would imply increased imports, in the medium term, successful joint ventures are likely to spread out internationally with positive ramifications for exports. Solutions in India are to be found in liberalizing, among others, the financial—including banking and insurance—sector, as well as retail trade, though its achievement will not be easy.

China's 12th Five-Year Plan and global economic rebalancing

This article examines the likelihood of China's 12th Five-Year Plan, making a significant change in the economic balance between global savings and consumption in the aftermath of the recent financial crisis. It illustrates this by pointing to the high savings and investment rates, and low-consumption rates in Pacific Asia, especially in China. It goes on to consider whether the 12th Five-Year Plan is likely to change those tendencies significantly and move China towards greater domestic consumption as the main driver of domestic growth. The article concludes by considering the likely impact upon China's foreign trade balance, especially with the United States.

International trade, domestic market potential and income in developing Asia

We derive a Frankel–Romer instrument from a global trade matrix of 157 countries over the period 1990–2007, and deploy it to assess the relationship between international trade, domestic market potential and income for the case of developing Asia, compared to the world average. The findings from panel instrumental variable regression confirm international trade to have caused income to rise on average across all the trading nations, but particularly so for countries of developing Asia, where this effect appears to be strongest. By contrast, domestic trade potential as explained by country size is found to be less relevant a factor explaining the rise in income of developing Asia. In light of a likely softening of external demand for Asian exports, as global rebalancing will take hold, Asia's underexploited domestic market potential represents considerable scope for the region to step up its efforts to gradually reinforce the domestic and regional dimensions as an additional engine of growth.

Global rebalancing: Effects on trade and employment

A sustained reduction of global current-account imbalances must include a decline in the share of household consumption in aggregate demand in the United States and the opposite development in China. Accordingly, import demand would decline in the United States and increase in China. Given non-homothetic demand preferences, the resulting change in the income distribution of global import demand affects both the intensity and pattern of other countries’ exports. Simulations suggest that, for the world economy, the net effect of this shift would be a decline in industrial exports, especially from labor-intensive sectors producing consumer durables. A multilaterally coordinated rebalancing that would also include an increase in the share of household consumption in aggregate demand of developed country surplus economies would reduce these adverse effects on trade and employment. Apart from the countries undertaking rebalancing, developing countries in East and South-East Asia face the greatest adjustment pressure from global rebalancing.

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How to Sustain the Chinese Economic Miracle? The Risk of Unraveling the Global Rebalancing

This paper investigates China’s role in creating global imbalances, and the related call for a massive renminbi revaluation as a (supposed) panacea to forestall their reemergence as the world economy recovers from severe crisis. We reject the prominence widely attributed to China as a cause of global imbalances and the exclusive focus on the renminbi-dollar exchange rate as misguided. And we emphasize that China's response to the global crisis has been exemplary. Apart from acting as a growth leader in the global recovery by boosting domestic demand to offset the slump in exports, China has in the process successfully completed the first stage in rebalancing its economy, which is in stark contrast to other leading trading nations that have simply resumed previous policy patterns. The second stage in China’s rebalancing will consist of further strengthening private consumption. We argue that this will be best supported by continued reliance on renminbi stability and capital account management, so as to assure that macroeconomic policies can be framed in line with domestic development requirements.

Asia's contribution to global rebalancing

Developing Asia remains at the core of global payment imbalances. While the geographical concentration of current account imbalances is significant—with the People's Republic of China accounting for the lion's share of the region's current account surplus—how Asia contributes to global rebalancing also depends critically on the newly industrialising economies and larger Association of Southeast Asian Nations economies. Given the region's huge diversity, the necessary national macroeconomic and structural policies will vary significantly across Asia's emerging economies. Whereas near-term rebalancing efforts will be driven primarily by macroeconomic and exchange rate policies, structural reforms are essential for boosting domestic and regional demand as sources of economic growth over medium to long-term. We argue that regional rebalancing will depend critically on the adoption of deeper and more comprehensive structural reforms and further trade liberalisation to unlock the potential of strong domestic and regional spending—thus reducing Asia's high dependence on extra-regional demand. Priority policies should include infrastructure spending, competition, trade, financial development, investment, immigration, and other social policies to reduce national savings.

Regional capital mobility in China: 1978–2006

We examine cross-region capital mobility in China and track how the degree of mobility has changed over time. The effects of fiscal and redistributive activities of different levels of government in China on private capital mobility are taken into account. Our results indicate that there was a significant improvement in capital mobility over time in China, particularly for private capital in the more developed regions. The central and provincial governments, via their taxation, spending, and transfers, loosen the relationship between private saving and investment and appear to promote capital mobility, particularly for less developed regions. There are considerable differences between more and less developed regions in terms of the degree of capital market integration and the improvement in capital mobility over time. The results have important policy implications on global re-balancing as well as regional development gap and risk-sharing within China.

Global Rebalancing: The Macroeconomic Impact on the United Kingdom

This paper considers the implications for the United States, the United Kingdom and the rest of the world (ROW) of shocks that may contribute to a further reduction in global current account imbalances using a dynamic stochastic general equilibrium (DSGE) model. We consider a shock that increases domestic demand in the ROW; a shock that reduces domestic demand in the United States; and a supply shock that raises US productivity relative to other countries. The impact on UK output and inflation depends on the nature of the shock that drives global rebalancing. An increase in domestic demand in the ROW would raise UK exports and output, but would also contribute to increased inflationary pressure in the United Kingdom. Further weakness in US domestic demand is likely to weigh on UK output and inflation. Productivity gains in the United States relative to other countries would worsen the United Kingdom’s current account position, pushing down on output, but would lead to reduced inflationary pressure in the United Kingdom.

Statement by the Managing Director to the International Monetary and Financial Committee on the Global Economy and Financial Markets

The recovery is solidifying. However, old policy challenges still need to be fully addressed and new challenges are arising, especially on account of rising commodities prices. In many advanced economies the handoff from public to private demand is proceeding. But unemployment remains high and weak public balance sheets and still vulnerable financial sectors mean that the recovery is subject to downside risks. In many emerging market economies, overheating and financial imbalances present growing policy concerns. Monetary policy should stay accommodative in advanced economies, but needs further tightening in a number of emerging and developing economies to rein in inflationary pressure and rapid credit growth. Additionally, in emerging surplus economies, real exchange rate appreciation is needed to help contain inflation and support global demand rebalancing. In most economies, the time has come to begin fiscal adjustment by implementing measures to steadily reduce debt ratios toward more prudent levels. Moreover, financial sector repair and reform need to accelerate. Absent major progress on all these fronts, the recovery will remain vulnerable and job creation will continue to fall short of requirements in many parts of the world.

Current Accounts and Global Adjustment: The Long and Short of It

Global rebalancing is underway, but still quite a distance from being done. Current account imbalances have been a persistent feature of the global economy for over 100 years, especially during the two eras of globalization—the period 1870 to 1914 and the present. Such imbalances have reflected underlying imbalances between savings and investment as well as the prevailing international monetary regime.One important lesson from the past 150 years is that capital flows play an important role in funding global investment opportunities—a role that would be harmed if policy makers responded to the perceived threat of global imbalances by imposing any sort of cap. During those periods when capital flows have been relatively unhindered, investment opportunities around the world have been financed by capital flows. Such flows have financed the growth of many erstwhile “emerging market” economies, including the U.S. in the early part of this century. And global capital flows are doing much the same for many emerging markets today, even though purchases of reserves by some countries have been offsetting inbound private capital flows in the aggregate.The other main lesson of history is that imbalances do not last forever, and tend to lead to adjustments and reversals. Experience shows that such adjustments are much easier for surplus countries than for deficit countries.

The Changing Nature of Global Imbalances and Sovereign Risk

As economies worldwide struggle to recover from the recent financial crisis, emerging markets are positioned to be significant contributors to global rebalancing. The traditional economic anchors of the United States and the European Economic and Monetary Union, however, may be weakening. Without a globally coordinated policy response, only a global recession can realign current imbalances.

Global Rebalancing: Crisis and the East–South Turn

ABSTRACTThis article argues that the rise of emerging societies is a major turn in globalization and holds significant emancipatory potential. North–South relations have been dominant for 200 years and now an East–South turn is taking shape. The 2008 economic crisis is part of a global rebalancing process. Ongoing developments can be read in two ways: towards recalibrating the old order, or towards the emergence of new logics, which can be simplified as a tale of two scripts. One is global plutocracy with Anglo‐American capitalism and financial markets in the West back in the lead and emerging markets joining the club. An instrument for achieving this is the hegemonic ideology of ‘global rebalancing’. On the other end of the continuum is the script of emancipatory multipolarity, considering that countries representing the majority of the world population have joined the global head table. This essay discusses global rebalancing, global plutocracy and emancipatory multipolarity, before taking on the conceptual question of capitalism or capitalisms. Ultimately, the author concludes that developments are layered and that elements of both scripts are combining.