Rebalancing act: rationales and policies for sectoral economic rebalancing

Since the financial crisis of 2008, policy-makers in developed countries have shown a renewed interest in the sectoral composition of their national economies, in particular whether their manufacturing sector is too small or their financial sector too large. These concerns have been described as ‘imbalances’ and the remedy as ‘rebalancing’, and they have been widely covered in the media. But many economists are sceptical, arguing that the concept of sectoral balance is not meaningful, or that sectoral imbalance is nothing to worry about, or that, even if it is, policy-makers can do little about it. This paper explores the concept of sectoral rebalancing, considers the evidence for sectoral imbalance in the economies of rich countries, and examines the arguments why rebalancing might be a good thing. It finds that while arguments for interventions to restrict the risk and growth of the financial services sector have considerable evidence to support them, arguments that manufacturing output is especially desirable and should be promoted more than other sectors are less well evidenced. Finally, the paper considers recent policies that have been introduced to change the sectoral structures of economies, and sets out some principles for would-be rebalancers to follow. Copyright 2013, Oxford University Press.