Global imbalances and developing countries

The main distinguishing features of present-day global imbalances go beyond their sheer amount and generalisation. First, the world economy is characterised by an increased and dynamic presence of many developing countries that simultaneously have turned from deficit into surplus economies. Second, imbalances happen in a context of variable exchange rates and under an accelerated process of financial globalisation. Third, the international reserve currency is basically the currency of just one advanced country in the world. Both the variability of exchange rates –in principle freeing countries of the need to defend their parities–and the easy availability of private foreign finance –liberating them from the limits imposed either by the amount of foreign exchange reserves or the conditional access to IMF resources– go to a great extent to explain the increase and generalisation of current account deficits. But, additionally, the capacity of the United States to run deficits financed by the fact of their issuing the international reserve currency, has decisively contributed to the explosion in the magnitude of the imbalances. Of course, the ability to finance deficits by resorting to foreign inflows is dominated by its variability and by the accumulation of debt frequently ending up in severe crises. Thus, financial stability is endangered. On the surpluses side, quite a few major advanced countries persist in generating them instead of promoting fast rates of growth and improving the lot of their own citizens. Thus, the old-time deflationary bias that places limits on deficit countries while leaving the major surplus countries to unfettered run restrictive policies playing beggar-thy-neighbour on the rest of the world still rules the present-day non-system. Surely, many fast growing developing countries, having on the contrary become the dynamic force in the world economy, play a completely different role based on their having overcome the restrictions that deficits used to place on their performance. Redressing global imbalances to avoid financial instability, therefore, would, at the international level, require regulating “speculative” private international capital flows, on the one hand, and devising a new international monetary system that would run on the basis of a multilateral reserve currency. Additionally, a less restrictive mechanism than the conditionality-run IMF should be established for clearing temporary imbalances with similar obligations for surplus and deficit countries, although growth rates and the stage of development would have to be taken into account. Redressing global imbalances, however, should not be made at the expense of growth in the world economy that as mentioned before has come to increasingly depend on the developing countries’ economies. Room, therefore, would have to be built for the surpluses of the developing countries following successful export-led strategies to be accommodated within such a system. This way, developing countries will keep being able to pursue expansionary policies, reduce inequality and continue to represent a dynamic force in global terms.