Global Imbalances: A Primer

The global imbalances (current-account of BOP) refers to the large current account deficits of developed economies such as the United States and the large surpluses of developing economies such as China and oil rich economies of the Middle East and Russia. In other words, global imbalances are inevitably viewed as the surplus net savings of the developing economies financing the consumption/investment of deficit developed economies. Against the backdrop of the recent Global Financial Crisis (GFC), persistent large global imbalances were seen as one of the triggering factors for causing the crisis. The argument is that before the crisis, the flows of savings from emerging to developed economies eased financial constraints in deficit economies, thereby lowering global interest rates resulting in the credit boom and excessive risk taking. While the causes of the GFC are still open to debate, it may be prudent, nonetheless, to contain global imbalances even though it may have not directly triggered the crisis. In the current situation, there is still this urgent need to address these imbalances to prevent the world economy of being stuck in “midstream”, thus threatening the sustainability of the global recovery.