When Global Imbalances Unwind: Challenges for the Asian Region

The current configuration of global imbalances, the financing that they entail, and the possible economic fallout that may occur as they unwind have become hot topics of discussion lately and understandably so since the scale and number of countries involved are unprecedented. The aim of this paper is to highlight the challenges faced by the Asian region in dealing with the repercussions of unwinding global imbalances, especially in light of extensive intra-regional production-trade linkages and their dependence on US demand, as well as motivate the need for serious policy dialogue before an abrupt adjustment takes place so that policy coordination needed in dealing with the fallout can be achieved more quickly and effectively. It does so by emphasizing the inherent fragility of the current setup and, in particular, the dependence of the status quo on a particular pattern of private capital flows rather than official flows. It argues that the real role played by the latter is to help coordinate private sector expectations on a future path of the US dollar that ensures continued financing of the US current account deficit and manageable level of capital inflow into East Asia. Given the underpinnings of the situation, it becomes progressively more difficult for the official sector to serve this role effectively as time goes by and the urgency for policy initiatives to deal with the potential fallout from unwinding global imbalances becomes more pressing.