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Global imbalances have been a central theme of the international economic policy debate for much of the last decade, prompted by large and sustained current account deficits in the United States and counterpart surpluses in China, Germany, and many of the oil-producing economies.
In the United States, low saving rates and growing household consumption—fueled in part by what later turned out to be a bubble in the property market—sucked in imports from abroad, causing the trade and current account deficits to balloon.
Among the oil producers, strong demand and rising prices resulted in growing trade surpluses and rising net foreign asset positions. Finally, beginning inthe trade surplus in China took an unprecedented turn upward, which, in turn, created significant pressure for the renminbi to strengthen.
The principal concern among commentators was that, at some point, the global system would be unwilling to continue to finance the growing imbalances in the United States particularly in financing the U.
This disorderly unwinding was predicted to be painful, creating macroeconomic and financial instability and a collapse of global growth. The global economy did fall into a crisis—the worst tailspin since the Great Depression—but in a manner that was far from what was predicted by Bretton Woods II proponents see Delong, ; and Dooley, Folkerts-Landau, and Garber, Catastrophic failures of risk management and financial regulation were exposed—spilling out from the U.
Roubini Global Economics is now Continuum Economics. You will now be redirected to the Continuum Economics website. If you are not redirected, click here. Roubini Global Economics is now Continuum Economics. 0. You will now be redirected to the Continuum Economics website. (for a discussion see Roubini and Setser, ). Sooner or later the US external imbalances will prompt for either a devaluation of the USD, or for an increase in US public saving, or for an increase in US interest rate, or for a combination of these outcomes. propagated by the hope that external financing would alleviate the scarcity of saving in developing US to provide financial intermediation relative to that of emerging markets, and the viability of 4 See Roubini (), Setser (), Edwards (, , ), Chinn and Ito ().
All of this occurred with relatively modest movements in the real Roubini setser us external imbalances rates of both the deficit and the surplus economies Figure 1. As a by-product of the Great Recession, current account surpluses and deficits across the globe contracted.
And then there was China.
The surplus leveled off in as the global economy recovered, but then in the current account surplus was cut almost in half once again Figure 1. It aims to assess what has driven the external imbalance to shrink and provides a revised outlook for the current account in the medium term.
At a more disaggregated level, the trade surplus or deficit for various product components was also very small, although the trade surplus for textiles grew steadily during the period.
However, what happened next was an extraordinary set of global circumstances that combined to set off the worst global financial crisis in the post—World War II period.
This compression in the external surplus was largely a result of a falling trade balance which went from 9 percent of GDP in to 3. Certainly the drop in the trade balance has a cyclical component.
After all, growth and demand in the global economy were damaged by the global financial crisis, and balance sheet repair and ongoing deleveraging were expected to weigh on growth well into the medium term. At the same time, the significantly higher demand for imported minerals Figure 1.
Nevertheless, more lasting forces have also been at work, affecting the trade surplus in both directions. However, the relocation of global manufacturing capacity to China financed by significant foreign direct investment [FDI] inflows continues and capacity is being built in new industries as China moves rapidly up the quality ladder.
What is Driving the Declining Surplus? The Collapse in Global Demand Sincethe global environment that China faces has changed radically.
As a result, inthe level of GDP in the advanced economies took a large step down. In addition, future growth is likely to struggle as balance sheet excesses are worked through.
Part of this is cyclical; eventually the output gap in advanced economies is expected to close. However, the advanced economies are expected to endure lower potential growth in the medium term. Indeed, the contribution of these items to export growth has declined to about 5 percent in the postcrisis period.
While maintaining its foothold in traditional areas, China has also started to make a concerted push into industries typically dominated by more advanced economies.
Prominent examples of these new growth areas include wind turbines, solar panels, automobiles, and semiconductor devices. Thus, China has increased its global market share in exports of wind energy equipment to about 6 percent as of September from almost zero five years earlier.
A Step Increase in Investment Inas the global financial system melted down, China responded early and resolutely with a large stimulus package that was designed to prop up domestic demand and offset the large shock emanating from the coming collapse in external demand.
This stimulus created the conditions for a dramatic step-up in investment, to 47 percent of GDP from 42 percent Figure 1.
Much of that investment was concentrated in transportation, utilities, and housing construction.The US as a Net Debtor: The Sustainability of the US External Imbalances Nouriel Roubini Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford First Draft: August This revised draft: November 1.
The concept of “financialization” has informed recent analyses of the contemporary dynamics of monopoly capitalism. Roubini Global Economics is now Continuum Economics. You will now be redirected to the Continuum Economics website.
If you are not redirected, click here. Roubini Global Economics is now Continuum Economics. 0. You will now be redirected to the Continuum Economics website.
The Sustainability of the US External Imbalances Nouriel Roubini Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford the current account1 and a rapid increase in the United States’ net external indebtedness.
Sep 20, · In this conversation. Verified account Protected Tweets @; Suggested users. The Financial Crisis Through the Lens of Global Imbalances Peter Dorman [email protected] August,