Global Imbalances

Global Imbalances:

Gradually, over many years, first Germany and Japan, and then China, developed large balance of payments surpluses. These had their roots in two factors – high levels of saving and at times, very low exchange rates, in the countries concerned. In 2007, their current account surpluses were respectively $253bn, $211bn and $372bn.

For many years these surpluses were used to fund large loans to the deficit countries, the largest of which are the UK and the USA, both of which imported large quantities of the surplus countries’ exports. Thus serious imbalances developed. So long as all countries were experiencing robust economic growth it was possible for their governments to ignore the potential problems. By 2009, however, it was clear that these imbalances had had a major role in the development of the financial crisis.

The deficit countries need to cut spending so that they live within their incomes.

However, this means much reduced demand for the surplus countries’ products and the necessary adjustment could be very painful. The Chinese government recognises that it would be wise to encourage the Chinese people to consume more of their own products, but if they experience serious job cuts due to lack of demand, they may not be able to afford to. China is still a relatively poor country. At the time of writing the UK exchange rate is low and this may help UK exporters, which will reduce the external deficit.

This is a very complex story but A-level students should be aware of the problem of global imbalances and the fact that long-term changes will be needed to prevent them from leading to further instability. (See also current account imbalances and balance of payments.)

02/12/2020

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