Before the global financial crisis
exploded a year ago, global imbalances were a major issue that bothered investors how it would
be resolved. But once the worst economic and financial crisis since the
1930s broke out, such concerns took a back seat. Though the global recovery
appears to have taken faster root, growing concerns over the US dollar may
give rise to new patterns of global economic imbalances which in turn would
haunt financial markets. IMF warns these imbalances as a paramount risk for
the global economy.
Financial collapse of the past two years led to smaller trade
surpluses for the big exporting nations and smaller deficits for the importing
nations. Consequently, imbalances have been getting worse in recent
months. These include excessive American consumption, too much trade
flowing from Asia to the West, too little from the US to Asia and too much
saving combined with insufficient spending by Chinese consumers. The US
is struggling with record current account deficit which measures the balance
of investment and saving, Spain, Greece, Ireland and Portugal have even
larger deficit to GDP ratios, and China is registering too large a
surplus. China's current and projected external surpluses remain huge.
Along with academicians, a growing number of policy-makers believe that
imbalances lay at the root of the financial crisis. Against such a backdrop, an
international consensus has emerged—"the global economy needs to be
rebalanced." If policy-makers don't correct them, economists warn that the
next major crisis is in the offing.
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