Imbalances in trade between countries are, of course, as old
as trade itself. In the normal course, they tend to get
corrected gradually. This phenomenon has however changed
considerably in the recent past. Particularly, post the breakdown of
the Bretton Woods system in the early 1970s, followed by the
globalization, as capital—not backed by trade in
merchandise—started flowing around the world financial markets, the
global imbalances widened to near unprecedented
levels, causing greater consternation to both the surplus and deficit nations.
And in the aftermath of the global economic crisis of
2009, as demand in the world's major economies fell by around
$2.5 tn, high liquidity and continued economic weakness in
rich countries led to a surge in capital flows into emerging
markets that are strong in macroeconomic fundamentals and
are open to free flow of capital seeking better returns.
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