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Tackling global imbalances

Prime Minister Manmohan Singh's recent exhortation to the Asian Development Bank and other multilateral institutions to devise appropriate strategies for the world economy to cope with increased unpredictability and volatility is timely. The issues raised pertain to what are broadly called global imbalances and have occupied centre stage in the monetary and other economic policies of developing and developed countries alike for quite some time now. Global imbalances refer to a well-entrenched asymmetry between global savings and investment, with the phenomenon of excess savings in some countries feeding the deficits of others. The U.S. runs a current account of deficit of $805 billion, around 6.4 per cent of its GDP. In contrast, Japan has a surplus of nearly $164 billion and China $158.billion. The record rise in oil prices and — the dim prospects of their coming down soon — have certainly exacerbated the problem. One of the largest transfers of resources in recent history is taking place from the petroleum-consuming nations to the oil producers. Gulf countries have collectively accumulated a surplus of $196 billion in their current accounts. The oil producers have thus emerged as a significant source for financing the U.S. deficit. Many attribute the mismatch between savings and investment to the forces of globalisation. Integration of financial markets across the globe, focussed attempts to spur economic growth through exports — such as in China, Japan, and South Korea — and the propensity of some countries to import more have been some of the causes.

Just as the reasons for the imbalances are many and varied, the remedial measures too are complex and obviously involve coordinated action by many countries which is difficult to bring about. It has not been easy to speed up the Doha round of trade talks despite all countries accepting the multilateral framework as set out by the WTO. There is no unanimity among individual countries on what needs to be done. Yet the consequences of not doing anything are certain to be serious. Piecemeal measures such as the attempts by the U.S. to persuade China and Japan to revalue their currencies and hence make their exports costlier at best address the symptom. India, which until last year had a surplus but now has a growing deficit in the current account, cannot escape the consequences of an abrupt winding down of imbalances. Extreme volatility in currency and interest rate movements, a sharp increase in the domestic nominal interest rates, shrinking export opportunities, and some slackening of the fast growing IT-based sectors are on the cards. One positive factor however is that India might be much better prepared than many other emerging market economies. The spectacular fall of 462 points in the Sensex on Monday has followed major declines in Asian stock markets and is said to be among the first signs of global imbalances asserting themselves.

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