Balancing the Global Economy

Sources:
The Financial Times: China scorns focus on imbalances; A lopsided world tilts upward, slowly
Reuters: China, U.S. key to global imbalances: Meirelles

Resolving global economic imbalances is likely to be another important issue along with financial regulations at the upcoming G-20 summit in Pittsburgh. The U.S. and European leaders will try to reach an agreement on a policy framework for addressing global imbalances at the summit to ensure that imbalances do not re-emerge as the global economy recovers from the crisis. The leaders will also try to ensure that future global economic growth no longer depends on “bubble-fuelled spending” in the United States.

In response, Chinese officials say that the summit should focus on repairing financial regulations rather than global imbalances. They believe that the root cause of the financial crisis is “the lack of supervision and abuse of openness of the market, very risky levels of leverage and too much speculation,” and China is not to blame for the financial crisis. In addition, China may also argue that it has already launched an effort to rebalance its economy. Its fiscal stimulus program contributed to increasing demand for commodities and its current account surplus is expected to fall this year.

According to the Financial Times, both sides represent valid perspectives. The global savings glut contributed to overly expanding credit and bad regulations failed to recognize the true risk of higher returns. Rather than engaging in such an unproductive blaming game, global leaders should focus on fixing both problems. In balancing the global economy, however, China’s role is limited and other developed surplus countries must act as well. The size of the Chinese economy is not large enough to solve the huge deficits in the developed countries, but its economic growth could boost domestic consumption. In this regard, Europe and Japan must exert the same effort to enhance domestic consumption and avoid turning back to surplus as the economy recovers.

Discussion Questions:
1. What kinds of policy measures or framework could be effective in reducing global imbalances? Could G20 leaders reach a meaningful agreement on those measures at the Pittsburgh summit?
2. What kinds of actions could China take in order to balance its economy rather than boosting domestic consumption with a stimulus program?