Global Imbalances: Avoiding a Tragedy of the Commons

IMF Blog, July 28, 2017

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Global Imbalances: Avoiding a Tragedy of the Commons

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Bibliographic details

• Authors: Gustavo Adler, Luis Cubeddu
• Published: July 28, 2017

Overview

• Authors: Gustavo Adler, Luis Cubeddu
• Date: July 28, 2017
• The IMF released assessments of external positions for the 29 largest economies.
• Excess current account imbalances in 2016 were broadly unchanged and "represented about one-third of total actual surpluses and deficits, with only small shifts in 2016."
• Since 2013 there has been a rotation of excess imbalances toward advanced economies.

Key findings

• Excess imbalances:
  • Were broadly unchanged in 2016.
  • Represented about one-third of total actual surpluses and deficits.
  • Have rotated since 2013 toward advanced economies, creating new risks and policy challenges.
• Emerging market developments:
  • Excess imbalances narrowed in key emerging market economies.
  • Narrowing was led by a smaller excess surplus in China and smaller excess deficits in Brazil, Indonesia, South Africa, and Turkey.
  • Adjustment in these emerging markets was supported as prospects of U.S. monetary policy normalization became more evident and external financing conditions tightened.
• Advanced economy developments:
  • Excess imbalances widened in several advanced economies.
  • Large and persistent excess surpluses continued in Germany, Korea, the Netherlands, Singapore, and Sweden.
  • Historical analysis indicates these large and persistent surpluses (outside oil-exporting countries and financial centers) are a fairly recent phenomenon; when reversals occurred, policy actions on multiple fronts played a role.
• Risks from current constellation:
  • Weak automatic adjustment mechanisms: prices and saving and investment decisions are not adjusting fast enough.
  • Rigid currency arrangements and structural features (for example, inadequate social safety nets and barriers to investment) contribute to undesirable saving and investment levels.
  • Concentration of excess deficits in a few advanced economies (mainly the United States and United Kingdom) could:
  • Reduce deficit-financing risks in the near term.
  • Raise the likelihood of protectionist measures.
  • Risk derailing the global recovery if continued reliance on debtor-country demand persists, increasing the chances of a disruptive adjustment later.

Policy implications and recommendations

• Shared responsibility: Addressing external imbalances in a way that supports global growth requires recalibration of the policy mix in both deficit and surplus economies.
• For excess deficit countries:
  • Move forward with fiscal consolidation.
  • Gradually normalize monetary policy in tandem with inflation developments.
  • Implement policies directed at improving external competitiveness and overall saving.
  • Emphasize reforms that boost education outcomes and strengthen the business climate.
• For excess surplus countries:
  • If there is fiscal space, reduce reliance on easy monetary policy and allow for greater fiscal stimulus.
  • Focus structural policies on lifting distortions that constrain domestic demand or limit trade competition and investment.
• For countries where monetary policy is constrained (for example, individual euro area members):
  • Use fiscal and structural policies to facilitate relative price adjustments.
• Exchange rate policy:
  • Allow exchange rates to move in line with fundamental levels.
  • Limit interventions to addressing disorderly market conditions (consistent with recent practice for most countries).
• Structural policy emphasis:
  • Excess surplus countries: lift distortions that constrain domestic demand or limit trade competition.
  • Excess deficit countries: improve external competitiveness and overall saving, with emphasis on education and the business climate.
• Protectionism:
  • Protectionist policies should be avoided because they are unlikely to meaningfully address external imbalances and would be detrimental to domestic and global growth.

Purpose and mandate

• Assessing countries’ external positions is a core IMF mandate.
• These assessments are an analytical tool to determine, on a multilaterally-consistent basis, when external imbalances are appropriate or signal risks.
• Imbalances can be appropriate: developing economies that need to invest should generally run deficits; aging countries (for example, Japan and Germany) may need to run surpluses to meet future obligations.
• The focus of the exercise is identifying the undesirable portion of imbalances and discussing policies to address them.
• Goal: avoid a tragedy of the commons in which countries acting independently in their own self-interest undermine the common good of supporting global growth and stability.

IMF Blog — "Global Imbalances: Avoiding a Tragedy of the Commons", Gustavo Adler and Luis Cubeddu, July 28, 2017.

References

• https://www.imf.org/wp-content/uploads/2017/07/BLOG-1024x600-GERMANY-ESR-cranes-over-trailors-Caro-Oberhaeuser-Newscom-carophotos138589.jpg
• External Sector Report
• https://www.imf.org/wp-content/uploads/2017/07/ENG_Jul_27_ESR_1-4-002.jpg
• https://www.imf.org/wp-content/uploads/2017/07/ENG_Jul_27_ESR_2-6-002.jpg
• assessments are an analytical tool