## Addressing Global Imbalances Requires Cooperation

_IMF Blog, July 24, 2018_

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## Bibliographic details
- Authors: Maurice Obstfeld
- Published: July 24, 2018

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### Overview
- Excess imbalances remain generally unchanged and are increasingly concentrated in advanced economies.
- Their persistence is fueling trade tensions among countries.
- The configuration of imbalances does not pose an imminent danger, but if unaddressed, it could threaten global stability down the road.
- The assessments reported are from the 2018 External Sector Report (ESR) covering the 30 largest economies and evaluate when current account surpluses and deficits are appropriate or signal risks.

### Key findings on excessive imbalances
- After narrowing in the aftermath of the global financial crisis, global current account surpluses and deficits have remained relatively unchanged over the past five years at about 3¼ percent of global GDP.
- The analysis indicates that about 40 to 50 percent of these global balances are excessive, and increasingly concentrated in advanced economies.
- Geographic concentration:
  - Higher-than-desirable current account balances prevail in northern Europe — in countries such as Germany, the Netherlands, and Sweden — as well as in parts of Asia — in economies like China, Korea, and Singapore.
  - Lower-than-desirable balances remain largely concentrated in the United States and the United Kingdom.
- Excessive external imbalances (both deficits and surpluses) pose risks for individual countries and for the global economy:
  - Deficit risks: economies that borrow too much may become vulnerable to sudden stops in capital flows.
  - Surplus risks: countries with excessive surpluses may invest savings abroad when domestic investments could offer higher social returns and may become targets for protectionist measures.
- The ESR focuses on each country’s overall current account balance rather than bilateral trade balances.

### Risks down the road
- Under planned policies, imbalances are projected to grow over the medium term and could eventually pose a risk to global stability.
- Specific projected dynamics:
  - The planned fiscal expansion in the United States will likely increase the country’s current account deficit — with mirror-image larger surpluses in the rest of the world — and result in a faster pace of US monetary policy normalization.
  - The ensuing tightening of global financial conditions could prove disruptive to emerging and developing economies, especially the more vulnerable ones who have already been subject to some pressure.
- Continued patterns and consequences:
  - Limited actions by surplus countries suggest their surpluses will linger.
  - Net foreign asset stock positions will continue diverging, increasing the likelihood of disruptive currency and asset price adjustments down the road in indebted countries.
  - Such developments would diminish global growth, also harming the surplus economies.
- Adjustment dynamics:
  - Because of the risk that foreign lending dries up, deficit countries face greater pressure to balance their international accounts than surplus countries do.
  - When adjustment comes, both debtor and creditor countries lose, as illustrated by the adjustment in the aftermath of the global financial crisis.

### How to tackle imbalances — Policy recommendations
- In the current conjuncture (many countries near full employment and limited fiscal room), governments should carefully calibrate policies to achieve domestic and external objectives while rebuilding monetary and fiscal policy buffers.
- Policy guidance by country type:
  - Countries with lower-than-warranted external current account balances should:
    - Reduce fiscal deficits.
    - Encourage household saving.
    - Allow monetary normalization to proceed gradually.
  - Countries with higher-than-warranted current account balances should:
    - Use fiscal space, if available, to reduce excess surpluses.
  - Well-tailored structural policies should play a more prominent role in tackling external imbalances while boosting domestic potential growth:
    - For excess surplus countries: reforms that encourage investment and discourage excessive saving — for example, removal of entry barriers or stronger social safety nets.
    - For excess deficit countries: reforms that improve productivity and workers’ skill base.
- Trade and multilateral cooperation:
  - All countries should work toward reviving trade liberalization efforts while modernizing the multilateral trading system — for example, to promote trade in services.
  - Such efforts may have small effects on excess current account imbalances, but can have big positive effects on productivity and welfare and reduce the risk that imbalances trigger protectionist responses.
- Emphasis on cooperation:
  - Both surplus and deficit countries must work together to reduce excess global imbalances in a manner supportive of global growth and stability.

*Maurice Obstfeld — July 24, 2018*

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## References

- [2018 External Sector Report (ESR)](http://www.imf.org/en/Publications/ESR/Issues/2018/07/19/2018-external-sector-report)
- [https://www.imf.org/wp-content/uploads/2018/07/eng-july-17-esr1-1.png](https://www.imf.org/wp-content/uploads/2018/07/eng-july-17-esr1-1.png)
- [https://www.imf.org/wp-content/uploads/2018/07/eng-july-17-esr2-1.png](https://www.imf.org/wp-content/uploads/2018/07/eng-july-17-esr2-1.png)
- [https://www.imf.org/wp-content/uploads/2018/07/eng-july-17-esr3.png](https://www.imf.org/wp-content/uploads/2018/07/eng-july-17-esr3.png)

_Source: https://www.imf.org/en/blogs/articles/2018/07/24/blog-addressing-global-imbalances-requires-cooperation_