WASHINGTON, February 17—The idea of global rebalancing—which aims to reduce trade deficits and surpluses—receives a great deal of attention and is a main agenda item at this weekend’s G20 finance ministers meeting. In a new policy brief, however, Uri Dadush writes that this focus is misguided. Obsessing over global rebalancing stokes currency and protectionist tensions and diverts attention from what is really needed—reforms at home.
- Further global rebalancing is unlikely. Trade deficits and surpluses narrowed significantly during the Great Recession and with emerging markets in danger of overheating are unlikely to shrink further. The deficits and surpluses can be financed and eased over time and are largely the result of domestic forces. In many instances, further narrowing may not actually be desirable.
- Exchange rates can’t rebalance economies on their own. While exchange rates are the main instrument governments have to directly affect external imbalances, both logic and experience indicate that they cannot correct external imbalances without simultaneous changes in underlying domestic savings and investment patterns.
- Domestic reforms are most important. Countries should concentrate on fixing their domestic problems, for example, the large fiscal deficit in the United States and artificial impediments to growth in domestic consumption in China. Instead of focusing on trade deficits and surpluses, they should aim to expand domestic demand at the maximum sustainable rate.
"The rebalancing dispute rages on," writes Dadush. "The G20, beginning with the United States, may soon have to make a choice: deal decisively with the profound domestic vulnerabilities that the global financial crisis exposed, or put at risk the open, rules-based trading system that has underpinned postwar prosperity."
Uri Dadush is senior associate and director in Carnegie's International Economics Program. His work currently focuses on trends in the global economy, the global financial crisis, and the euro crisis. Dadush previously served as the World Bank’s director of international trade and director of economic policy. He has also served concurrently as the director of the Bank’s world economy group. Prior to joining the World Bank, he was president and CEO of the Economist Intelligence Unit and Business International.
The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, and draws out policy implications. The current focus of the Program is the global financial crisis and the policy issues raised. Among other research, the Program examines the ramifications of the rising weight of developing countries in the global economy.
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