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In Praise of Global Imbalances

As China shifts from being the world’s workshop to its main financier, only the US has the capacity to absorb China's savings. The resulting imbalances should be welcomed as a spur to global growth – just as they have been in the past.

SINGAPORE – In recent weeks, there has been a chorus of opinion arguing for a sharp increase in global investment, particularly in infrastructure. Former US Treasury Secretary Lawrence Summers asserted that public investment really is a free lunch, while IMF Managing Director Christine Lagarde has argued that an investment boost is needed if the world economy is to “overcome a new mediocre.”

These comments suggest that the world has been under-investing for many years. In fact, according to International Monetary Fund data, the current overall global investment rate, at 24.5% of world GDP, is near the top of its long-term range. The issue is not a lack of overall investment, but the fact that a disproportionate share of it comes from China.

China’s share of world investment has soared from 4.3% in 1995 to an estimated 25.8% this year. By contrast, the United States’ share, which peaked at 36% in 1985, has fallen to less than 18%. The decline in Japan’s share has been more dramatic, from a peak of 22% in 1993 to just 5.7% in 2013.

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