Global Imbalances and Domestic Inequality

WASHINGTON, DC – Despite years of official talk about addressing global current-account imbalances, they remained one of the world’s main economic concerns in 2011. Global imbalances were, to be sure, smaller overall than before the crisis, but they did not disappear. Now some are increasing again, alongside inequality in many countries. That link is no accident.

One often hears calls for global rebalancing whereby emerging-market countries with payments surpluses – China is the most-often mentioned – would stimulate internal demand, so that advanced countries (the largest being the United States) could reduce their deficits and public debts with less threat to their economies’ recovery. The net foreign demand created by a reduction in balance-of-payments surpluses abroad would partly offset the weakening of public demand in the US and other high-debt countries as they tightened fiscal policy.

The story should not, however, be just about current-account deficits in advanced countries and surpluses in the emerging countries. Many emerging-market countries – including India, South Africa, Brazil, and Turkey – actually run current-account deficits. There are also many advanced countries that run a current-account surplus: Germany’s has been well publicized since the eurozone crisis started, but Japan, the Netherlands, Norway, and Sweden run surpluses as well.

So, while global rebalancing does require a reduction of surpluses, the issue is not simply one of shrinking emerging-market surpluses in order to allow a corresponding decline in the deficits of the advanced countries. As we enter 2012, a reduction in Germany’s surplus may be more urgent than a reduction in China’s, since reducing Germany’s surplus will yield more immediate benefits for Europe, where the greatest risks to global recovery lie.