1. Global Imbalances and the Bretton Woods II System

2. Global Imbalances
This is a term used to describe the state of the world economy during 2000 to the present.
The imbalance is between two different groups of economies:
High savers creating surpluses
High spenders with a need to borrow.

3. Global Savings Glut Glut= surplus, oversupply
This is a related term which gives the impression that there is excess savings in the world economy which cannot be made use of.
The logic of national income accounting tells us that this is not possible.

4. National Income Identity
In an open economy,
GDP = C+I+G+EX-IM
EX-IM = Current Account
Subtract taxes from both sides
GDP-T=C+I+G-T+EX-IM

5. Rearrange terms GDP-T-C-I+(T-G)=EX-IM Private savings S= GDP-T-C
(S-I)+(T-G)= EX-IM
The two components of the current account are
private sector savings-investment balance
public sector balance.

6. CA deficit or surplus
If a country runs a current account deficit, the sum (S-I) and (T-G) must be a net deficit
If a country runs a current account surplus, the sum (S-I) and (T-G) must be a net surplus

7. CA deficit or surplus
If a country runs a current account deficit, it is financed by a decrease in reserves and imports of savings from abroad
If a country runs a current account surplus, it is experiencing an increase in reserves and is exporting capital (savings)

8. Sum of Global CA balances
Since transactions recorded in one country’s CA have mirror images in those of other countries,
sum of global CA balances = 0.
This means then, on a global scale, sum of (S-I)+(T-G)= 0

9. Global imbalances
It is impossible to have a positive or a negative balance on the global sum of CA’s.
But, statistical discrepancy makes it possible to have nonzero balances.
Likewise, global savings and investment have to be equal, but are not.

10. World Savings and Investments % of GDP
Source: IMF WEO, October Table A16

11. Global Savings Glut What is meant by this term?
An increase in world saving rates
An increase in funds available for borrowing
An increased concentration of savings in certain parts of the global economy
Who are the savers? Who are the dissavers?

12. Advanced Nations (% GDP)
2003
2004
2005
2006
2007
2008 S
19.3
20.0
20.2
20.9
20.7
19.5 I
20.6
21.1
21.6
21.5
21.0
Net Lending
-0.7
-0.6
-0.9
-1.5

13. Advanced economies
The aggregation over advanced countries masks differences.
US and UK are borrowers.
Japan and Germany are savers.
US net lending (S-I) increases over time.
Negative net lending is CA deficit.

14. Saving, investment ,net lending US, (%GDP)
saving
16.3
17.0
investment
18.8
19.6
Net lending
-2.6

15. Saving, investment ,net lending US, (%GDP)
2002
2003
2004
2005
2006
2007
2008 S
14.2
13.9
14.5
15.1
16.2
12.6 I
18.4
18.7
19.7
20.2
20.3
19.5
18.2 NL
-4.2
-4.8
-5.2
-5.1
-5.0
-5.6

16. Saving, investment ,net lending Germany, (%GDP)
2002
2003
2004
2005
2006
2007 S
19.3
19.4
21.8
22.1
23.7
25.9 I
17.3
17.4
17.1
16.9
17.6
18.3 NL
2.0
4.7
5.2
6.1
7.6

17. Saving, investment ,net lending UK, (%GDP)
2002
2003
2004
2005
2006
2007 S
15.3
15.1
15.0
14.7
14.2
14.6 I
17.1
16.7
17.3
17.6
18.4 NL
-1.7
-1.6
-2.1
-2.6
-3.4
-3.8

18. Saving, investment ,net lending Japan, (%GDP)
2002
2003
2004
2005
2006
2007 S
25.9
26.1
26.8
27.2
27.8
28.6 I
23.1
22.8
23.0
23.6
24.0
23.8 NL
2.9
3.2
3.7
3.6
3.9
4.7

19. CA Balance as % of global GDP

20. Current Account Balance ($bil)

21. Current Account Balance 2001-2008 ($bil)

23. CA balance (% of GDP)

24. CA Balance as % of GDP 1.3 2.4 2.8 3.6 7.2 9.4 11.0 9.8 Dev Asia 1.6
2001
2002
2003
2004
2005
2006
2007
2008
China
1.3
2.4
2.8
3.6
7.2
9.4
11.0
9.8
Dev Asia
1.6
2.5
2.7
4.2
6.1
7.0
5.9
Mid East
6.3
4.4
7.9
11.6
19.3
20.9
18.1
18.3

25. Direction of global capital flows
US is the major borrower in the global economy along with some other developed nations.
The source of savings:
China and developing Asia
Some developed economies
Oil producing economies
Capital flows uphill.

26. Stages of financial globalization
The first phase of financial globalization took place in the 19th century
Second phase of financial globalization started in the 1980’s and lasted until (Asia crisis)
Third phase of financial globalization took place in the 2000’s.

27. Second phase of financial globalization
Emerging markets can benefit from the pool of global savings by removing restrictions on capital account transactions.
They did import capital that is needed for development but this movement proved to be volatile and ended in financial crises.

28. Third phase of financial globalization
In order to avoid the painful experience of the Asian and othe emerging market crises, these countries started building up reserves.
These countries ran a current account
Deficit equal to 1.7% of GDP in
Surplus equal to 2.5% of GDP in

29. Chimerica
The third stage of financial globalization led to a financial symbiosis between US and China
“How China helped create the macroeconomic backdrop for financial crisis” By Moritz Schularick, Financial Times, February 24, 2009

30. Exchange rate protectionism
Keep the domestic currency undervalued so that there is increased demand (expenditure switching) for tradable goods and services.
So, production of tradable sectors is enhanced.

31. Intervention in the foreign exchange market
S $,
Chinese exports
RMB/$
intervention
Excess S of $ reserve accumulation
D $,
after intervention
D $,
Chinese exports

32. If there is no intervention in the foreign exchange market
RMB/$
Exchange rate with intervention
Exchange rate
without intervention
D $,
after intervention
D $,

33. Without the intervention
Domestic currency would be more valuable
You do not have reserve accumulation
Current account surpluses would have shrunk
Governments would have to pursue more expansionary policies

34. Intervention by emerging market governments will cause
Current account surpluses
Encourage private capital inflows because the exchange rate is predictable
Both will lead to reserve accumulation.
There will be a pressure on the domestic currency to appreciate.

35. To sustain this situation
Fiscal policy must maintain that Y is greater than spending (ie, contractionary)
Monetary policy must ‘sterilize’ the buildup of reserves.
Reserves are held by the government.
Otherwise monetary expansion created by reserves overheats the economy.

36. Result
Although emerging market countries received capital inflows, they accumulated more reserves by not investing as much.
The reserves ended up being recycled back to the developed world.
Chimerica is the most vivid example of this.

37. Two sides complement each other
The US gives CA balances against the exporting emerging nations
The US CA deficit is financed by the capital inflows of exporting nations (vendor financing)
The source of capital imports is reserve accumulation and hence savings not utilized at home.

38. For the holders of reserves
Investing in US liabilities (dollar denominated assets)is desirable because:
The dollar is the most important vehicle currency
There are investment opportunities (dynamic economy) and property rights are secure
There is no risk of the dollar crashing

39. Joint BP of emerging and developing economies in 2006
CA Surplus: $660 billion
Net FDI inflows: $254 billion
‘Other private capital flows’: close to zero
Increase in foreign currency reserves 2001 and 2006: $2.22 trillion
2001 and 2008: $4.11 trillion

42. Reserves (Billion $)by IMF
2000
2008
Emerging and developing
801.1
4962.5
Africa
54.3
332.0
CIS
33.2
504.0
Developing Asia
320.7
2537.7

43. Reserves (Billion $) 2000 2008 China 320.7 1950.3 India 38.4 248.0
Middle East
146.1
825.9
Western hemisphere
155.7
497.5