Global imbalances,crisis and the lack of global governance

Gross domestic product

Vast disparities in per capital income levels continue to exist around the world. The catching-up process of the developing world, which has broadened since 2003, received a boost since the global crisis as key developed countries have struggled to recover from it. These post-crisis developments are not fully benign, since the hesitant and fragile recovery in developed countries risks holding back or even undermining income growth in developing countries. The fast shifting balance in the world economy is reflected in the decline in the share of developed countries in global gross domestic product (GDP).

Employment and unemployment

Widespread unemployment and underemployment in the global economy continues to present the most pressing social and economic problem of our time. The situation was made worse by the global crisis. While many developing countries merely suffered a temporary deterioration, the lasting labour market impact in major developed countries poses fresh challenges and risks to the continuation of positive runs in job creation and poverty reduction in the developing world. Ill-guided policies directed at the labour-market legacies of the crisis in developed countries risk global spillovers that could destabilize developing countries.

Current and account Imbalances 

Large current account balances have been at the centre of long-standing international economic policy debates regarding global imbalances. The United States has run persistent current account deficits since the early 1990s, with net private capital inflows as well as official inflows (i.e. international reserve accumulation by other countries) as the counterpart. A small and only partly evolving group of developed and developing countries features prominently on the surplus side of global imbalances. Current account imbalances may arise for a number of reasons and are not indicative per se of a systemic problem that needs coordinated intervention. Rather, it is the loss of competitiveness at the national level that causes an unsustainable current account deficit.

Misaligned exchange rate

Countries’ competitiveness positions are primarily shaped by trends in unit-labour costs and exchange rates. Since the end of the multilateral Bretton Woods exchange rate system, non-orderly floating of currencies has prevailed, featuring large exchange rate swings and persistent misalignments. Current account imbalances caused by unbalanced competitiveness positions matter both at the regional and global levels. Unbalanced competitiveness positions are the underlying cause of the ongoing European crisis. In general, exchange rate movements that are persistently inconsistent with achieving balanced global competitiveness positions provide strong evidence for the need to coordinate global currency markets.

Interest rates, volatile capital flows and exchange rate instability

Traditional theory holds that floating exchange rates insulate countries against external shocks and enlarge national policy space. Driven by stabilizing currency market speculation, movements in nominal exchange rates are held to compensate for inflation and/or interest rate differentials, so as to avoid any build-up of unbalanced competitiveness and trade positions. Actual experiences speak another language altogether. In the absence of proper global governance, global finance has become dominated by herd-like short-term risk-reward calculations that may ignore the gradual build-up of economic imbalances and related financial fragilities for a long time. The authorities of target currencies in the developing world are facing difficult choices.

Financial liberalization and the financialization of commodity markets

Sizeable commodity price volatility can have adverse effects at both the macroeconomic and microeconomic levels. The wide price fluctuations observed over the last decade coincided with major shifts in commodity market fundamentals, as well as with increased trading by financial investors in commodity derivatives markets. The financialization of commodity markets has accelerated significantly since about 2002–2004 and most probably reduced the reliability of price signals emanating from commodity futures exchanges. Greater market transparency and tighter regulatory measures are called for to contain the price impact of financial investors and the associated risk of price bubbles.

Global rebalancing and recovery contributions

After briefly shrinking during the global crisis, global imbalances in trade and financial flows have made a comeback during the recovery and remain large as of today. While the balances of the main surplus and deficit countries or regions are below their pre-crisis peak, there has been no fundamental change in the global imbalance constellation. Developing countries at large have contributed disproportionately to global rebalancing and recovery, while an increasing number of them have reached the point where rising current account deficits signal future risks of fragility and crisis.

Source: United Nations conference on Trade and Development 2012