Global imbalances: a job for the G20?

Excessive imbalances between countries’ current accounts are significant for two very different reasons. First, they are objects of contention between the Group of Twenty (G20) countries, which use imbalances to try to force other countries to change their policies, and even to justify unilateral trade measures – thus making it harder for G20 members to reach consensus on other important issues. Second, imbalances are not always based on sound economic reasoning and excessive imbalances signal that the global economic system is malfunctioning: It cannot effectively transform available funds created by savings, credit or monetary expansion into consumption and productive investment. Accumulation occurs due to a confluence of factors. Uncertainty, inequality and ageing constrain consumption, while productive investment is constrained by overcapacities and technological change, and the financial system’s inability to distinguish between productive and non-productive purposes. Downward revaluations and bankruptcies normally reduce financial resources that are not used for consumption or production. However, vested interests, easy monetary conditions and assumptions about the systemic nature of certain institutions – especially those in the financial system – interfere with this correction. This may well have been at the root of the 2008 global financial crisis and also be causing today’s excessive imbalances. If there is not resolved, crises can recur. The relational nature of imbalances (one country’s surplus is another’s deficit) means that international coordination is required. The G20, a leaders group that brings together the world’s largest economies, is best placed to coordinate. It can pilot approaches for transforming available funds into consumption and productive investment, and upgrade its working methods, and thus help reduce excessive imbalances.