Were global imbalances a once off adjustment, and will they now come to an end?

These are some of the issues raised in this provocative piece by Pradhan and Taylor.

11 replies on “Were global imbalances a once off adjustment, and will they now come to an end?”

I notice that they fail to mention the most important sources of global imbalances: the currency peg with China, the undervaluation of Germany, and the large surplus’s of Japan (thought these might stop with the earthquake). And poor demographics push the savings rate up, not down.

They don’t mention inequality in the piece. But if inequality was the cause of the crisis then reducing it is a necessary condition for recovery.

I think they give a plausible mechanism for this.

Basically producers need to earn enough to buy what they produce.

Tensions between the US and China have eased and soon, the renminbi’s effective appreciation againt the US dollar will be 10% in a year – – comprising a small move in the managed float rate and and a larger margin from relative inflation rates.

Another 15% and the issue will be off the table.

China will be concerned in the next year with food and oil price inflation which again will give an incentive for it to move up the rate.

It’s poor countries who compete in the same makets as China such as the textile sector, who have been most impacted by China’s acculumation of reserves.

The Brazilian shoe industry has been severly damaged by cheap Chinese imports as the real has risen sharply in the past two years. In return, China buys unprocessed soybeans.

@Rory O’Farrell
“Basically producers need to earn enough to buy what they produce.”
And importers need to not borrow to buy…

If you believe that there was a massive credit fuelled bubble in large parts of the ‘importing’ nations which gave the illusion of wealth, but which was mostly unproductive and that a similar mechanism is now taking place in parts of the exporting nations, then I think you will also be of the opinion that because these cycles are out of step, we’ll see a see-saw of relative advantage rather than any permanent moves.

While there was a bubble in assets in the US &c, imports declined in price – or rather failed to rise in price due to wage pressure. Now there is a bubble in assets in China &c and with it wage pressures combined with a bursting in the US &c, their exports are no longer relatvely so cheap.

When the chinese bubble collapses, normal service will be resumed. Look at Japan, after all. How much has twenty years of apparent stagnation damaged their export machine? Apparently not at all…

China has managed its economy exceptionally well for the past twenty years. America has hollowed out its manufacturing capability as cheap imports pushed its unemployment rate to near 10%. The American Gov’t will be forced to stop sitting on its hands in the near future. Japan behaves much like Germany which is to protect export market share whatever the cost. Gov’t and business both ensure that the stabilizers are well established and there is no need for knee jerk reactions when recession hits. To experience this in action from the inside is a truly wonderful experience. Long periods of prosperity and stability usually lead to risk taking by the electorate. The love affair with the CDU is coming to an end as the voters become enamoured with the Greens and not the SDP who have a proven track record. We will miss Frau Doktor Merkel who always started by catering to the base but then softened her stance (expert advice) over a couple of weeks, we will look back with fond memories.

As for Brazil exporting unprocessed foodstuffs, they need only look next door to Argentina who at one time had an export duty of up to 40% on raw foodstuffs. The stated reason was that soy beans which have brown foliage as compared to corn which is green was ruining the appearance of the countryside. The price of chicken in the less well off areas of Buenos Aires was also a motivator. Under WTO rules it is permitted to declare an industry as distressed and impose import quotas on anything including shoes. Sovereign states are helpless only when they chose that option.

@ Maurice Hickey

It’s true that sovereign states are helpless only when they chose that option. However, in the big bad world, Brazil is able to fight its own corner but the evidence is that a smaller developing country is unlikely to pinch the dragon’s tail.

The dollar peg may have been eroded away somewhat, but when you have the worlds 2nd, 3rd and 4th largest economies relying on an export led growth model, others have to incur debt to finance these imports. Until these economies rebalance towards the consumer, talk of inequality and emerging markets textile industries seems (although interesting) irrelevant.

Profits in the developed world seem to have been built on the availability of cheap labour. This resulted in accumulation of wealth for a few and for the many they were left with the result of cheap labour – low wages -> little money available for spending.

The wealthy few in the developing world do seem to have a preference for putting their profits to use in the developed world – buying assets, spending and lending money to developed world banks.

Nations like Germany and Japan are aging and therefore they have to save. Their economies risk shrinking due to few people working supporting many in old age and the rational thing to do is to build up a nest egg for old age. This might lead to a rebalancing for them.

Younger nations with big trade surplus and big unequality are on more uncertain ground. Unless equality improves there might be some problems to maintain the status quo (could lead to civil unrest). So the wealthy few are doing the rational thing in moving their profits into countries where status quo is more likely to continue – into the developed world. Some states might need to rebalance internally (reduce inequality) and that could lead to a rebalancing in the international trade.

I’m not a big fan of balance based models of economy – If the economy is in balance how can it constantly be changing/rebalancing? The economy is constantly changing but there are those who try to stop it from rebalancing as a rebalancing would not be to their advantage.

There’s also the psycological aspect to German saving. Whenever they do get any income increase they generally save it. Japan does run large trade surplus’s and is definitely not on certain ground. I would have thought that poor demographics would excarbate the problem by putting more pressure on the feable consumer. Poor demographics push up savings, they don’t help rebalancing. They do the opposite.

That’s an interesting take on the Lucas Paradox, but I don’t think that capital flows uphill because people are afraid of inequality in developing nations and somehow think that the most unequal nation in the developed world (America) is OK because of rationality or status quo bias, or whatever unimaginative vague terms academics are using these days.

I think what you mean is equilibrium based models, not balance based. And I would agree with you. Complete nonsense.

Oh, and I’m not sure that Western growth was based on cheap labor. How so? And remember there is a difference between cheap labor and poorly paid labor. Taking productivity into account, the developing world doesn’t look that cheap.


yep, equilibrium based model is what I should have referred to.

I’m not quite sure we’re looking at the same thing. What I see is developing countries with high income and wealth inequality. Historically the few that have wealth in developing countries have for some reason parked a lot of that wealth in countries like Switzerland. There are probably a multitude of reasons why they’ve chosen to do so. Old habits die hard so they continue. I might be wrong & in fact it is instead a lot of peoples savings that have been transferred but the inequality seem to negate that possibility.

I’m not sure what you’re referring to with your comment on Western growth?

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