IMF Recognises Global Imbalances

Global economic imbalances, most notably the current account imbalances of countries are rising once again, ac­cording to a recent International Monetary Fund paper. IMF argues: “Our analysis suggests that tariffs only improve the current account in a limited set of circumstances, and generally have mod­est and uncertain effects on the current account. Industrial policies, when applied with economy-wide tools, can have larger impacts by raising national saving and compressing domestic demand.” These sentences name no countries but it is hard to ignore that the US and China lurk behind them. (The current account reflects the difference between the saving and investment of a country).

This has led to a heated debate with observers like Michael Pettis and Brad Setser noting “inconsis­tencies” in the IMF paper. Pettis—a long time China watcher—has said that what the IMF claims implies that every coun­try determines and controls its internal imbalances, and so also determines and controls its external imbalances. He says this implies “the world balances by coincidence”, something that cannot be true. The actual mechanisms by which such imbalances arise are more complicated, adds Pettis.

Whatever be the actual processes by which these imbalances arise, the reality is that it has led to unusual and self-defeating “solutions”. The US under Donald Trump is a case in point. Merely levying large tariffs on all countries and then revising them on whim is unlikely to sort out the issues that led to these problems in the first place. The problems of low savings, high debts and deficits across large economies cannot be viewed in isolation in a world where trade and financial flows have an independent life. What Trump is trying to do is to bring 19th century tools to a 21st century problem. A better way is to coordinate global action, the kind that created the Bretton Woods institutions at the end of World War II. But as in 1971, so in 2025-26, it is the US that is breaking the global system that underpins economic exchanges and stability. It should be remembered that political instability lurks just behind economic instability. At the moment, with its unparalleled military capabilities, the US may seem immune to these risks. This should not be taken for granted.