Global Imbalances

Timothy Geithner proposed (in anticipation of the G-20 meeting in South Korea) that governments agree to limit the magnitude of their current account imbalances to 4 percent of GDP. Emmanuel thinks this is unlikely to be accepted. I would like to suggest that Geithner's proposal misses the point entirely.

The figure above plots current account deficits and surpluses (for 2008) expressed as a percentage of the total global imbalance. Notice that ten countries account for three-quarters of the total global current account deficit, and one country alone accounts for 44 percent (in 2006 the US share was 68 percent; still wonder why we had a global crisis?). The remaining 90 countries with deficits make up the balance. The global deficit, therefore, is really concentrated in a single country.

The surplus is less concentrated. The ten largest surpluses account for a combined total of 58% and the largest single surplus equals about one-quarter of the total. The other 42% is accounted for by the other 30 countries with surpluses. The global surplus, therefore, is less obviously the consequence of decisions in a single country than is the global deficit.

Asking governments to embrace a current account imbalance no larger than 4 percent of GDP misses the point, therefore, because it suggests that all imbalances are equally problematic for global stability. These simple statistics indicate quite clearly that all deficits are not of equal importance. Asking Portugal to limit its imbalance to 4% of GDP may be good for the Portugese economy and its overseas investors. For the world economy, however, reducing Portugal's deficit from 5 to 4 percent of GDP is irrelevant. And Portugal has the tenth largest deficit. Does anyone really believe that restricting Romania (0.1% of the total) to a current account deficit of 4% of GDP will have any impact on global imbalances?

The only imbalance that matters for global stability is the US imbalance. The US imbalance is problematic because when as much as 70 percent of the total global imbalance is concentrated in a single economy, an economic crisis in that economy has dramatic negative global consequences. You can't fix that problem by imposing a 4% of GDP limit. During the Reagan imbalance, for example, the US deficit equaled 58% of the total global imbalance but never rose much above 4% of GDP). What the G-20 ought to agree is that no country's current account imbalance shall account for more than 10 percent of the total global imbalance.

Of course, we don't need a global rule to make that happen. We just need to adjust.