Introduction
Balance of trade is referred as the distinction between monetary significance of imports and exports of output in an economy over a specific time. This is the correlation between exports and imports of a country. Global imbalances are the major contributors to the global crisis experienced today.
Since economic crises have moved from financial markets to actual economies in nations all over the globe, governments have reasonably paid attention on short term measures to control the damage. Crafting financial bailouts and stimulus packages to deal with immediate issues has been for various reasons a main concern for policy makers.
Legislators must move beyond such steps and deal with the root cause of the crisis which is the imbalances between investment and savings in major nations.
These imbalances are caused by some nations like the United States when they run huge current accounts deficits while other nations like China uphold huge surpluses (Yuechun 1). The global economic imbalances related to the trade deficit of the United States are largely seen as a crucial underlying factor behind the Great depression as well as economic crisis of 2008.
For many years, global trade has grown significantly much faster compared to the total global production.
The development of the technological possibilities of capital flows and trade and the reduction of laws on the transportation of products and capital between different nations have made economies more open simultaneously as the nations have become increasingly interdependent. In the last few decades, the world growth has shown some extensive and significant patterns.
Recent developments in the global economic imbalance
After the 2nd world war, the western nations showed a rapid growth. At the present, Asia and most especially China has been the growth winner. In the 1960s, the per capita income of Africa and Asia was the same however, since then these two continents have showed a discrepancy where Africa has not grown while Asia has largely developed. The fast developing nations have a lot of cheap labor but few natural resources.
The effect of this has always been increased costs on natural resources and reduced prices on manufactured products. This change in price has profited the nations which import manufactured products and export natural resources.
Globalization has also increased global macroeconomic imbalances. A majority of developed nations have increased their foreign or public debt whereas China has had large surpluses of current accounts. At the moment, many people would agree that the current trade imbalances are the main cause of the current global financial crisis and the economic imbalances are not sustainable.
These differences are clearly indicated in the financial and monetary policies and associated financial issues between developed and developing countries. These diversities are very crucial to international trade which is why global imbalance in trade has been growing gradually.
Global trade imbalance has become one of the harshest issues facing the normal growth of the global economy. With the development of economic globalization, imbalance of the global economy has increasingly become outstanding (Yuechun 1).
Global economic imbalances are marked by external imbalance among nations in the areas of trade account, gaps between the rich and the poor, the global investments, and internal imbalances in the facets of saving, consumption, and debt as a result of macroeconomic policies in various nations.
Currently, the issue of global imbalances has become the issue of annual reports of the main global economic organizations and the major subject of the major international conferences which fueled extensive debates in the circles of academics.
The global imbalances emerge as the deficit of trade and balance of payment of America. The main cause of the deficits in America is the large surplus that some nations like China hold which are the results of globally undervaluing and controlling currencies.
Global economic imbalances concern the trade deficit of the United States which is equal to the trade surplus of the rest of the globe. At the center of the global economy are nations like Europe, North America, and emerging economies which concentrate on exports.
Recently, the resource exporting nations have run aggregate trade surplus on the back of the higher commodity prices. In the North American region, the United States has run huge trade deficits with trade partners of NAFTA including Mexico and Canada.
Monetary policies and exchange rates
The global economic crisis affects both the regulation of financial institutions and the macroeconomic policies; particularly policies of exchange rates and monetary policies both at the global and national levels. The past few decades have been marked by partial low inflation and macroeconomic volatility in the developed countries (Gerlach 1).
This forced various central banks in both developing and developed nations to concentrate on domestic targets of inflation and national short term interest rates therefore enabling other vital elements like exchange rate to be totally determined by the market forces.
The current financial crisis and the undesirable position of various economies with huge deficits of current accounts have indicated that the present structure for exchange rate and monetary policies produce provisionally a lucrative opportunity for exploratory actions which have destabilizing impact.
Such an experience calls for more and better global economic coordination to stay away from imbalances of current account and undesirable trade.
Owing to the looming depreciation and the depreciation of the American dollar, the United States trade deficit is diminishing. Nevertheless, in a majority of nations there is no correlation of the rates of exchange and neither is an end to the sight of destabilization speculations.
These speculations are still moving exchange rates in the wrong position in spite of increasing and large current account deficits experienced in various regions and nations.
Managers of banks have been criticized for openly displaying uncontrolled lending and failure to pay attention to the risks facing their organizations. Policymakers are also sleeping on their jobs. Few decades ago, central bankers were praised for understanding inflation as well as the business cycle but this is no longer feted.
The public would blame this on the global imbalances including the pattern of a huge and relentless deficit of current accounts in the United States (Gerlach 1). Bad incentives, careless controls, and inactive regulation all have done simple damage to the global economic system.
However, economic imbalances were the major cause of the whole problem. A numerous number of academicians and regulators are convinced that global economic imbalance is the source of the present financial crisis.
Savings and investments
Economists had previously predicted that the United States would destabilize its economy through borrowing from other countries. Since 1992, the current account has been indicating a downward trend. In the year 2006, the United States needed to sell assets or borrow from other countries in order to pay for the continuous shortages. Deficits should not be harmful and most particularly if they fund profitable investment.
Concerns came from economists and other citizens that the consumption increase of the United States would take the nation into deeper problems because other nations would be hesitant to lend to America. This would cause a sudden stoppage of financing and a fall in the value of the dollar.
China recently has faced increased political challenges with the constant growth of its economy. From the beginning of 2004, external imbalances have increased geographically and there has been a significant change in the rates of investment and savings. However, the large pattern which developed after 1996 is still in existence. The America’s current account deficit has further broadened in the last few years.
The increase of the United States deficit basically shows an increase in the rates of investment from 19% in 2004 to 20% in 2006. The saving rate of America did not change in this period (Drysdale 1).
In the meantime, $350 billion is the amount by which the total current account surplus of emerging market economies expanded and about all the economic expansion was accredited to an increased total saving rate.
China is the main contributor of a large fraction of this increased development because it had an increased surplus of current account of approximately 3.6% $180 billion in 2004 which grew to in 2004 to 9.4% of GDP in 2006. This increase in the current account surplus of China is accredited to the increase in the rate of saving between these two years (Drysdale 1).
Contributing to the high rates of saving is the fast growth rate in China causing a rapid growth of income whereas there is no readily available credit of customers. Another factor which contributes to the high rates of saving in China is the decision by the regulators to restrict the appreciation of the currency hence, limiting the demand of imports and increasing exports.
Oil prices and Oil exporters
The increase in the prices of oil has been followed by a large increase in the prices of a variety of other products. This collective increase in price has pushed the CPI up in various developing and developed nations.
A part from their effect on the CPI, increase in oils prices also impacted the prices of other products for which oil is a vital intermediate element. This raises an alarm among those in charge of monetary policy and has promoted calls for thorough pre-emptive action by the central banks against the acceleration of the inflation.
In emerging market nations, the growth of the total balance of current accounts has been contributed by oil exporters. For the nations in the Middle East as well as the former Soviet Union the total balance of current account between 2004 and 2006 increased to about $150 billion (Gerlach 1).
This increase is also wholly reflected by a growth in the rates of savings a huge fraction of the increased revenue which comes from increased oil prices since continues to be saved by exporters of oil (Gerlach 1).
Contrary to the case in developing markets, the aggregate surplus of current account for developed nations apart from America has currently reduced from approximately $350 billion in 2004 to about $200 in 2006. A bigger part of this decline indicated a steep decline in balance of the euro-area.
Therefore, contrary to the 1996-2004 periods except for America, industrial nations and developed nations have taken up a fraction of the increase in the total capital supply emerging from developing market economies.
Aggregately, the current reduction in current account balances of industrial economies other than the United States indicates a growth in rates of investments but rates of savings have largely remained the same. From the last few years the emerging markets have had an increase in the current account and saving surpluses.
In the same period in the industrial nations current accounts have further plunged into deficits basically because of increased investment rates (Gerlach 1). The basic elements of the international saving glut still remain even though some elements have changed.
The international markets are supplied financial capital by nations of the emerging market and producers of oil. The blends of the fund suppliers and the factors which motivate the supply have changed considerably. The larger share of aggregate surplus of developing nations is attributed to oil exporters and China.
In the last few decades, the expansion of the total supply of saving of the region basically indicates a growth in the preferred saving by the emerging market nations while the preceding growth in the total saving included some reduction in the preferred investments in East Asia following the 1990 financial crisis. Policies of exchange rate have also affected the preferred savings in Asia.
Additional growth in total capital flow from developing nations other things being constant should have further discouraged real rates of interest globally. Although interest rates have increased currently, this does not mean that the global saving glut has been driven away.
It implies that, the preferred total investment of preferred saving should have increased in the industrial nations enough to counteract any growth in the desired saving by emerging market nations. In the last few decades, the total demand for saving in the industrial nations has increased due to economic growth and this has somehow increased the international real rates of interest.
The current instability in financial markets and the shareholders demand to have bigger compensation has had an effect on the premiums due to the unsustainable low levels.
Global imbalances have played a key role in the occurrence of the financial crisis by discouraging real rates of interest and supporting the search for yield. Central banks around the world were not the ones responsible for triggering this phenomenon but they accommodated it (Yuechun 1).
Macroeconomic policy
The monetary policy is not the best way of dealing with current global imbalances and the resulting capital flows and developments of asset price. Therefore, much significance should be attached to fiscal policy.
Even if global cooperation is advantageous, it is not expected to attain so much every time there is a conflict with vital domestic policy matters. Nonetheless, the agreements reached at the G-20 summit in Pittsburg increase people’s expectations that cooperation can and will be improved.
From 1996, the current account deficits of the United States rose steadily and peaked in 2005 reaching 1.65% of world GDP and later contracting in 2006 to 2008. The deficits were predicted to further decline in 20009 through to 2010.
Huge deficits were run by nations in Eastern Europe, Ireland, United Kingdom, Portugal, Spain, and Greece which are also current account deficit nations. Balancing these deficits were the huge surpluses operated by Japan, Germany, China, and a collection of emerging market nations from Asia.
At the time of the financial crisis, the monetary policy was not strict enough and this was its main problem. It did not allow lowering of the interest rates before the existing recession is just a negligible mistake.
Current account balance definitely show decisions of households and institutions to save and invest as well decisions of the government sector to finance existing spending through borrowing or taxation. Economic imbalances are therefore the consequence of choices of a big collection of economic agents at home and abroad because ignoring measurement matters, the current account deficit must be equal to zero.
It is not advantageous to have the current accounts of all nations in equilibrium. Income expectations are very crucial because fast growth of the economy would cause deficits in the current accounts since the economy spends against future income.
People therefore expect to experience deficits in many transition countries which they do, and surpluses in Japan and Germany which are developing gradually for structural situations such as aging populations and inexistence structural reform. China and several emerging countries from Asia are running huge surpluses.
The reason for this is that due to the 1997-1998 financial crises in Asia which came after a huge price increase in assets which was characterized by a large increase in capital stock, investment obviously went down causing a huge imbalance between savings and investments and a surplus of the current account (NTNU 1).
More of the facets which were in support of the shift were the necessity to restructure reserves of foreign exchange after the crisis, the aspiration of making sure that the situation does not reoccur by accumulating huge reserves of foreign exchange, the reluctance in various economies to experience the appreciation of real exchange rates due to the costs that would have on the income distribution, and unavailability of social safety nets which became apparent in the crisis and supported private saving.
This indicates that imbalances of the current accounts have many causes and indicate a wide variety of past and present economic policies.
Global cooperation (opening borders)
The historic dedication of global leaders to develop the millennium development goals has restated the simple and plain fact that the important element to make the world a better place for living in is a global cooperation.
The function of global trade in this view is very clear because it has always been an acknowledged suggestion that a non-discriminatory and easy multilateral trading system can lead to growth and development. A successful ending of the Doha Development Round of negotiations will greatly help global governments in attaining the millennium development goals.
The recent developments in the global economy have led to a more cooperative trading setting for governments to make use of their comparative advantage. The global economy in 2004 recorded a total tremendous performance with the highest expansion of output in more than a decade.
The World Bank stated that developing economies fully share in this expansion because they experienced their fastest growth in GDP in the past few decades. Growth of trade was strong with the share of the developing nations in the merchandise exports reaching 31% in a 50 year peak (Drysdale 1).
The reasons for such a success include the increase in the prices of goods from robust international demand for raw materials and a strong expansion in the exports of manufactured products. Such reasons have greatly contributed to the enhancement of LCDs’ export performance and also explain the reason in 2004, all the major developing nations; particularly Asian economies had surpluses in both current accounts and trade.
The emergence of China as one of the main traders of manufactured products in the world has had a positive impact on the global trade. In 2004, the share of China of the global exports was twice the same level a decade ago by 8%. In recent years, the role of China as the market for raw materials has sharply increased.
In 2004, the share of China in the global fuels imports was approximately 4.5%. However, in 2004, the total performance of trade was blurred by the presence of huge imbalances in current accounts especially between East Asia and the United States.
The economic imbalances broadened in 2005, a situation which poses various risks for the future expansion of the international economy and particularly for global trade. The current account deficit of the United States is equal to 7% of global trade products and a reduction or stabilization of this deficit through a slowdown of the imports of the United States could have a severe impact on the expectations of international trade expansion.
2004 is possibly a reflection of trade and economic development (NTNU 1). A majority of economic predictors forecast that international trade and expansion of output in developing and developed nations will be weaker in coming years compared to 2004.
As a result of the strong 9% global trade growth in 2004, the secretariat of World Trade Organization forecasts growth of real trade to be 6.5% by 2010. The data that supports this forecast indicates a steeper slow down of trade in Asia and Eastern Europe.
World Trade Organization members are eagerly waiting for the world economic situation to improve. The results of their negotiations are an essential input to the efforts of the global community to attain the millennium development goals. Global trade can be a very effective and powerful driver for alleviating poverty and improving the well being of the economy.
The effectiveness of global trade depends on a wide range of issues. It is very exciting to note that developed economies are not waiting for the completion of negotiations so as to improve the access of market opportunities for developing economies. In the year 2003 approximately two thirds of exports from developing nations entered the markets of developed countries duty free (NTNU 1).
Also developed countries allowed about two thirds of exports from less developed nations to enter their markets duty free. In the last few years, these numbers have been gradually rising but in spite of such accomplishments there is a lot which can be done to further improve global trade.
Various studies have indicated that the level of protection residue in the developed nations is discriminatory against products of export interest to less developed and developing economies. The support offered by the governments of developed nations to their agricultural sector still limits access of markets for agricultural exports from developing nations.
Governments in developing countries have been strict in their commitment to contribute towards developing an open and free system of trading. However, they realize that a lot of work needs to be done in order to open their markets particularly to merchandise originating from other developing nations.
In developing countries, the average taxes are much more than those of developed nations. A reduction in such barriers to trade can stimulate global trade.
The involvement of the multilateral and global trade system is not restricted to Millennium development goals and alleviation of poverty. Improved access of markets for all traded products with an efficient multilateral system based on rules may help the efforts to accomplish the MDGs related to the environment and health. Trade negotiation cannot define the success in accomplishing the MDGs.
The issue here is making trade work as a means for development which can only take place when openness is realized in a situation of logical economic policies. Successful negotiations which concentrate on conditions of accessing markets and committed support from the government in agriculture together with conditions of debt access and improved support will put national governments in a better position to accomplish the MDGs.
Conclusion
Due to the undesirable fluctuations in the market for real estate the growth of the United States was restricted. Even though the private consumption continued to grow, the market for housing developed slowly, investments were at a very low level, and the slow demand did not permit successful development of the industry.
According to international monetary fund, an increase in the United States’ growth rates in 2007 is predicted to be 2.2% and the growth may continue to increase. The economy of China developed slowly at the start of 2006 particularly because of unpredicted consumption deterioration but the growth was rapid in the second quarter of the year.
Owing to the likelihood of a decline in exports and irregular private consumption, the economy of Japan was estimated to be at 2.3% in 2008. In 2006, the old EU members experienced a stable national demand and a growth in investments. Positive indicators were seen in the labor market evident in a low rate of unemployment.
In addition, increased growth rates were indicated by the new EU member states. The exports have rather increased rapidly including the increasing demand from the old EU member states. Increases have also been indicated the rate of employment and in the national demand. The stated risks include a decline of external demand and downturn of financial conditions.
Investors from overseas may be unwilling to invest in this global region in the future. According to the calculations of the IMF therefore, the growth in this region in 2007 was slightly slower compared to 2006 but come 2008 the growth decreased slightly. Since 2006, the section of common wealth of independent states has been growing successfully.
The origin of the growth is basically exports encouraged by the increase in the prices of energy products as well as the steadily growing domestic demand.
The status of current accounts of oil exporting nations has really gotten better. However, the current accounts of the other nations have gone down owing to the growing imports. Since the export demand and imports are decreasing these nations may experienced a decrease in growth in the future.
Works Cited
Drysdale, Peter. “Fixing global economic imbalances”. EastAsiaForum: Economics, politics and public policy in East Asia and the pacific. (2011). Web.
Gerlach, Stefan. “Future development of global imbalance”. University of Frankfurt: Institute for monetary and financial stability. (2010). Web.
NTNU Globalization Research Programme. “Research focus area: Global economics flows, governance and stability”. Norwegian university of science and stability. Web.
Yuechun, Jiang. “Imbalance of the world economy and challenges to the G2o”. China institute of international studies. (2011). Web.