Despite years of official talk about addressing global current-account imbalances, they remained one of the world’s main economic concerns in 2011. Global imbalances were, to be sure, smaller overall than before the crisis, but they did not disappear. Now some are increasing again, alongside inequality in many countries. That link is no accident.
One often hears calls for global rebalancing whereby emerging-market countries with payments surpluses—China is the most-often mentioned—would stimulate internal demand, so that advanced countries (the largest being the United States) could reduce their deficits and public debts with less threat to their economies’ recovery. The net foreign demand created by a reduction in balance-of-payments surpluses abroad would partly offset the weakening of public demand in the U.S. and other high-debt countries as they tightened fiscal policy.
The story should not, however, be just about current-account deficits in advanced countries and surpluses in the emerging countries. Many emerging-market countries—including India, South Africa, Brazil, and Turkey—actually run current-account deficits. There are also many advanced countries that run a current-account surplus: Germany’s has been well publicized since the eurozone crisis started, but Japan, the Netherlands, Norway, and Sweden run surpluses as well.
So, while global rebalancing does require a reduction of surpluses, the issue is not simply one of shrinking emerging-market surpluses in order to allow a corresponding decline in the deficits of the advanced countries. As we enter 2012, a reduction in Germany’s surplus may be more urgent than a reduction in China’s, since reducing Germany’s surplus will yield more immediate benefits for Europe, where the greatest risks to global recovery lie.
Moreover, the Chinese renminbi is experiencing a fairly steep real appreciation, as inflation in China is rising much more rapidly than in the U.S. or the eurozone. Indeed, the “German” euro is losing value, despite Germany’s large surplus, because it is also the currency of the southern European countries that are in so much trouble.
The Chinese and German current-account surpluses are correctly viewed as an obstacle to recovery, because they subtract from potential world effective demand and contribute to global “planned savings” exceeding “planned investments”—a recipe for recessionary pressure. But the increasing concentration of income and wealth within many countries, foremost the U.S., should attract similar “Keynesian” worries.
An increasing concentration of income and wealth can be viewed as an “internal” imbalance similar in some ways to “external” current-account imbalances, because the highest-earning groups tend to save a much larger share of their income. An ongoing income shift towards the highest earners will tend to lead to higher overall savings, which would have to be compensated by higher investment, higher net exports, or higher public expenditures to avoid recessionary pressure.
While levels of inequality around the world vary widely, the tendency towards greater concentration at the top appears to be a general one, and it is changes in concentration that lead to changes in planned savings. An ongoing trend towards income concentration should be expected to lead to deflationary pressure wherever it takes place.
Of course, other factors, including government policies, can compensate for that pressure. In the U.S., low interest rates and debt-financed consumption by lower-income groups, encouraged by government policy and financial-sector practices, compensated for higher savings at the very top during the pre-crisis years. Thus, despite record income concentration, the U.S. ran a large current-account deficit. In China, net exports and strong government-supported investment ensured continuous expansion. In Germany, too, net exports increased.
Nonetheless, shifts of income to high-saving groups and increasing current-account surpluses have similar first-round effects on aggregate world savings. Of course, it is only the first-round effects that are similar. Much then depends on whether an increase in a current-account surplus leads to more reserve accumulation or more direct investment abroad; on how different income groups allocate their spending between imports and domestic goods; and on what kind of macroeconomic policies are being pursued.
The full story of imbalances has to include propensities to spend on imports and domestic goods in various countries, as well as the balance between public and private savings. Moreover, it is necessary to complement our concerns about “global imbalances” with an analysis of how increasing income concentration may be leading to “internal imbalances” and recessionary pressures that are similar in magnitude.
These imbalances are linked, and both threaten sustainable rapid growth. Global imbalances and rising domestic inequality need to be analyzed and debated together. Only then can they be addressed effectively.