Reducing Risks From Global Imbalances Committee for Economic Development 2000 L Street N.W., Suite 700 Washington, D.C. 20036 202-296-5860 Main Number 202-223-0776 Fax 1-800-676-7353 www.ced.org A Statement by the Research and Policy Committee of the Committee for Economic Development Reducing Risks From Global Imbalances A Statement by the Research and Policy Committee of the Committee for Economic Development Reducing Risks from Global Imbalances Includes bibliographic references ISBN: 0-87186-185-2 First printing in bound-book form: 2007 Printed in the United States of America COMMITTEE FOR ECONOMIC DEVELOPMENT 2000 L Street, N.W., Suite 700 Washington, D.C., 20036 202-296-5860 www.ced.org Contents Purpose of Th is Statement. xi Executive Summary . 1 I. Introduction. 3 II. “International Imbalances” and Th eir Recent Rapid Growth. 5 What Are “International Imbalances?” . 5 Why Should We Care About International Imbalances?. 5 Recent Trends in International Imbalances . 6 Th e U.S. Current Account . 6 Current Accounts Abroad . 8 Th e U.S. Capital Account. 8 Th e U.S. Net International Investment Position (NIIP). 10 U.S. Liabilities, International Portfolios, and International Reserves . 13 III. Th e Sources of Large International Imbalances . 15 Th e International “Mismatch” Between Desired Saving and Investment . 15 Th e Decline in U.S. Saving. 15 Th e Emergence of Saving-Investment Gaps Abroad . 16 Th e Strong Demand for Dollar Assets . 18 Globalization and Portfolio Diversifi cation . 18 Th e Dollar as International Money and the Principal Reserve Currency . 18 Th e U.S. Economy as a Magnet for Foreign Capital . 19 Relatively Rapid U.S. Economic Growth . 21 Th e Recent Rise in Energy Prices . 21 Export-Promotion Policies and Exchange Rate Intervention . 22 IV. Risks Created by Continued Large Imbalances . 25 Even Sustainable Imbalances May Produce Serious Problems . 25 Protectionism. 25 Intergenerational Equity: Borrowing from the Future. 27 iii Large Imbalances Are Unsustainable in the Long Term. 27 Adjustment and the Reduction of Imbalances. 28 Th e Idealized Adjustment Mechanism. 28 Impediments to Smooth Adjustment. 29 Th e Costs of Disorderly Adjustment . 31 V. Facilitating Adjustment: CED’s Policy Recommendations. 33 Th e General Policy Framework: Th ree Principles. 33 All Economies Should Contribute to Adjustment . 33 Changes in Both Total Spending and Relative Prices Are Required . 34 A Multilateral Cooperative Approach Is More Likely to Be Successful. 34 Policies of the United States. 34 First, What Not to Do: Protectionism. 35 Increase National Saving . 35 Depreciation of the Dollar . 37 Policies in Other Countries . 37 Europe. 38 Japan . 38 China. 39 Petroleum Exporters . 40 Other Surplus Countries . 41 Other Measures to Reduce Risk . 42 Multilateral Consultations and a More Proactive IMF . 42 VI. Conclusion. 45 Memoranda of Comment, Reservation or Dissent. 46 Endnotes. 47 iv Figures Figure 1. Current Account Balances of Selected Countries and Regions. 5 Figure 2. U.S. Balances on Current Account, Trade, Income, and Unilateral . 7 Figure 3. Major Net Exporters and Importers of Capital in 2006 . 9 Figure 4. Current Account Balances of Selected Countries and Regions, 1992-2006 . ..