Balancing the world's imbalances
By Rodrigo de Rato
Good times - and these are good times for the global economy - are rarely the moment for concrete initiatives to deal with difficult problems. It is against this backdrop that I find welcome this weekend's announcement by a group of major economies acknowledging their shared responsibility for the orderly resolution of global imbalances while sustaining robust growth.
For the past year, China, the euro zone, Japan, Saudi Arabia, and the United States have been discussing these plans among themselves and with the IMF. Behind the somewhat forbidding label of "multilateral consultation" are discussions that are the first of their kind, and that have proved to be a promising tool for dealing with an issue of global importance.
These five economies are relevant to global imbalances in different ways: either on account of their current account deficits or surpluses, or because they represent a very large share of world output. They all agree that resolving these imbalances is in each of their interests. But they also recognize that it is a multilateral challenge and a shared responsibility for them all.
Over the last year, partly reflecting past policies in these countries, the imbalances have shown signs of stabilizing and, indeed, even of improving slightly. But these countries must signal that policies will continue to ensure a progressive and orderly reduction in imbalances together with sustained growth. Otherwise, the global economy will remain at risk from renewed protectionist pressures and economic or political events that might trigger a disorderly resolution of the imbalances and undermine growth.
The five economies spelled out their policy plans in considerable detail to the semi-annual meeting of the IMF's membership, which gave them a warm welcome. This is the first time such plans have been presented together. As Gordon Brown, the chairman of the Fund's International Monetary and Financial Committee, noted, these plans are fully in line with the medium-term approach to solving imbalances that the Fund's membership has consistently supported:
China has elevated the reduction of external imbalances to a major national objective in 2007. It intends to boost domestic demand and is committed to moving gradually toward greater exchange rate flexibility.
Euro-zone countries reaffirmed their intention to press ahead with structural reforms across a broad front, in product, labor, and financial markets.
Japan plans to accelerate labor market reforms, strengthen competition, and advance fiscal consolidation to sustain domestic confidence.
Saudi Arabia is boosting its spending on social and infrastructure investments substantially, as well as expanding oil sector capacity.
And the US is taking steps to balance its budget, boost private savings, and enhance energy efficiency. The US also intends to strengthen capital market competitiveness and ensure that it remains an attractive environment for foreign investment.
Just as global imbalances were not built up overnight, nor will they be solved quickly. The aim of multilateral consultation was not to seek to solve imbalances in one fell swoop, but rather to solidify agreement on a medium-term approach that could reduce imbalances gradually over time.
The policies outlined by the participants will, when implemented, constitute a step in that direction. Publication of their plans sends an additional signal of their commitment and provides a valuable roadmap with which to assess progress, and thus help build confidence that all countries are working to reduce imbalances. The IMF, for its part, will monitor these plans regularly as part of our responsibility to provide policy analysis and advice. The countries have made it clear that their future policy plans will continue to be consistent with the strategy called for by the IMF's membership.
The five participants and the rest of our members, as well as we at the Fund, all agree that this has been a fruitful exercise. An indicator of success is that a second multilateral consultation, aimed at fostering dialogue on how financial globalization and innovation influence growth and stability, is under consideration. Like the first round of talks, this consultation would occur between a group of economies that have special relevance to the issue.
Rodrigo de Rato is Managing Director of the International Monetary Fund, and was formerly Spain's Finance Minister.
(Exclusive to The Sunday Times - Copyright: Project Syndicate, 2007)