This is a guest post by Célestin Monga, a Lead Economist at the World Bank's Development Operations and Strategy group.
A mini-civil war has been going among macroeconomists in recent years over the issue of global imbalances (the existence of large, sustained current account deficits in some countries that are compensated by equally large and sustained external surplus in others). On one side, a prudent, if not pessimistic view considers large imbalances as evidence of problems with the international monetary and financial system, and symptoms of domestic distortions (mainly in the United States and China). On the other side, a relaxed, if not optimistic view suggests that global imbalances are not anomalies but simply the predictable outcome of a world with increasingly globalized financial flows in search of the right mix of risks and returns. The former view prescribes that the two largest countries in the world rebalance their economies to avoid the potentially painful cost of disruption and adjustment. The latter contends that global imbalances will be corrected through time by the normal functioning of market forces.
While these two opposing views often rely on some well-constructed theoretical and empirical underpinnings, they suggest a dichotomy that may not allow grasping fully the issues at hand. The main issue with large current account deficits (see figure) is obviously their sustainability, that is, whether they will be met by sufficient, timely and affordable inflows of foreign capital. In the case of the US for instance, it bears on the questions of (i) the size of the financial obligations that the deficit reflects, (ii) the availability of income payments and receipts that will eventually be paid out of the economy’s production—with the risk of reducing current consumption and investment, and (iii) the confidence in creditor nations or in the low probability of sudden swings in the mood of foreign investors.
Source: World Bank
The truth is that despite their rivalry, the US and China have become economically and financially so interdependent that one needs to go beyond the traditional narratives of external imbalances, which have focused on the analysis of national accounts, trade flows, and financial flows. Hegel’s dialectics of lordship and bondage (also known as master and slave), may be quite helpful in explaining the persistence of external imbalances in the US and China. A joke by comedian Jon Stewart on the TV program The Daily Show can help make the point. Poking fun at President Barack Obama for his decision to delay a meeting with the Tibetan leader Dalai Lama in favor of strengthening relations with China, Stewart said sarcastically: “We don’t want to upset China! Gosh!... Imagine what they would put in our toys and toothpaste if we upset them!...” Like most TV jokes on international economics, this one was quite tasteless. Still, it made a couple of interesting points: it highlighted the reliance by US on China as the source for a large fraction of consumer goods for its large domestic market. Perhaps more important, it conveyed the implicit acceptance (which almost rises to the level of addiction) by American households and firms of these cheap imports from a country often viewed with suspicion by politicians and located thousands miles away.
My new paper on Hegelian Macroeconomics offers a more nuanced view and argues that a more complete understanding of global imbalances requires a multidimensional perspective that more fully takes into account events beyond traditional macroeconomic variables. Global imbalances are neither just a temporary aberration that can be addressed through economic policy actions in the U.S. and China as suggested by proponents of the first view, nor are they only the result of globalization as implied by proponents of the second view. While agreeing with the need for the U.S. and China to take corrective action, it also suggests that eliminating global imbalances will require structural changes—some of them well beyond the realm of economics—that may take a long time to materialize.