Blog Post

Rebalancing growth

What’s at stake: On Thursday evening and Friday, heads of government from countries belonging to the G-20 met in Pittsburgh and reached agreement on a US led proposal for a new framework for tackling global economic imbalances. The goal was to achieve both a basic agreement on what needs to be done to produce more […]

By: Date: September 24, 2009 Topic: Global economy and trade

What’s at stake: On Thursday evening and Friday, heads of government from countries belonging to the G-20 met in Pittsburgh and reached agreement on a US led proposal for a new framework for tackling global economic imbalances. The goal was to achieve both a basic agreement on what needs to be done to produce more balanced global growth and on a process for ensuring that countries deliver on their commitments. The ideas are not new, and there is no enforcement mechanism to penalise countries if they stick to their old habits. But for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

Brad Setser, who is now director of International Economics at the White House’s National Economic Council, outlines the US administration’s view signalling that the United States will not continue to be the world’s consumer and importer of last resort. As the U.S. starts to act more responsibility, it will borrow less and spend a bit less on the rest of the world’s goods. That means borrowing by U.S. households cannot be the main source of global demand growth in the future and that the world will need to rebalance the global pattern of growth in demand, with a shift from domestic to foreign demand in the United States and a reverse shift from foreign to domestic demand in other parts of the world.

Menzie Chinn says that it is easy for the US to put global imbalances at the top of its policy agenda, given that the US consumer is now rebalancing by force. Although it is hard to see any means of credibly precommiting to implement policies that would enhance rebalancing, many of the forces at play – deleveraging, higher household saving – might very well accomplish a lot of what did not occur in the past.

Simon Johnson says the US pursuit of a rebalancing agenda at the upcoming G20 meeting is something that sounds nice, but that to which no parties, particularly China and the US, can make a credible commitment.  It is pointless rhetoric because such an approach has been tried before, most recently in the Multilateral Consultation, run by the IMF, but achieved little results. This approach will always be fruitless unless and until you can put pressure on surplus countries to appreciate their exchange rates. The call to “rebalance” global growth is appealing to the G20 leaders because it involves no immediate action and no changes in policy – other than in the “medium run”. 

C. Fred Bergsten and Arvind Subramanian say that the US strategy is not consistent with strategies elsewhere. To the extent that the US strategy is credible, America’s trading partners will not be able to rely on export-led growth and will have to find ways to expand domestic demand on a lasting and substantial basis as America cannot resolve global imbalances on its own.

Carlo Bastasin says that pressure on Germany might bring negligible results and even be counterproductive.  For one thing, even if Germany were to cut its global trade surplus to zero, the effect on the American trade deficit would be marginal — about 0.2 percent of the US GDP, whereas at its peak the US current account deficit was nearly 7 percent of its GDP. Instead of pressuring Germany directly, the United States should ask the eurozone members to coordinate their economic planning more deeply in order to avoid a recession-driven adjustment in Europe and to find a common way to stimulate the growth of the euro area. The obvious problem of coordination is a political one. But America has the right to call for a responsible Europe.

Markus Jäger does the math and says that it looks impossible for China to offset the expected decline in US growth in the near term. This would require China to add 4-5 percentage points to its growth rate during 2008-10. Historically, the Chinese economy has moved much less in line with global growth than other economies, and China’s contribution to pre-crisis global growth was already substantially larger than that of the US. So although China is making a significant contribution to global growth, it is not going to be “driving” growth in the developed economies. Nor are indeed the BRICs.

Michael Pettis says that Beijing’s massive stimulus will probably prevent the necessary adjustment toward faster consumption growth from taking place in the near future. Instead of reversing long-standing policies aimed at promoting and subsidizing domestic investment and manufacturing that have been the main reason for shifting income from households to producers, Beijing forced through a large increase in investment. China will find it difficult to generate the kind of consumption growth that will take up some of the American slack, and we may be locked into a period during which the world adjusts by growing more slowly.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Podcast

Podcast

Will ‘common prosperity’ address China’s inequality?

Why is China reviving this old mantra?

By: The Sound of Economics Topic: Global economy and trade Date: October 13, 2021
Read article
 

Opinion

Xi’s pledge on financing coal plants overseas misses point

China’s domestic installation of coal-fired power plants continues at great pace.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 7, 2021
Read article
 

Opinion

Will China use climate change as a bargaining chip?

Beijing shows signs of changing tactics ahead of the COP26 conference.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 6, 2021
Read article More on this topic More by this author
 

Opinion

What Evergrande signals about China's economic future

Under Xi Jinping's new economic agenda 'common prosperity', China is cracking down on indebted real estate developers like Evergrande.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 30, 2021
Read article More on this topic More by this author
 

Opinion

Europe doesn’t need a ‘Mega-Fab’

Europe should defend its existing dominance in equipment manufacturing for semiconductors and invest in chip design instead of luring high-end fabrication to its shores.

By: Niclas Poitiers Topic: Global economy and trade Date: September 22, 2021
Read article More on this topic More by this author
 

Blog Post

Opening up digital platforms and reducing anticompetitive risks

The current convergence in measures to open up digital platforms leaves a door open to some form of international coordination.

By: Georgios Petropoulos Topic: Digital economy and innovation Date: September 22, 2021
Read article More on this topic
 

External Publication

Investing in China: myths and realities

Concerns are real, but the country fares as well as peers at similar levels of development. Analysis published in fDi Intelligence.

By: Uri Dadush and Pauline Weil Topic: Global economy and trade Date: September 20, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A Late Bloomer: where is China’s climate plan?

The world awaits China's concrete plan on carbon reduction, but the country is following its own pace.

By: The Sound of Economics Topic: Global economy and trade Date: September 8, 2021
Read article More on this topic More by this author
 

External Publication

What is behind China's Dual Circulation Strategy?

China's dual circulation strategy should not be dismissed as a buzzword: its implementation will entail major consequences.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 7, 2021
Read article More by this author
 

Opinion

Why China should fear the EU's carbon border tax

Expect Beijing to soon start lobbying against the proposal.

By: Alicia García-Herrero Topic: Global economy and trade, Green economy Date: July 26, 2021
Read article More on this topic More by this author
 

Opinion

Could the RMB dislodge the dollar as a reserve currency?

The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks.

By: Alicia García-Herrero Topic: Global economy and trade Date: July 14, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

CCP's 100th Anniversary: Reflecting and looking forward

As the Chinese Communist Party celebrates its 100th anniversary, we looked into the past, future and present of the country's economic development.

By: The Sound of Economics Topic: Global economy and trade Date: July 7, 2021
Load more posts