Blog Post

The global scoreboard to address imbalances: remarks on the G20 indicative guidelines for assessing persistently large imbalances

At the meeting in Washington on April 14-15th, G20 leaders agreed on the way forward for promoting external sustainability as part of the Mutual Assessment Process. The approach they agreed upon is a two-step procedure. In the first step, a number of indicators will be measured against a benchmark reference value. Countries that are then […]

By: Date: April 19, 2011 Topic: Global economy and trade

At the meeting in Washington on April 14-15th, G20 leaders agreed on the way forward for promoting external sustainability as part of the Mutual Assessment Process. The approach they agreed upon is a two-step procedure. In the first step, a number of indicators will be measured against a benchmark reference value. Countries that are then judged to be problematic will subject to an an in-depth assessment of the nature and root causes of these imbalances and of any impediments to adjustment. Based on an assessment by the IMF and the G20, the G20 plans to ascertain the set of corrective and preventive measures that will form the 2011 action plan to ensure “strong, sustainable, and balanced growth”, to be discussed by leaders at the Cannes Summit. The overall aim is to promote external sustainability and to ensure that G20 members pursue the full range of policies required to reduce excessive imbalances and maintain current account imbalances at sustainable levels. This framework calls for a number of observations:

  1. To anyone following the European policy discussion, the framework is very familiar. The European Commission has recently come forward with a so-called “excessive imbalances procedure (EIP)”, which looks like the blueprint of the current G20 procedure. The Commission has played a key role in promoting the approach at the G20 level.
  2. The list of indicators agreed upon by G20 leaders is very similar to the Commission’s scoreboard, including public debt and fiscal deficits, private savings rate and private debt, and the “external imbalance” composed of the trade balance and net investment income flows and transfers. However, there are a number of important differences. Most importantly, the G20 scoreboard does not include a measure of exchange rates or competitiveness, unlike the EU scoreboard, which does. Exchange rate issues are only “taken into account”. Moreover, the external imbalance is assessed not on the basis of the current account but on the basis of the trade balance and the net investment income flows and transfers. The current account is, essentially, the sum of the two. So why this break-up of the current account and the omission of the exchange rate?

    China was opposed to these indicators as it does not want the G20 exercise to touch upon exchange rate issues and current account issues. But excluding exchange rates and current accounts also has implications for the IMF. The 2007 surveillance decision of the IMF (IMF 2007) puts the concept of external stability as the organizing principle for bilateral surveillance. External stability is assed on the basis of exchange rate misalignments which would be judged based on an estimate of the current account deviation from the “equilibrium” current account. By excluding the exchange rate and the current account form the list of variables to be monitored in the first stage of the procedure, the G20 effectively also constrains the scope of assessment to be done by the IMF for the G20. The G20 therefore agreed that the organizing principle of external stability for bilateral surveillance (IMF 2007) would not be relevant for the G20 surveillance. Clearly, China scores a victory here. At the same time, all that China opposed is still indirectly part of the process.

    Leaving out the exchange rate is a major weakness for the G20 scoreboard. Large imbalances in the global economy are related to exchange rate misalignments and current accounts can also reflect fundamental imbalances. Of course, the current account should not be considered as a problem by itself but it may reflect fundamental policy failures for example related to inappropriate financial regulation or insufficient developments of capital markets. In turn, the exchange rate is used by some economies as a policy tool to promote stability and exports. Clearly, omitting the exchange rate from the scoreboard will render a discussion of this issue more difficult.

  3. The G20 agreed on 4 different approaches for setting a reference value, against which to benchmark the indicators. This will mostly likely make the assessment exercise very complicated. Two of the approaches allow for significant discretion, namely the structural approach and the benchmarking of G20 countries against “a group of countries at similar stage of development”. It seems clear that G20 leaders could not agree on publishing precise numbers for the reference values. It will be all the more important, that the IMF comes forward with a thorough and convincing assessment.
  4. Finally, it appears strange for the reference values for moving to the second stage of the G20 process to be different for “systemically” relevant countries, defined as countries representing more than 5% of G20 GDP. For non-systemic countries the threshold will be set at two standard deviations of the distribution, but for systemic countries the threshold will be at one standard deviation. Systemic countries would thus more easily move to the second stage. Economically, it is however difficult to argue that such a threshold of 5% makes any sense. A major crisis in any of the G20 countries would certainly have major implications for the world economy. An interesting case in point is France, which would fall below the 5 % threshold in the PPP-exchange rate based computation and could easily also fall below 5% in the market based exchange rates, depending on the data used. It is difficult to see that imbalances in France would be less consequential than imbalances in Germany for instance. For the UK, computations are similarly ambiguous – indeed a strange idea to count the UK as an economy without systemic relevance. Clearly, the systemic relevance of imbalances depends on the nature of the links across countries and the vulnerability of other countries to that economy. The simple GDP threshold definition is not adequate. Alternatively, all countries could be considered as systemically relevant. Accordingly, for all countries, the lower threshold would be applied. This would also help

Overall, the compromise reached in Washington is somewhat disappointing. While the agreement is a step in the right direct, it is still mostly technical. G20 leaders will need to move forward and agree on the really burning issues such as exchange rate misalignments, financial regulation etc.

Reference

IMF (2007), Review of the 1977 decision – proposal for a new decision and public information notice, Washington, IMF, June 21.


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
 

External Publication

L’Union européenne et les États-Unis, un an après

Après une année troublée par Kaboul et AUKUS, qu'avons-nous retenu de l'an I de la présidence Biden ? Maria Demertzis revient sur les évènements marquants de l'année 2021 pour la relation entre les États-Unis et l'Union européenne.

By: Maria Demertzis Topic: Global economy and trade Date: December 8, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What to watch in 2022: China's economic outlook

Our end of 2021 recap of China’s economic activities.

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

Blog Post

European governance

The Global Gateway: a real step towards a stronger Europe in the world?

Disappointment at the lack of fresh cash from European Union global connectivity strategy is short-sighted: Europe supports global development more than any other country in the world. Using existing funds more strategically is the right priority for now.

By: Simone Tagliapietra Topic: European governance, Global economy and trade Date: December 7, 2021
Read about event
 

Past Event

Past Event

China’s medium term outlook: Will innovation save China from becoming old before it becomes rich?

What can China do to stop the deceleration of its economy. Is innovation the solution?

Speakers: Jean-Francois Di Meglio, Alicia García-Herrero and Guntram B. Wolff Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 1, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A new consensus for economic resilience

Is there a need for systemic reform of global economic governance?

By: The Sound of Economics Topic: Global economy and trade Date: December 1, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read about event More on this topic
 

Past Event

Past Event

Advancing global value and supply chains to mitigate the challenges arising from the pandemic

Session at the 1st ASIA-EUROPE ECONOMIC AND BUSINESS FORUM: Transitioning to a New Normal: Leveraging Global Value Chains, Multilateralism and the 4IR

Speakers: Carmen Cano, Alicia García-Herrero, Jong Woo Kang, André Sapir, Luca Silipo and Tetsuya Watanabe Topic: Global economy and trade Location: Phnom Penh, Cambodia Date: November 24, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read about event
 

Past Event

Past Event

How can we create more sustainable value chains?

There is an urgent need for GVCs to become more resilient and inclusive, and meet the net-zero challenge.

Speakers: Erik Berglöf and Alicia García-Herrero Topic: Global economy and trade, Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 10, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Why is China cracking down on big tech?

A look at China’s recent regulatory efforts in the digital space.

By: The Sound of Economics Topic: Global economy and trade Date: November 10, 2021
Read article More on this topic More by this author
 

Blog Post

What to make of the EU-US deal on steel and aluminium?

While deeply disappointing that the surprise deal maintains aluminium and steel tariffs against the EU beyond a modest quota, it alleviates a major irritant in transatlantic relations and contains interesting and innovative features relating to climate policy and to dispute settlement under WTO rules.

By: Uri Dadush Topic: Global economy and trade Date: November 4, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

The state of trade: the EU's trade policy

A conversation with Member of the European Parliament Bernd Lange on the European Union’s trade policy.

By: The Sound of Economics Topic: Global economy and trade Date: November 3, 2021
Load more posts