Rebalancing a Lopsided Global Economy

Abstract

The growth in global current account imbalances has produced a lopsided global economy, characterised by large lenders and large borrowers, large savers and large consumers, and large exporters and large importers. For many years, the G-20 has committed to reducing these imbalances. But has it been successful? Are the G-20’s policy prescriptions for reducing these imbalances the right ones? And have countries altered their policies because of the discussions and commitments in the G-20 or not? The paper assesses whether the G-20 has achieved its goal of reducing global current account imbalances. It then uses the G-Cubed (G-20) model—a multi-country, multi-sector, intertemporal general equilibrium model—to assess the impacts of the G-20’s proposed policy agenda. It shows that the G-20’s policy prescriptions—reducing the fiscal deficit in the United States, increasing public infrastructure investment in Germany and increasing domestic consumption in China—are not necessarily effective in reducing current account imbalances and, when imbalances are reduced, it often comes at the cost of the real economy. Finally, the paper uses the results from in-depth interviews with 61 policymakers from across all G-20 countries—including Janet Yellen, Kevin Rudd, Ben Bernanke, Haruhiko Kuroda, Jack Lew, Mark Carney, and 55 others—to explore whether the G-20’s focus on current account imbalances influences domestic policies. It finds that while the G-20’s influence has been marginal, there are ways in which it could be strengthened. The paper concludes with a discussion on how the G-20’s agenda could be reformed to help reduce current account imbalances in the future.