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Summit theme two - Rebalancing the global economy

In recent months, there have been encouraging signs that the worst of the current crisis may be over. But as many speakers at the Globalisation Redefined conference stressed, there are fundamental imbalances in the global economy that need to be addressed if the world is to continue on a more sustainable path to prosperity.

The most significant imbalance lies between the export-led model of China, with its high savings rates and low domestic consumption, and the import-oriented model of the US, which has sucked in capital from China’s massive surpluses to fuel a boom in lending and household consumption. But there are other, important imbalances, including the need for India to develop a manufacturing sector in order to create jobs for its rural workforce. As many speakers at the conference pointed out, these imbalances are quite simply unsustainable.

Domestic consumption in China remains extremely low, at just 35% of GDP in 2007. Saving rates are also very high – in part because there is a very limited social safety net, so the population feels it needs to save in order to protect itself against future mishap. According to one high-level speaker from the UK, the Chinese government recognises that the high savings rate and low consumption rate are issues that need to be addressed. There is also evidence that it is trying to correct these imbalances. 

The speaker said that policy-makers are making significant efforts to stimulate domestic consumer demand. With its huge financial resources, China has been able to enact the largest fiscal stimulus programme in the world. It has also massively increased lending through the Chinese banking system (although there are concerns about the potential level of non-performing loans that could come home to roost). “The main purpose of our fiscal stimulus package is to stimulate domestic demand and consumption,” said the speaker. She cited numerous examples of this approach, including increases to teacher salaries, a 30% contribution to the price of a television set for rural dwellers, and raising the minimum purchase of grain.

But there is also evidence that the lessons from the crisis are not being learnt and that, in fact, these imbalances continue to be reinforced, particularly through stimulus packages. “In the US, there are creative schemes like ‘cash for clunkers’ and in China, it’s ‘cash for bridges’,” noted one speaker. “But both these approaches are reinforcing imbalances. Stimulating the consumer sector in the US is the last thing it needs, and in China, stimulating the investment sector is also compounding imbalances.”

Rather than take these short-term approaches, the US needs to stimulate its population to save more, while China needs to use its stimulus package to create greater internal demand. It was also noted that imbalances would be corrected to some extent if China’s surpluses could be directed into IMF currency, rather than dollars. More broadly, emerging markets need to be shifted away from their current account surplus model, which in itself has been one of the contributing factors to the current crisis. “If other emerging markets conclude that they can run current account surpluses in the way that China has, then that’s a problem,” noted one speaker.

India is also making efforts to stimulate local consumption, according to another speaker. Every month, there are more than 12m new mobile phone users, mostly in rural India. Many other sectors are recording double-digit growth in consumption. “India consumes two-thirds of what India produces,” said the speaker.

Correcting imbalances in the global economy will clearly be a gradual, long-term project measured over decades rather than years. But this slow progress should not discourage policy-makers from focusing on the long term. A more balanced global economy is in the interests of all countries, and it could prevent further, possibly worse, crises from erupting at some point in the future.