One reason I’ve been writing so long about global imbalances is that they played a crucial role in setting the stage for the last financial crisis and its dreary aftermath. As (should have been) clear from the record trade and broader financial surpluses amassed by oil exporting countries and mercantile Asian countries, and from the record deficits racked up by the United States in particular, these imbalances revealed that the global economy was on a completely ruinous course during the previous bubble decade. Too much of the world’s productive capacity was being transferred to countries that could not consume enough, would not consume enough, or some combination of the two. Conversely, too much of the world’s consumption was accounted for by countries like the United States, which were losing their capacity to produce.
But I also write a lot about these imbalances because so few others do – which made me elated that no less than the International Monetary Fund has just come out with a chapter on the subject in its latest World Economic Outlook report. The chapter is a treasure trove of data, and I hope to be posting on lots of these statistics and their implications. It was also great to see the Fund echoing my warnings that lopsided trade and investment flows still threaten global financial stability, and that their rebound during notably weak worldwide (and U.S.) recoveries casts big doubts as to how quickly real national or global economic health can be restored.
I do, however, have a bone to pick with the IMF. Like the U.S. Treasury, the Fund seems to be more worried about Germany’s surpluses as a threat to global stability, and less worried about China’s.
On the surface, this shift seems reasonable. Since the U.S. and global bubbles peaked (in 2006), Germany’s worldwide trade and financial surplus grew from six percent of its total economy to 7.5 percent. China’s during this period shrank from 8.3 percent all the way down to 1.9 percent. In fact, in absolute terms, Germany’s surplus is now bigger than China’s.
Here’s what this analysis leaves out, though. Countries growing quickly are supposed to be running big trade (and financial) deficits, especially if the fast growers are beating the global averages. In particular, their out-performing economies are supposed to buy many more goods and services from their more sluggish trade partners than they sell to them. From 2006 to 2013, China was a clear world growth leader, with its gross domestic product expanding by an annual average of 10.10 percent in real terms. Yet it continued to run huge surpluses both in absolute terms and as a share of its output.
More strikingly, China has not only been a fast grower. It’s also a low-income, relatively low-tech country whose fast growth should also be attracting huge amounts of capital from around the world on a net basis. But again, with China, it’s been exactly the reverse.
Big surpluses are much more natural for relatively slow growers like Germany, which are supposed to pull in fewer imports in particular. Its real GDP expanded only at an average annual rate of 1.43 percent between 2006 and 2013. And if the slow-growing country is wealthy and technologically advanced — like Germany — a surplus is even more defensible.
That’s not to say that Germany doesn’t deserve criticism. In particular, after the Eurozone was created, it was happy to lend huge amounts of the common currency to the monetary union’s more spendthrift countries, like Greece. But it was much less happy to give them much opportunity to generate the export earnings needed to pay these loans back. Further, Germany’s trade has benefitted considerably because the euro has for years been a weaker currency than its former national currency, the deutschemark, would have been. And the country has long maintained a formidable array of nontariff trade barriers. Germany is more than large and rich enough to give the world economy a substantial boost if Berlin would only encourage more importing.
But China remains the biggest and most harmful anomaly in the global economy. Until the mercantilism fueling its surpluses is halted voluntarily or by foreign pressure, the world will remain threatened by a new financial crisis if and when global growth does reach a takeoff point.