IMF Backs Plan to Reduce global imbalances

• Author: David Robinson
• Position: IMF Western Hemisphere Department and member of the IMF's multilateral consultations team
• Pages: 161-165

Page 161

The IMF plans to follow up on its first multilateral consultation, aimed at reducing imbalances in the global economy while maintaining robust world growth, by monitoring the policy commitments of the five major players involved:

China, the euro area, Japan, Saudi Arabia, and the United States. IMF estimates suggest that, once implemented, these policies could result in a reduction in the U.S. current account deficit of about 1-1¾ percent of GDP, accompanied by reductions in surpluses elsewhere.

In July, the IMF's Executive Board met to take stock of the experience with the first round of multilateral consultations, conducted between June 2006 and March 2007, and to draw lessons for the future.

The 24 Directors, who together represent the IMF's 185 member countries, said the consultation had helped deepen agreement on a coherent medium-term approach that would reduce the imbalances while supporting global growth.

In 2000, when the IMF first warned policymakers that imbalances in the global economy could derail global growth, the U.S. current account deficit stood at 4 percent of GDP. Today, that deficit has risen to more than 6 percent of GDP and is matched by large current account surpluses elsewhere, especially in China, Japan, and oil-producing countries.

Page 165

There are those who argue that these imbalances are sustainable and that the world economy will continue its impressive expansion. But many others, including the IMF, do not think imbalances of this magnitude are sustainable in the long run and believe that action is needed to reduce them before they unravel in an abrupt and disorderly way.

IMFC strategy

Since 2004, the IMF's International Monetary and Financial Committee (IMFC) has called for joint action to address the risks posed by the imbalances. The IMFC Strategy, as these recommendations have become known, has evolved over time, reflecting the changing nature of the problem.

But, in April 2006, imbalances were still growing, and IMF Managing Director Rodrigo de Rato felt that more urgent action was required. He suggested that the problem be addressed in a framework involving only the key players. The objective of the first multilateral consultation, as this process is now known, was to seek to reduce the imbalances while maintaining the robust growth enjoyed by the world economy in recent years.

A new forum

The...