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March 10, 2009
Council on Foreign Relations
In advance of the G20 summit in April, a new Council Special Report, Global Imbalances and the Financial Crisis, urges governments to tackle one of the root causes of today’s global financial crisis: imbalances between savings and investment in major economies, which have led to large current deficits and surpluses.
“If the G20 is to prevent similar crises in the future, it will have to reckon with global imbalances and the features in the international financial system that facilitated their growth. If nothing is done, the imbalances will simply build up again as the world economy recovers, and in time they will become a major contributing factor to the next global crisis,” warns the report’s author, CFR adjunct senior fellow and former International Monetary Fund (IMF) official Steven Dunaway.
The subject could not be more topical, as underscored by the chairman of the Federal Reserve System Ben S. Bernanke, speaking at CFR today. “It is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. …Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade, even as real long-term interest rates remained low.”
Dunaway complements the analysis with prescription. In particular, he advocates improving the IMF’s surveillance of member states’ economic policies. “The IMF cannot compel member countries to change their economic policies, however; it can only persuade. To be effective in this task, IMF surveillance has to provide countries with candid assessments of their policies and clear advice on needed change. The surveillance process also has to bring international pressure to bear when countries persist with policies that are in neither their best interests nor those of the world.”
Dunaway contends that the ultimate responsibility for tackling imbalances rests with national governments. “Governments must demonstrate the political will to choose policies that may entail risks in the short run but that are in the medium run best for their own countries, as well as for the rest of the world.”
The report explains that as the economic crisis has spread through real economies and financial markets, governments have understandably focused on short-term measures to contain the damage. “However, for [the G20 summit] to have a substantial impact, the agenda will have to be broadened beyond economic stimulus and financial market regulation. If not, global policymakers will miss a critical chance to make the world economy and financial markets more stable,” says Dunaway.
This report was sponsored by CFR’s Maurice R. Greenberg Center for Geoeconomic Studies.
For full text of the report, visit: www.cfr.org/global_imbalances
Steven Dunaway is a CFR adjunct senior fellow and former deputy director of the Asia and Pacific Department at the IMF. From November 2001 to December 2008, he was primarily responsible for directing the IMF’s country work on China and headed the IMF’s consultation missions with the Chinese government. Prior to his assignment in the Asia and Pacific Department, Dunaway was head of the North American Division in the IMF’s Western Hemisphere Department. During his 25-year career at the IMF, Dunaway had a wide variety of other country assignments ranging from such countries as Australia and New Zealand to Indonesia and the Philippines. In addition, during the mid 1990s, he directed the IMF’s research on private capital flows to developing countries and handled IMF support for Brady debt deals for Ecuador, Panama, and Peru. Dunaway holds undergraduate and graduate degrees in economics from the Universities of Louisville and Cincinnati, and he received his PhD in economics from the George Washington University.
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