As to the term itself, it has a rather broad interpretation. For instance, if we speak about the most developed countries, the global imbalances may be described as an over-hyped financial sector if we compare it to the real economic situation. In its turn, the financial sector is characterized by permanently increasing investment in operations with derivative financial instruments (Krugman, 2009). Moreover, on a global scale, the imbalances reflect the difference of growth rates between developed and developing countries, uneven distribution of natural resources as well as of reserves of labor between countries, and so on (Krugman, 2009). It is easy to notice that in this interpretation of the global imbalances, we should refer to the term “disproportion”.
In a narrow sense, the problem of global imbalances can be touched upon in the context of the US trade deficit, followed by the growth of the American external debt. On the contrary, the situation in China and in some other countries in South-East Asia is opposite (Butcher, 2009). Until the global financial crisis, the USA acted as a net importer. The US dollar exchange rate did not fall due to strong capital inflows - mostly in government bonds, which were considered to be a source for reliable long-term investments. Meanwhile, the US investors, in contrast to the lenders, preferred direct investments (Krugman, 2009).
Overall, if we speak about the 2008 world financial crisis, we may see that its connection with the issue of global imbalances is unclear. The crisis was mainly caused by poor banking practices as well as by low interest rates in the USA and within the EU.
Nevertheless, some economists state that the global financial crisis occurred due to imbalances within the US economy (they call it “bubble economy”). Furthermore, they also refer to the Eurozone debt crisis as to one more manifestation of the imbalances, accumulated in the world economy.
The crisis began in the summer of 2010 in the peripheral countries of the euro area, such as Greece or Ireland (Mulligan, 2012). Nevertheless, the crisis quickly acquired all-European scale, becoming the first comprehensive crisis of the euro zone. The debt crisis has exposed fundamental weaknesses of the concept of economic governance in the EU, especially in the euro area.
Moreover, it should be stated that the key issues regarding the Eurozone crisis included the problems with payments balance, inability to cope with the outcomes of the 2008 world financial crisis and unexcessive governmental debt in the states of Greece, Spain and Ireland. Technically, the birth of euro reduced the interest rates in those states to German levels (Mulligan, 2012). Banks in Greece borrowed too freely in order to avoid problems in balance, while banks in Spain and Ireland borrowed for a property boom. In my view, this situation within the Eurozone resulted from certain imbalances of development of the European states (Mulligan, 2012). Therefore, a question arises if such different states really should live on a common currency.
Finally, if we look at China and at the states in South-East Asia, we may see that those states are the only ones, who are constantly winning from the situation with the global imbalances as long as they are generating profit from exporting capital to the developed Western countries. For instance, the People`s Bank of China purchases US bonds, which leads to the accumulation of foreign exchange reserves by China (Butcher, 2009). Therefore, both global imbalances and the financial crises caused the capital to flow from the developing states to the developed ones. At the first glance, this situation seems irrational. However, it is a direct outcome of the existence of the global imbalances (Butcher, 2009).
All in all, I consider that the global imbalances are shaping the nowadays economy. Apart from it, I believe that there are no economic tools that would help to outcome these imbalances. Nevertheless, taking due account of the global imbalances may help to avoid future crisis.
References
Butcher, B. (2009 Jan 22) . When a Flow Becomes a Flood. Web. The Economist. Retrieved from http://www.economist.com/node/12972083
Krugman. P. (2009 Nov 15). World out of Balance. Web. The New-York Times.
Retrieved from http://www.nytimes.com/2009/11/16/opinion/16krugman.html
Mulligan, D. (2012 Nov 27) . Eurozone Crisis Explained. Web. The BBC.
Retrieved from http://www.bbc.com/news/business-13798000
