Rebalancing the World Economy: a Common Challenge

1 Great changes are taking place in the world economy. The center of gravity is moving to Asia and the emerging world. This has been recognized in the landmark agreement on IMF reform reached at the last G20 Ministerial meeting. China has become the IMF's third shareholder, India has moved up by five ranks and Brazil is now on par with Canada (a G7 country). Symmetrically, the European representation in the Board will be reduced by the equivalent of two chairs (out of nine currently held). At the same time, we are facing great challenges. Output is growing fast in emerging economies but this relative shift in production has not been fully matched by a rebalancing in demand. Overall, beyond the turbulences caused by "hot money", net capital flows are going "uphill" from emerging to developed economies. That means that some of the poorest citizens of the world are lending money to some of the richest, allowing those to finance their consumption. And financial bubbles have tended to proliferate in an environment of permanently low inflation and ample liquidity. I will argue that those phenomenons can all be ascribed to two common causes: a worldwide based shift in the primary distribution of income; and asymmetries in financial development among countries. Together, they combine to produce (1) excess saving in emerging economies (2) strong capital inflows to the US (3) an increasing frequency in financial booms and busts and asset price bubbles in both advanced and emerging economies. Let's look first at income distribution. In China, the share of wages in GDP has declined from 55% in 1992 to 48% in 2008. In the US, the median real wage has been stagnant over the last fifteen years despite the fact that real GDP has grown annually by above 3% over the same period. These are deep changes mostly driven by technology and demographics, in proportions which are hotly debated, and partly unexplained. 1 in preparing those remarks, I was very influenced by the works by Ricardo Caballero and Raghuram Rajan (see references) among others. All interpretations and errors are mine.