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1.3 World macroeconomic imbalances: Economic Report on Africa 2007
Widening macroeconomic imbalances constitute a major concern for future growth
prospects and economic stability. These imbalances cause uncertainty and increase
the risk of financial instability, which have negative impacts on economic growth.
Recently, equity markets and commodity and currency markets have become
more volatile while short-term capital outflows from some emerging markets have
increased. This development has raised fears of a new global financial crisis. However,
the turbulence is limited to a number of countries with high current account
deficits. Losses in stock markets occurred in Eastern European countries, but also
in South Africa, which experienced a drop in the value of the rand (UNCTAD
Imbalances in the current accounts widened between 2002 and 2005 but stabilized
in 2006 (figure 6). In the advanced countries the deficit widened from 0.9 per cent of
Gross Domestic Product (GDP) in 2002 to 1.4 per cent in 2005 and 1.6 per cent in
2006. This was mainly driven by the USA, whose deficit increased from 4.5 per cent
of GDP in 2002 to 6.4 in 2005 and stabilized at 6.6 per cent in 2006. The deficits of
other developed countries such as Australia, Spain and the UK have also increased.
In Japan, the current account surplus remained relatively constant around 3.5 per
cent of GDP between 2003 and 2006. Both Asia and Latin America increased their
current account surpluses between 2002 and 2005, which then slightly declined in
2006. China’s surplus increased from 2.4 per cent of GDP in 2002 to 7.2 per cent in
2005 and 2006, making it the largest financier of the US deficit (UN-DESA 2006;
The recent stabilization in global imbalances is mainly driven by weaker domestic
demand in the USA, acceleration of economic activity in Europe, continued recovery
in Japan and growing domestic demand in developing countries. The reduction
of growth in the USA together with the depreciation of the US dollar over recent
years has contributed to a 13 per cent increase in exports in the first half of 2006,
while imports grew much slower. The decline in oil prices in the second half of 2006
further improved the trade balance (World Bank 2006b).
The widening of global macroeconomic imbalances was partly due to the increases
in the price of oil and other commodities. In the USA, the growing current account
deficit was associated with deterioration of the private savings rate, further threatening
the sustainability of global imbalances. In 2007, global imbalances are expected
to stabilize further as cooling of the US housing market and slower growth are
expected to reduce imports, while depreciation of the dollar is expected to boost
exports and reduce imports (UN-DESA 2006).
Accumulation of reserves comes at a cost
Over recent years, developing countries have pursued strategies to stabilize their
exchange rates and accumulate large foreign exchange reserves to shield themselves
from financial crises. However, accumulation of reserves comes at a cost as it freezes
resources that would otherwise be invested in productive activities to boost growth.
As a result, developing countries need to strike a balance between the goals of financial
stability through reserves build up and growth through stimulation of private
and public investment (UNCTAD 2006a).
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VI. Module III: National, Regional, and International Support
By United Nations Economic Commission for Africa
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