Growth in the world economy improved slightly in 2006 relative to 2005, from 3.5 per cent to 3.8 per cent. It is driven by the strong performance by Asian economies, which continue to post growth rates above 8 per cent. In contrast, growth in advanced economies remains modest and is yet to reach the pre-2001 level. Key constraints to growth include the massive global macroeconomic imbalances along with tight macroeconomic stances in advanced economies, which prevent demandled recovery. High oil prices undermine growth in both advanced and developing countries through high production costs.
Developed countries, especially the United States, face the challenge of rising current account, government, and private sector deficits which threaten domestic economic recovery as well as global financial stability. The US current account deficit has risen systematically since the 1990s, reaching 6.6 per cent of GDP in 2006. Meanwhile, its budget balance has moved from a surplus in 2000 (1.9 per cent of GDP) to a deepening deficit that stood at 2.5 per cent of GDP in 2006. Moreover, the US private sector position continues to deteriorate due to insufficient savings partly driven by the easy credit that fuels consumption.
Thus far, the widening deficits in the US have been financed by savings in the developing world, especially Asia and the oil-exporting emerging economies in the Middle East. Asia, the Middle East, and Latin America increased their current account surpluses since 2000. In particular, China’s surplus increased from 1.7 per cent of GDP in 2000 to 7.2 per cent in 2006, making it the largest single financier of the US deficit. Central banks in developing countries have accumulated massive US dollardenominated reserves partly as a means of preventing national currency appreciation.
Given the low world interest rates, these reserves have earned low returns to the asset holders. Low world interest rates have also allowed the US to accumulate debt at low cost.
However, the willingness of central banks to continue to accumulate low-return reserves may be limited. Markets will need to be convinced that policymakers will not let the imbalances go out of hand. This will require concerted and coordinated efforts in industrialized economies and the developing world to achieve a smooth correction of the imbalances. The adjustment mechanism will involve a decrease in the US deficit, an increase in investment in other countries (a decline in savings in high-surplus countries), as well as a weak value of the dollar, which will allow adjustment of the US trade deficit and reduce incentives for reserves accumulation.
Most importantly, it is critical to accelerate growth in advanced economies as well as developing countries, which will require loosening of the policy stance to foster demand-led recovery.
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
Like this article? Share it with your friends
 |
Related Businesses - Evan Elite Authors |
|
The Evan Elite Authors program is currently in beta phase. For details please contact us.
|
|
|
United Nations Economic Commission for Africa's
Complete
List Of
African-Accounts
Articles
|
|
If you enjoyed this article, get United Nations Economic Commission for Africa's Complete List of African-Accounts Articles For FREE!
|
|
|
|
![[Get Copyright Permissions]](http://license.icopyright.net/images/icopy-w.gif){kind=small}
