---

Guest post by: United Nations Economic Commission for Africa Become an Author

Tweet

---

---

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.

Related Articles

  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  1.8 References: Economic Report on Africa 2007
  V. D. The Future of China-Africa Economic Relations: FACTORS INFLUENCING THE GROWING TIES
  References: What Drives China’s Growing Role in Africa?
  Introduction: Human Capital and Economic Development
  CONCLUSION: What Drives China’s Growing Role in Africa?
  2.0 Gender in African economies: Gender Entrepreneurship and Competitiveness in Africa, 2007
  What Drives China’s Growing Role in Africa?
  III. A. China’s African Policy and New Commitments for 2007–09: THE ROLE OF CHINA’S PUBLIC SECTOR
  Least Developed Countries Report, 2007
  SMEs - opportunities in Africa
  III. C. Commercial Policies: THE ROLE OF CHINA’S PUBLIC SECTOR
  V. B. African Demand for Infrastructure: AID VS. COMMERCE: FACTORS INFLUENCING THE GROWING TIES
  Go to Africa, Young Investor
  Is Africa Choking on its own development?
  IV. A. Private Traders: THE ROLE OF THE PRIVATE SECTOR
  II.a Merchandise Trade: TRADE AND CAPITAL FLOWS BETWEEN CHINA AND AFRICA
  II.C. Other Debt-Creating Financial Flows: TRADE AND CAPITAL FLOWS BETWEEN CHINA AND AFRICA
  Wall Street, “Africa is Investing’s Final Frontier”
  Conducive Environments for Leveraging Economic Opportunity in Africa

Related Forum Posts

Re: Internet Marketing Dashboard for Business Owners
Re: need advice
Re: Newbie from Africa
Adventure travel to Africa.
Re: Global Moderators

Share this article. Fund someone's dream.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Top 5 Qualities in an Outsourcing Company

Tips for the Novice Traveler

Life is a Balancing Act!

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.