It is not just up to Washington to correct global imbalances
16 Jan '06
10 min read
Some progress has been made recently in addressing the underlying issues. Fiscal revenues in the United States have rebounded. There has been progress with structural reform in the euro area and Japan, and the prospects for further progress in Japan are bright. And we have begun to see greater exchange rate flexibility in Asia. But these are just the first steps, and much more action is needed.
While much attention is focused on dealing with imbalances in Europe and the United States, other countries need to do their part. In emerging Asia, there is scope for greater exchange rate flexibility and increased domestic demand. The recent moves by China and Malaysia toward greater exchange rate flexibility are welcome, and other Asian countries have been allowing more flexibility as well. There is still scope for greater exchange rate flexibility. Such flexibility is in China's best interest, as it would provide more room for monetary independence and strengthen the economy's resilience to external shocks. Flexibility also would potentially raise domestic consumption in China by boosting households' real income. Indeed, faster domestic demand growth in Asia through structural reforms—including to encourage higher investment in some countries and better investment in others—should be part of an orderly adjustment process.
Oil producing countries, which now have some of the largest trade surpluses, can also help. Specifically, those oil producing countries whose macroeconomic positions are sufficiently strong can help reduce global imbalances by increasing productive spending, including in some cases social spending, in priority areas.
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