Chapter 1. The Global Crisis and Imbalances

Hamid Faruqee, and Krishna Srinivasan
Published Date:
August 2013
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Hamid Faruqee and Krishna Srinivasan1 

In the wake of the financial crisis, policymakers around the world renewed their focus on key imbalances in major economies with an eye toward reducing vulnerabilities that led to market upheaval and global recession. Two questions have received particular attention. First, were the main global fault lines responsible for the crisis rooted in global imbalances? The answer is not as straightforward as many presume if one carefully distinguishes between symptom and cause. Second, is global rebalancing essential for securing a durable recovery? A consensus among policymakers has been building that such a multilateral undertaking would benefit the global economy going forward and should be encouraged through policy collaboration.

At the Group of Twenty (G20) Summit in Pittsburgh in 2009, leaders committed to achieving strong, sustainable, and balanced growth. Toward this end, a new framework was created that has evolved over time to support these objectives. An embodiment of that collective commitment in Pittsburgh was the launch of the Mutual Assessment Process (MAP) to evaluate the consistency of G20 policies and frameworks with members’ shared growth objectives. Since then, the framework has been augmented to enhance its effectiveness. At the 2010 G20 Summit in Seoul, for example, leaders committed to enhancing the MAP to promote external sustainability. It was agreed that “persistently large external imbalances, assessed against indicative guidelines … warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process …”2

More to the point, it was clear at the Pittsburgh Summit that resolving the financial crisis, sustaining a durable recovery, and anchoring strong, sustainable, and balanced growth required two “rebalancing acts.” One is internal, involving a hand-off from public-demand-led to private-demand-led growth; the other is external, involving rebalancing demand in countries with large current account deficits toward external demand, and rebalancing demand in countries with large current account surpluses toward internal demand.

These dual rebalancing acts, however, have largely been stuck in midstream, and as a consequence global activity remains weak, while financial stability risks have risen sharply. With regard to internal rebalancing, while fiscal consolidation has gained significant momentum across many G20 economies, private demand has not picked up the slack, owing both to unresolved crisis-related fragilities and a barrage of new shocks, notably major financial turmoil in the euro area. As a result, growth has slowed, contributing to a strengthening of adverse feedback loops between the real economy, public sector balance sheets, and the financial sector, posing risks to financial stability. At the same time, external rebalancing has stalled, as domestic demand in key surplus countries has not accelerated sufficiently because underlying impediments remain unaddressed (Figure 1.1).

Figure 1.1Current Account Balances, 2000–09 and 2010–15

(Percent of world GDP)

Sources: G20 authorities; and IMF staff estimates.

Note: Figures for 2000–09 reflect data from the IMF, World Economic Outlook (WEO). Figures for 2010–15 are G20 authorities’ estimates and projections for G20 countries and WEO projections for the rest of the world.

To make progress on the commitments of members to promote external sustainability in pursuit of their broader goals, the G20 asked the IMF to provide a series of assessments of key imbalances for an enhanced MAP.3 Specifically, the IMF was asked to undertake an in-depth assessment across key G20 economies of the nature of large imbalances, their root causes, and impediments to adjustment that may undermine growth. Box 1.1 describes the G20 indicative guidelines and how they were used to identify the specific G20 members selected for these studies. The first step of an integrated two-step process—based on G20 indicative guidelines—identified significant imbalances in seven systemic members: China, France, Germany, India, Japan, the United Kingdom, and the United States. These countries were identified as having “moderate” or “large” imbalances (external or internal) that warranted more in-depth assessment of their root causes, implications for growth, and possible need for corrective action.

BOX 1.1G20 Indicative Guidelines for Identifying Large Imbalances

To move forward the G20’s commitment at its Seoul Summit in 2010 to promote external sustainability, indicative guidelines were developed to help identify persistently large imbalances among members that warranted deeper analysis. This process identified seven members for in-depth assessments (i.e., sustainability reports) using the approach described below.1

A set of key indicators were agreed upon by the G20 to evaluate key imbalances. These indicators were (1) public debt and fiscal deficits; (2) private saving and private debt; and (3) the external position (composed of the trade balance and net investment income flows and transfers).

Developing the indicative guidelines consisted of comparing indicators to reference values to determine if deviations were significant based on four different approaches (see Figure 1.1.1). While not policy targets, reference values were derived based on (1) a structural approach using economic frameworks to derive suitable norms; (2) a time-series approach to provide historical trends; (3) a cross-section approach to provide benchmarks based on group averages for countries at similar stages of development; and (4) quartile analysis to provide median values based on the full G20 distribution. Values of the indicators were based on the IMF’s World Economic Outlook projections for 2013–15.

Figure 1.1.1G20 Indicative Guidelines: Comparison of Approaches

(Systemic rule; at market exchange rates)

Source: IMF staff estimates.

Members were selected if imbalances significantly exceeded their reference values in at least two of the approaches. “Large” imbalances were identified as such if two or more of the methods found deviations from indicative guidelines to be significant in two of the three sectors (external, fiscal, and private sector). Systemic countries (which account for 5 percent or more of GDP of G20 countries) were evaluated on stricter criteria (requiring only moderate-sized imbalances), recognizing that imbalances in systemic members are more likely to affect others.

On this basis, the member countries selected for sustainability assessments of imbalances were China (high private saving and external surplus); France (high external deficit and public debt); Germany (high public debt and external surplus); India (high private saving and fiscal deficits); Japan (high public debt and private saving); the United States (large fiscal and external deficits); and the United Kingdom (low private saving and high public debt).

1For a more detailed summary, see the G20 Communiqué issued by the Meeting of Finance Ministers and Central Bank Governors in Washington, April 14–15, 2011. Available at

This volume is mainly an outgrowth of that 2011 work by IMF staff. The seven case studies provide an assessment of the underlying causes and internal or global risks of key imbalances in these major systemic economies, derived from IMF staff’s sustainability reports prepared for the MAP. These studies provide essential analyses and assessments as input for global rebalancing scenarios that the IMF staff envisions would deliver healthier global growth.

Policy Objectives

In terms of policy implications, there is agreement in the G20 that securing strong, sustainable, and balanced growth will require reducing excessive imbalances. If large internal or external imbalances persist for an extended period, they could pose systemic problems, including the risk of disruptive adjustments. A central question is what determines whether balances are indeed “excessive” from both domestic and multilateral perspectives. This volume provides a basis to answer this question and to explore the attendant policy requirements.

Conceptually, imbalances are not necessarily “bad.” They warrant remedial action only to the extent that they are underpinned by distortions. In particular, imbalances may reflect differences in saving and investment patterns and portfolio choices across countries owing to differences in levels of development, demographic patterns, and other underlying economic fundamentals. In such cases imbalances are not a reason for concern. At the same time, imbalances may also reflect policy distortions, market failures, and externalities at the level of individual economies or at a global level. If so, they are a cause of concern, since they could undermine both the strength and sustainability of growth. In particular, the following typology is useful:

  • Imbalances can be beneficial if they reflect the optimal allocation of capital across time and space. For instance, to meet its life-cycle needs, a country with an aging population relative to its trading partner may choose to save and run current account surpluses in anticipation of the dissaving that will occur when the workforce shrinks. Similarly, a country with attractive investment opportunities may wish to finance part of its investment through foreign saving, and thus run a current account deficit.

  • Imbalances can be detrimental if they reflect structural shortcomings, policy distortions, or market failures. For instance, large current account surpluses may reflect high national saving unrelated to the life-cycle needs of a country but instead related to structural shortcomings, such as a lack of social insurance or poor governance of firms that allows them to retain excessive earnings. Similarly, countries could be running large current account deficits because of low private saving owing to asset-price booms that are being fueled or accommodated by policy distortions in the financial system that impede markets from equilibrating.4 Imbalances could also reflect systemic distortions, reflected, for instance, in the rapid accumulation of reserves by some countries to maintain an undervalued exchange rate.

From a multilateral standpoint, reducing large imbalances is also a pressing need given the current global situation. Large external surpluses in key emerging market economies persist alongside a liquidity trap in major advanced deficit economies (which face rising demands for fiscal consolidation). This configuration underpins low output and deflation risk in the major advanced deficit economies and slower growth for the world more generally. Policy paralysis or incoherence has contributed to greater uncertainty, a loss of confidence, and heightened financial market stress—all of which are inimical to prospects for rebalancing demand and for global growth. These issues have come to the fore dramatically in the euro area, where intra-area imbalances, including large external deficits in the periphery, have accompanied a loss in market confidence and a more fundamental reassessment of the Economic and Monetary Union. Thus, understanding large imbalances within and across countries has taken on renewed importance. Policymakers need to move with a greater sense of urgency toward reaching an agreement on policies that will reduce problem imbalances and lay the foundation for restoring the global economy to health.

What this discussion highlights is the need to have a sound conceptual framework for understanding imbalances before determining what policy objectives should be undertaken. Considering both domestic and multilateral perspectives, Chapter 2 elaborates our understanding of how to assess “good” (or normal) versus “bad” (or excessive) current account or “external” imbalances. It then looks at when corrective policy action is warranted—both at the national level (i.e., tackling domestic distortions) and at the international level (i.e., promoting global rebalancing). This framework provides a basis for analysis and assessment of imbalances in the seven major G20 economies in Chapters 3 through 9.5 These case studies further examine the role of domestic factors underpinning key imbalances and develop policy recommendations to enhance welfare from a national perspective. To conclude, Chapter 10 draws from the country implications of the individual case studies to provide a multilateral perspective on the benefits of global rebalancing and collective action. The multilateral analysis investigates the extent to which pursuit of desirable policies at national levels, taken collectively, can also be complementary at the global level by way of facilitating the rebalancing of demand and supporting global recovery and growth.6


Hamid Faruqee is Division Chief of the Multilateral Surveillance Division in the IMF Research Department, and Krishna Srinivasan is an Assistant Director in the IMF European Department.

See Faruqee and Srinivasan (2012) for a discussion of the G20 MAP and broader lessons for international policy coordination.

IMF staff work on the set of MAP reports was undertaken in close partnership with the Organization for Economic Cooperation and Development, World Bank, International Labor Organization, and United Nations Conference on Trade and Development.

Less clear is what role (if any) global imbalances played directly with respect to the crisis. Our sense is that key market and policy failures (e.g., regulatory gaps) in major financial centers (e.g., United States, United Kingdom) were at the heart of the problem. In an environment of strong growth and low interest rates globally, large financial flows across economies appear to have contributed to the buildup of domestic financial vulnerabilities related to unsustainable housing and credit booms in deficit economies. These gross flows, which then retreated sharply with the crisis, also help us understand the wider transmission of the crisis in a world that is more financially interconnected. However, this is conceptually distinct from net flows associated with external imbalances. While these may have been a danger sign, the underlying causes of the crisis lie elsewhere. See IMF (2009).

Staff analysis and calculations draw heavily on medium-term projections from the IMF’s World Economic Outlook database (

This approach to coordination—which advocates policies seen to be beneficial both at the national level and globally—figured prominently in the Multilateral Consultations on Global Imbalances in 2006 (IMF, 2007). See Faruqee and Srinivasan (2012) for a comparative discussion of the Multilateral Consultations and the MAP.

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