Global rebalancing is in order

Tue, 19 Apr Pre-Open

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The global financial crisis changed the dynamics of the world economy. With the developed world down in the dumps, it was up to the emerging nations to lend a hand in rebalancing the economy. Partly, they have managed to do this, as emerging countries have recovered faster by reporting growth far superior to that of the West.

Further in this regard, the RBI opines that global rebalancing will require deficit economies to save more and consume less while depending more on external demand relative to domestic demand for sustaining growth. And the emerging nations will have to mirror these efforts i.e. they will need to save less and spend more and depend upon domestic demand to drive growth.

In short, there has to be symmetry between the two. But this scenario has not really panned out. The emerging nations for their part have witnessed strong growth in their economies. For instance, India's GDP growth has been healthy and strong focus on the domestic market means that the country is less vulnerable to any slowdown in exports. That said, all emerging nations including China so far have largely seen their economies expand on account of exports. With demand in the West remaining tepid, these economies to some extent have suffered and are now trying to lessen their dependence on external demand.

In the West too, especially the US, the government does not seem to believe in the concept of saving more. Its focus has been to revive growth and toward this end has introduced huge stimulus packages hoping that more money will induce Americans to spend. Hardly a sound strategy to propagate, especially since a large part of America's problem has been a rather consumerist culture. Americans, in the meantime, are not really playing to the tunes of its government and are choosing to save more especially since the job scenario is highly uncertain.

What is more, concerns of overheating and inflation are now plaguing the emerging markets too. So, while they will still outperform their developed peers in the medium term, their own growth forecasts are likely to get toned down till such time that inflation is brought down to an acceptable level.

Currency is also becoming an issue and the dollar's status as the reserve currency is being questioned more and more. There appears to be an increasing consensus that the focus should be more on a basket of currencies rather than depending on one single currency.

Indeed, RBI head Mr. Subbarao opines that managing rebalancing will require a shared understanding on conducting macroeconomic policies to minimize disruptions to macroeconomic stability. While that makes sense, implementing it may not be that simple.