An Analysis of the Global Imbalance Between the U.S. and the Emerging Markets

An analysis of the global imbalance between the U.S. and the emerging markets

As of second quarter of 2009, the United States’ current account deficit has shrunken to $98.8 billion, the smallest deficit since 2001 when $104.5 billion was recorded (Weinberg 2009). The decline is indeed praiseworthy but the remaining deficit is still huge and requires great amount of attention. Given the fact that most if not all economies today are interdependent with each other and U.S. economy is responsible for most of world GDP (IndexQ.org n.d.), that is global economic growth, even non-Americans should be concerned of this deficit.

This paper not only tackles the current account deficit of the United States but the related large U.S. dollar reserve of emerging markets as well. The causes, consequences and possible corrections to this global imbalance are discussed.

Causes

Global current account imbalances, more popularly referred to as global imbalances, indicates the large current account deficits of the United States (U.S.) and the corresponding surpluses in emerging markets—in developing Asia, Middle East and Russia. In simpler terms, today’s global imbalance is about the excess investment and inadequate saving in the U.S. and its opposite, the excess saving and inadequate investment in the emerging markets. There are a number of economic factors that led to this imbalance, which can be divided into two: microeconomic and macroeconomic causes.

The United States' excess investment level today can be attributed to a large number of foreigners investing in its assets. According to Forbes (2007), there are several factors that influence private-sector investors around the world which prefer to invest in the United States over their home countries or economies. Firstly, most national economies of the emerging markets have less developed financial markets and limited domestic investment opportunities; compared to the U.S. where there is a more highly...