Academics and policymakers are in broad agreement that a major rebalancing is needed to put the world economy back on track. Higher savings in deficit countries and stronger demand in surplus countries, particularly emerging markets in Asia, are required. However, most international organisations expect payments imbalances to increase again over the medium term. The International Monetary Fund projects the Chinese current account surplus to increase to 8.6 per cent of gross domestic product in 2010, after having fallen to 7.8 per cent last year.
The main reason for the lack of adjustment is that policymakers around the world tend to focus more on the short-term costs of rebalancing than on the longer-term benefits. The same short-sightedness that prevailed in the run-up to the crisis is once again in evidence.
Consider, for instance, the current rigidities in the foreign exchange policies of several emerging Asian economies, in particular China. The removal of these rigidities would contribute to a better-balanced world economy, with benefits both in surplus and deficit countries.