The authors are grateful to Hélène Poirson, Eswar Prasad, D. Subba Rao and Saumitra Chaudhuri for their insightful comments and suggestions on an earlier draft of the article.
The current account deficit of the USA has risen to improbable proportions, matched by the surpluses of some of its trading partners. The persistence of the resultant global imbalance over so many years has underlain one view that has seen this imbalance but to be a natural corollary of a world economy that has been for some time been running on a single engine, namely the US economy and the financing outcomes to have been an injection of benign liquidity from the reserve currency, namely the dollar, to the rest of the world, lifting world output growth to above trend levels. Some have speculated that even if the US current account deficit reaches values of 8–10 per cent of GDP by the beginning of this decade, the situation will nevertheless sustain, while others have sought to find in productivity gains and differential returns on US assets and liabilities structural causes to question the conventional interpretation of the current account deficit—that is the imbalance is not in reality an imbalance at all.
On the other hand, a weighty body of opinion has articulated the view that the current account imbalance is indeed very real, not sustainable over any significant length of time and a phenomena where policy options to encourage gradual unwinding is infinitely preferable to the disorderly unwinding that is perhaps inevitable in the medium term. The consequences of the adjustment—on exchange rates and interest rates—that would follow would not be unpleasant for the US alone, but for most of developing Asia as well.
This paper sets out by describing the anatomy of this global imbalance as it has unfolded over the years and the role of individual national economies in it. It argues for the need to adopt policies that can create conditions for the imbalance to reduce over time and the need for global coordination. But the patterns of the current account are not homogenous across nations and hence, the incentive for common action is not strong. Even if there is broad agreement on the strategy for an orderly unwinding, the response by different countries is likely to be uneven in view of domestic considerations. Thus though the process of orderly unwinding may be necessarily slow, but a greater recognition of the need for such coordination is helpful.
