From the International Herald Tribune:

Global imbalances — roughly defined, the different emphasis the
world’s leading economies place on savings, spending and debt — is a
phrase much used and little acted upon.

Well before the
current financial crisis began, world leaders pledged to address this
disconnect. At an International Monetary Fund meeting in 2007, for
instance, representatives of the United States and the European Union
agreed they should change economic incentives to encourage more savings
and less spending; officials speaking for China, Japan and Germany,
meanwhile, pledged to take steps to encourage spending. At the end of
the day, nothing much happened, and these imbalances helped grease the
skids for the global descent toward the economic abyss.

This
might not be readily apparent from current numbers; in fact, the
financial crisis has contributed to a significant narrowing of global
economic imbalances. Consumers in so-called “deficit countries” —
states like the U.S., Britain, Spain and the countries of Eastern
Europe that have huge trade deficits — are saving more as the crisis
has exposed the dangerous extent of their indebtedness. Meanwhile, in
China and other large export-driven economies, fiscal stimulus spending
and some other policy moves have encouraged more domestic consumption.

The
reduction in the U.S. current account deficit — the broadest measure of
trade in goods and services — is particularly striking and serves as an
example. This reduction holds true across other, less robust economies,
too. Many of the emerging economies of Eastern Europe had easily
financed wide deficits during the boom years. Now they find they are
reducing private consumption in light of the lack of credit.

In
more desperate cases like Ukraine and Kazakhstan, this has necessitated
currency devaluation that boosts the costs of imports. Others,
especially Eastern European countries in line for E.U. membership, have
clung to their currency pegs. This leaves room for adjustment only via
a sharp reduction in domestic demand.

Changing ingrained habits
— whether the tendency is to be too thrifty, or too loose with money —
is never easy. There is a powerful temptation to point at current
trends and argue that rebalancing is taking place naturally. That would
be a big mistake.

All evidence suggests that this rebalancing
is temporary — the result of reactive policy measures among exporters
and retrenchment among the profligate.

China, the world’s
sovereign wealth machine over the past decade, is a case in point. My
colleague, Rachel Ziemba, projects China’s current account surplus will
likely narrow to $350-370 billion depending on the import trajectory,
down from a record $420 billion in 2008. China’s trade surplus was just
under $100 billion in the first half of 2009. A trade surplus of about
$30 billion in the third quarter of this year is expected, which is
well below 2008 levels. Increased spending at home rather than savings
could further reduce the surplus. Yet with China reluctant to allow
currency appreciation, reserve accumulation has resumed at a strong
pace.

Although the export-oriented growth model has been shaken
by the crisis, many countries seem reluctant to recalibrate. The
beginning of inventory restocking has buoyed Asia significantly, as
companies that cut back sharply have now increased output. Avoiding
currency appreciation will exacerbate this trend, adding to reserve
accumulation and distortions.

The most recent I.M.F. estimates
— released in the October 2009 World Economic Outlook — suggest that
imbalances could widen again but remain lower (as a share of G.D.P.)
than their 2006 peak. Yet the dollar values of these imbalances could
be very large.

In the I.M.F.’s forecast, China’s surplus will widen again in 2010, even as a retrenched U.S. consumer remains weak.

So
who offsets the U.S. deficit? The I.M.F. suggests a diffusion of
imbalances, where surpluses of Germany and Japan will remain in
shrinking mode even in 2010, while the deficits of Canada and
Australia, as well as emerging economies like Brazil, will offset the
growth of China’s surplus.

However, the I.M.F. five-year
projections also show a widening current account surplus for the entire
world. This could suggest that some of the underlying export
assumptions are too optimistic given the growth estimates.

Global
imbalances are back on the policy agenda with the G-20 agreeing to
create a peer review of macroeconomic policies including imbalances to
avoid another crisis. The details are limited so far, but focus once
again on an agreement that the U.S. will consume less and save more;
Japan, Germany and China will spend more and will reallocate investment
away from the export sector.

These are the right goals, to be
sure. But a joint communiqué from a nascent international organization
isn’t much to hang the world’s hat upon. The I.M.F. needs teeth,
perhaps along the lines of the W.T.O.’s authority to prod member states
toward “out of court” settlements, in order to enforce these difficult
political and economic goals.

These imbalances represent
serious misallocations of capital in domestic economies that, projected
globally, raise the risks considerably of future financial crises and
asset bubbles.

While imbalances did not cause the current
financial crisis — I believe lax regulation bears a far greater onus —
these imbalances certainly helped create the conditions for this
crisis. Easy money and low long-term interest rates created an
incentive to invest in seemingly-safe high-yield assets. An orderly
unwinding of imbalances might put a lid on global growth during the
adjustment, but is fundamental to achieve sustainable global growth.

Nouriel Roubini is a professor of economics at the Stern School of Business, New York University.