The Transfer Paradox. Rethinking Global Imbalances
Global imbalances have come back to the top of the policy agenda. Many analyses and reports have been produced over recent months. The standard prescription involves better coordination of macroeconomic policies, with three familiar recommendations: higher consumption in China, higher investment in Europe, and fiscal consolidation in the United States.
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A current account surplus can be interpreted as a transfer of resources to partners. The fact that the latter complain is a paradox for standard economic analysis.
A dynamic perspective explains the paradox: by using global markets to leverage scale and learning effects, surpluses create and consolidate competitive advantage and technological dominance, to the detriment of deficit countries.
We call this the “transfer paradox”: receiving real resources becomes a disadvantage.
Beyond insufficient coordination, global imbalances reflect conflicting strategies. Acknowledging this objective antagonism is a prerequisite for devising cooperative policy responses.
In this view, sectoral balances are irrelevant. Since the current account is, by identity, equal to national saving minus domestic investment, sectoral policies cannot by themselves correct external imbalances. Tariffs, subsidies, industrial policies and exchange-rate movements may alter the composition of trade, but unless they affect aggregate saving or investment, they do not change the overall current account. The International Monetary Fund (IMF) recently introduced the concept of “macro-industrial policies” that act directly on saving and investment behavior. However, because of their cost for domestic consumption and welfare, they were described as second-order determinants of the current account.
We argue that these analyses and recommendations are model-dependent and therefore fragile. The analytical tools leading to these conclusions have existed for decades. Yet, they have not sufficiently informed mainstream analysis. This gap has direct consequences for policy prescriptions, as well as the nature and objectives of international cooperation.
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The Transfer Paradox. Rethinking Global Imbalances
Author(s)
Sébastien JEAN
Associate Director of Ifri's Geoeconomics and Geofinance initiative
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