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Global Rebalancing: Effects on Trade Flows and Employment

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The persistently large imbalances in the world economy contributed to the outbreak of the current economic and financial crisis and facilitated its global spread. While global imbalances declined in the immediate aftermath of the crisis, they have been widening again with the ongoing recovery of the world economy. Global current-account imbalances are not necessarily undesirable. However, there is widespread agreement that the current imbalances are unsustainable. This paper examines the effects on trade flows and employment that global rebalancing might entail.

No. 200
September 2010


GLOBAL REBALANCING: EFFECTS ON
TRADE FLOWS AND EMPLOYMENT
















GLOBAL REBALANCING: EFFECTS ON
TRADE FLOWS AND EMPLOYMENT





Jörg Mayer






No. 200
September 2010

























Acknowledgements: An earlier draft of this paper was part of the author’s input to UNCTAD’s Trade and
Development Report 2010. The author is grateful to Jörg Bibow, Alfredo Calcagno, CP Chandrasekhar, Heiner
Flassbeck, Jayati Ghosh, Detlef Kotte, Sheila Page, Ugo Panizza, John Weeks, Adrian Wood and seminar
participants at the ILO in Geneva and at Oxford University for discussion and comments on earlier drafts. Juan
Pizarro provided excellent research assistance. Alicia Rapin also helped with the data. The opinions expressed
are solely those of the author and do not necessarily reflect the views of UNCTAD or its Member States.



UNCTAD/OSG/DP/2010/4







ii








































JEL classification: F4, O11, J23


The opinions expressed in this paper are those of the author and are not to be taken as the official views of
the UNCTAD Secretariat or its Member States. The designations and terminology employed are also those
of the author.

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UNCTAD Discussion Papers are available on the UNCTAD website at http://www.unctad.org.







iii


Contents




Page


Abstract ........................................................................................................................................................ 1


I. INTRODUCTION ................................................................................................................................. 1


II. CONSUMPTION SPENDING IN THE UNITED STATES AND CHINA ...................................... 3


A. United States consumption spending.................................................................................................. 3
B. China’s consumption spending ........................................................................................................... 5


III. THE TRADE IMPACT OF CONSUMPTION SPENDING IN
THE UNITED STATES AND CHINA .............................................................................................. 11


IV. THE ACCUMULATION OF GLOBAL IMBALANCES: INCOME, TRADE
AND EMPLOYMENT EFFECTS IN DEVELOPING COUNTRIES ........................................... 15


V. THE POTENTIAL IMPACT OF A GLOBAL REBALANCING ON TRADE FLOWS
AND EMPLOYMENT IN DEVELOPING COUNTRIES .............................................................. 20


VI. CONCLUSIONS.................................................................................................................................. 28


ANNEX 1 ...................................................................................................................................................... 30


ANNEX 2 ...................................................................................................................................................... 34


REFERENCES.................................................................................................................................................. 37






List of tables


1 GTAP simulation results of the impact of rebalancing in China and the United States
on trade flows and factor prices, selected countries and country groups............................................... 21


2 GTAP simulation results for changes in sectoral trade balance, selected countries
and country groups ................................................................................................................................ 23


3 GTAP simulation results for changes in sectoral employment, selected countries
and country groups ................................................................................................................................ 25


A1 GTAP simulation results of the impact of rebalancing in China on trade flows and factor prices,
selected countries and country groups................................................................................................... 32




List of figures


1 Personal consumption in the United States, 1950–2010.......................................................................... 4


2 Household liabilities, disposable personal income and labour compensation
in the United States, 1965–2009.............................................................................................................. 5


3 Household consumption in China, Japan and the Republic of Korea from start of
economic take-off .................................................................................................................................... 6


4 Share of gross fixed capital formation in GDP in China, Japan and the Republic of Korea
from start of economic take-off ............................................................................................................... 7


5 Household consumption, employee compensation, corporate profits and disposable incomes
of households and firms in China, 1993–2007 ........................................................................................ 8







iv


6 China’s labour force by age structure, 1990–2050 ................................................................................ 10


7 Household consumption in selected countries and country groups, average for 2007–2008 ................ 12


8 Current-account balance and trade balance by end-use category in the United States, 1980–2009 ...... 13


9 Percentage of similarity in the composition of consumer good imports of selected countries
with the imports of the United States, 1992–2008................................................................................. 14


10 Growth rates of world trade by sector, 1995–2002 and 2002–2008...................................................... 16


11 Per capita output by sector, selected countries and country groups, 1995–2008................................... 18


12 Average sectoral shares in total value added and employment, selected countries
and country groups, 1995–2008 ............................................................................................................ 19


13 Labour intensity and GTAP simulation results for changes in world exports
by industrial sector caused by rebalancing in the United States and China........................................... 24


14 Labour intensity and GTAP simulation results for changes in world exports
by industrial sector caused by rebalancing in the United States, China and Germany .......................... 27











GLOBAL REBALANCING: EFFECTS ON TRADE FLOWS


AND EMPLOYMENT


Jörg Mayer
United Nations Conference on Trade and Development (UNCTAD)


(joerg.mayer@unctad.org)





Abstract


Medium-terms shifts in the structure of world demand affect the sectoral composition of domestic
output, trade and employment. A sustained reduction of global current-account imbalances
implies a decline in the share of household consumption in aggregate demand in the United States
and the opposite development in China. The net effect of these adjustments for the world economy
would be deflationary and yet insufficient for the unwinding of global imbalances. It would also
cause sizeable adverse employment impacts in the world economy as a whole. A multilaterally
coordinated rebalancing that would also include an increase in the share of household
consumption in aggregate demand of developed country surplus economies would reduce these
adverse effects. Apart from the countries undertaking rebalancing, developing countries in East
and South-East Asia are likely to face the greatest adjustment pressure from global rebalancing.





I. INTRODUCTION


The persistently large imbalances in the world economy – with sizeable current-account deficits in
some countries, particularly the United States, and sizeable current-account surpluses in others,
notably Germany, Japan, developing countries in East Asia, especially China, and a number of oil-
exporting countries – contributed to the outbreak of the current economic and financial crisis and
facilitated its global spread.1 While global imbalances declined in the immediate aftermath of the
crisis, they have been widening again with the ongoing recovery of the world economy. Global
current-account imbalances are not necessarily undesirable. However, there is widespread agreement
that the current imbalances are unsustainable.2 Hence, a smooth and non-deflationary reduction of
global imbalances is indispensable not only for ensuring that the recent global economic upturn




1 Financial excesses were the eventual trigger of the global financial crisis. However, these excesses would most
probably not have developed to the same extent if the macroeconomic environment had not been characterized
by large saving-investment imbalances and asset price misalignments. These factors exerted enormous pressure
in the United States and the global financial markets where the development of new complex financial
instruments and regulatory failures had progressively introduced serious systemic flaws. Regarding the
propagation of the financial problems that initially had been confined to the United States financial markets, only
a much broader set of interrelated factors, including macroeconomic in addition to purely financial elements,
could have been responsible for generating a crisis of these proportions.
2 The recent accumulation of global imbalances has generally been judged as undesirable not only because of
their size but mainly because of the unsustainability of the factors behind them, particularly the massive increase
in often debt-financed household consumption in the United States.




2


continues but also for minimizing the risk of recurrent global economic turmoil. This paper examines
the effects on trade flows and employment that global rebalancing might entail.


A correction of current-account imbalances and – their domestic mirror image – the savings-
investment disequilibria will change the structure of world demand and affect the sectoral composition
of domestic output, trade flows and employment. These changes are driven by: (i) the per capita
income levels of those countries that make the greatest contribution to world aggregate demand
growth; and (ii) the income distribution in rapidly growing economies and its attendant impact on the
role of household consumption in domestic demand growth. These mechanisms are global in scope,
covering developed and developing countries, but the paper focuses on the two main protagonists in
this story – China and the United States.3


Adopting this bipolar perspective appears useful for several reasons. First, the United States and China
have accounted for sizeable shares of global imbalances (the United States for about 45 per cent of
deficits and China for about 25 per cent of surpluses, respectively, in 2008, i.e. the year when the sum
of individual countries’ absolute current-account positions reached a post-war peak of over 5 per cent
of global GDP (de Mello and Padoan, 2010)). Second, the recent growth trajectories of the United
States and China appear to have developed in opposite directions. Consumption as a share of GDP
increased in the United States but fell in China; investment rose dramatically in China while its
importance shrunk in the United States; and China’s trade surplus sharply contrasted with the
substantial deficit in the United States. Thus the United States current-account deficit has been
associated with a low national savings rate and a continuously rising share of private consumption in
GDP, while along with China’s current-account surplus there has been a very high national savings
rate and a very low share of household consumption in GDP. However, the external position of neither
of these two countries is sustainable. Regarding the United States, unless another asset bubble occurs,
there is no alternative to de-leverage debt-financed household consumption, and in China, the need to
embark on a major structural transformation from investment- and export- to consumer-led growth has
been officially recognized.4


The main questions addressed in this paper are: (i) how, in the 5-year period before the current crisis
began, buoyant consumer demand in the United States and the relative slow expansion of household
consumption that accompanied vigorous aggregate growth in China influenced per capita output
growth, world trade and employment; and (ii) what would happen to the level and sectoral structure of
world trade and employment if the shares of consumption in GDP in the United States and China went
back to their historic trends. This set-up is of course simplistic because of lagged effects, path
dependence and irreversibility (for example, de-leveraging bad household debt does not simply mean
reversing savings ratios), but seems well-suited to indicate the direction of changes and a general idea
of the magnitudes involved.


Section 2 examines the development of consumption spending in China and the United States.
Section 3 looks at the trade impact of household consumption in these two countries and tries to
determine which countries’ consumer demand could make up for a decline in United States household
consumption. It argues that China’s consumer good imports are both too small and too different from
that of the United States to be able to compensate the adverse effects of a sizeable decline in United
States consumer spending on global consumer good imports. Developed surplus economies, notably
Germany and Japan, would be better placed to do so. Section 4 examines development in sectoral per
capita output growth, trade and employment during the 5-year period in the build-up to the current
crisis when global imbalances were accumulating rapidly. Section 5 simulates the effects on global
trade flows and sectoral employment shifts that re-balancing in the United States and China is likely to
imply. It shows that the net effect of rebalancing confined to China and the United States for the world


3 For a general discussion of the issues involved in moving from a current-account surplus to a more balanced
external position, see IMF, 2010.
4 See China’s 11th Five Year Plan enacted in 2006.




3


economy would be deflationary and yet insufficient for the unwinding of global imbalances.
Moreover, it would probably cause sizeable adverse employment impacts in the world economy as a
whole. A multilaterally coordinated rebalancing that would also include an increase in the share of
household consumption in aggregate demand of developed country surplus economies, especially in
Germany, would reduce these adverse effects. The concluding section 6 stresses that a global
rebalancing requires a multilaterally coordinated approach and raises some questions about the
sustainability of the export-led development strategy in East and South-East Asia. Much of this
strategy has been based on the participation in value chains in which these countries produce
intermediate goods that are finalized in China for export to the United States. Global rebalancing may
well reduce the production and export opportunities that these value chains have offered. As a result,
developing countries in East and South-East Asia may need to follow economic rebalancing in China
and reorient their development strategy towards a greater role of domestic demand as well.


II. CONSUMPTION SPENDING IN THE UNITED STATES AND CHINA


There are three main views on the causes of global imbalances and policies to correct them (for
surveys see Mann, 2002 and Yu, 2007). A first international perspective emphasizes the flows and
holdings of financial assets and views current-account balance as being determined by the portfolio
choices of private financial investors and official reserve holders that drive international capital flows.
The most popular expression of this perspective has been the “savings glut” hypothesis (Bernanke,
2005). A second international perspective focuses on flows of trade in goods and services. Exchange
rates play a key role in this perspective, in particular alleged “currency manipulation” by China for
maintaining an undervalued renminbi. A, third, national perspective examines national income and
product accounts, focusing on savings and investment, and sees the current account as driven by
national savings-investment imbalances. Contrary to the previous perspective, it sees trade flows
driven mainly by relative demand factors, rather than just by relative prices. In other words, it sees
international trade in goods and services as responding, in a relatively passive fashion, to domestic
demand factors as reflected in national accounts. Cross-country differences in the rate of economic
growth play an important role in this perspective.5


Each of these three perspectives provides a different basis for analysis, and one or the other
perspective may be particularly useful for certain circumstances or time frames. This paper adopts the
third perspective which implies that an effective rebalancing of the United States savings-investment
balance cannot occur without interrupting the secular decline in its saving rate or, what is equivalent,
the secular increase in its consumption rate, and that the opposite holds for surplus countries.


A. United States consumption spending


The secular decline in the United States household savings rate since the beginning of the 1980s went
hand in hand with a rapid expansion of private consumption. Since the late 1990s, the share of
personal consumption in GDP has considerably exceeded its average long-term trend of about 66 per
cent, reaching a peak in early 2009, when it accounted for 71 per cent of GDP (figure 1).




5 See annex 2 for further discussion of these three perspectives.




4


More importantly, the increase in United
States household consumption was largely
debt financed. Facilitated by easy consumer
credit, lax lending standards, a proliferation
of exotic mortgage products, the growth of a
global market for securitized loans and
soaring house values, burgeoning household
spending created strongly growing household
debt and led to a sharp decline in the United
States household savings rate to almost zero.6
The ratio of debt to personal disposable
income reached an all-time high in 2007,
exceeding 130 per cent. As a result,
household leverage was 27 percentage points
above where it would have been had it
maintained its 1975–2000 trend (figure 2).
This difference, which corresponds to about
$2.8 trillion, indicates the potential magnitude
of United States household deleveraging that
could be achieved through debt reduction and
increased savings.


The increase in private consumption was
unsustainable because it was not supported by
a similar expansion of labour compensation
in the private sector. Compared to previous


upswings, the economic expansion that ended with the onset of the current crisis had been
characterized by a low increase in employment and by the relative stagnation of real wages. As a
result, private sector labour compensation grew at an unusually sluggish pace and fell short by more
than $800 billion (in real terms) relative to the trajectory of the previous four business cycles (Roach,
2009: 14). Low- and middle-income households that intended to maintain their relative standards of
consumption thus turned from income- to debt-financed expenditure. While the share of consumer
credit in disposable personal income oscillated around an average of about 18 per cent between the
mid-1960s and the mid-1990s, it reached a peak of over 25 per cent in the 2000s due to an average
annual rate of growth of consumer credit of 8 per cent between 1992 and 2006 (Barba and Pivetti,
2009: 115). Low interest rates, asset price inflation (first for equities and then for housing) and
financial deregulation permitted this shift from wage to non-wage income (i.e. income from property
and government transfers) and loans as the sources of purchasing power, used increasingly by low-
and middle-income households. Resort to non-wage income allowed households to maintain the share
of disposable personal income in GDP at around 74 per cent, despite the long-term decline in the share
of labour compensation in GDP since the early 1980s (interrupted by only a brief upswing in the late
1990s) (figure 2). Efforts to maintain relative standards of consumption, despite sluggish growth in
labour compensation, led many households to lower their savings or increase their debts, causing a
marked fall in the household savings rate.7




6 Glick and Lansing (2010) show that large increases in household leverage (as measured by the ratio of debt to
disposable personal income) and the housing bubble were not unique to the United States; they also occurred in
other developed countries.
7 For further discussion on the development of income inequality and the relationship between income
distribution and the maintenance of relative, rather than absolute, standards of consumption in the United States,
see Barba and Pivetti, 2009.


Figure 1
PERSONAL CONSUMPTION IN


THE UNITED STATES, 1950–2010
(Per cent of GDP)


55


60


65


70


75


1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


Average, 1975–2000


Source: Author’s calculations, based on the United States
Bureau of Economic Analysis database.


Note: The observations are based on quarterly data. Data
for 2010 refer to the first quarter.




5


In the final two quarters of 2008, real
personal consumption expenditure fell
sharply, marking a departure from the trend
of a steady increase in the consumption rate
since the 1980s. Thereafter, it picked up
again, but this is most likely due to the one-
off effects of transfers related to various
government programmes such as the “cash-
for-clunkers” programme, food stamps and
extended unemployment benefits, as well as
tax cuts. This suggests the recovery is only
temporary. Indeed, there is good reason to
believe that the decline in household
consumption as a share of GDP has only just
begun. It has fallen by only about one
percentage point from its peak of 71.5 per
cent and, thus, remains about five percentage
points above its pre-bubble average of 66 per
cent during the period 1975–2000. The
decline in asset prices and the associated
wealth effects for households, a sharp
tightening of credit availability and a large
increase in unemployment risk are widely
expected to have a lasting downward impact
on household spending. According to recent
estimates (Lee, Rabanal and Sandri, 2010: 3),
the current changes in the respective shares of
household consumption and savings in total
income are likely to settle at the levels of the
early 1990s, which “implies a significantly
lower share of private sector demand in GDP
by about 3 percentage points compared to the
pre-crisis (2003–2007) average”.8




B. China’s consumption spending


Private consumer spending in China is low by international standards, regardless of whether it is
measured in per capita terms or as a share of GDP (McKinsey Global Institute, 2009). In 2008, per
capita consumption was only $758 (in real 2000 terms), much lower than that of many other
developing countries, including in Asia.


However, a low and declining share of private consumption in aggregate demand is a characteristic
frequently observed in rapidly industrializing economies during their early phase of economic take-
off. The industrialization experiences of Japan and the Republic of Korea indicate that the share of
private consumption in GDP tends to fall during about the first 20 years after economic take-off,
before turning to a slow upward trend thereafter, and that this may happen in spite of stable positive
rates of growth in private consumption expenditure (figure 3). The reason for this is the key


8 Carroll and Slacalek (2009) use a different simulation model but arrive at similar conclusions. They also note
that retail sales have declined particularly sharply, and considerably more than in any previous recession since
the Second World War.


Figure 2
HOUSEHOLD LIABILITIES, DISPOSABLE PERSONAL


INCOME AND LABOUR COMPENSATION IN
THE UNITED STATES, 1965–2009


(Per cent)


50


60


70


80


90


100


110


120


130


140


1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009


Household liabilities as a share of disposable
personal income
Disposable personal income as a share of GDP
Labour compensation as a share of GDP
Trend of household liabilities as a share
of disposable personal income, 1975–2000


Source: Author’s calculations, based on the United States
Federal Reserve, Flow of Funds database (tables
B100, F6 and F7).


Note: Data for 2009 are preliminary.




6


importance of capital accumulation for rapid industrialization and the associated high – and initially
rising – share of gross fixed capital formation in GDP during economic take-off (figure 4).9 However,
contrary to the experiences in Japan and the Republic of Korea at similar stages of economic take-off,
China experienced a sharp decline in private consumption and a sharp increase in investment – both
measured as a share of GDP – since about the mid-2000s, which is about 25 years after the country
began its economic take-off (figures 3 and 4).





Figure 3


HOUSEHOLD CONSUMPTION IN CHINA, JAPAN AND THE REPUBLIC OF KOREA
FROM START OF ECONOMIC TAKE-OFF


(Index numbers on a logarithmic scale,
initial year = 100, and percentage shares)


A. Absolute value


0


200


400


600


800


1 000


1 200


1 400


1 600


1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 44


Number of years from start of economic take-off


In
de


x
nu


m
be


rs


Japan (1957)


Republic of Korea (1965)


China (1979)


B. Share in GDP


30


40


50


60


70


80


90


1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 44


Number of years from start of economic take-off


P
er


ce
nt


ag
e


sh
ar


es


Japan (1957)


Republic of Korea (1965)


China (1979)




Source: Author’s calculations, based on UNCTAD Handbook of Statistics database; World Bank, World Development
Indicators, and Global Development Finance database; and Japan, Economic and Social Research Institute (ESRI),
Annual Report on National Accounts of 2010, Part 1.1.


Note: The year in brackets indicates when economic take-off began. For the definition of these dates, see footnote 9.






9 The dates used here for the beginning of economic take-off were determined through a breakpoint analysis of
productivity growth series, measured by growth rates of GDP per worker, as is frequently used in the literature
on catching-up and integration (Maury and Pluyaud, 2004; IMF, 2004). This analysis revealed clear starting
breakpoints for Japan, the Republic of Korea and China. By contrast, the starting point could not be determined
as clearly for India and, for the purpose of this analysis, was taken as 1980. These dates closely correspond to
(but do not coincide with) the dates used by the IMF (2005) for growth take-off. However, the IMF-study
determines the beginning of economic take-off by the start of an economy’s rapid integration into international
trade; it is defined by the IMF (2004) as “starting when the three-year moving average of constant-price export
growth first exceeded 10 per cent”.




7


Figure 4
SHARE OF GROSS FIXED CAPITAL FORMATION IN GDP IN CHINA, JAPAN AND


THE REPUBLIC OF KOREA FROM START OF ECONOMIC TAKE-OFF
(Per cent)


15


20


25


30


35


40


45


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44


Number of years from start of economic take-off


Japan (1957)


Republic of Korea (1965)


China (1979)




Source: See figure 3.
Note: See figure 3.




In order to explain the two features observed since the mid-2000s with regard to China’s private
consumption expenditure – its relatively slow growth over the five-year period as a whole, and its
declining share in GDP – some observers have focused on the savings behaviour of households. It is
argued that households’ marginal propensity to save has been high, and has increased further over the
past decade because of demographic developments (such as the increase in the proportion of the
working age population in total population), reforms of State-owned enterprises since the mid-1990s
(which increased many households’ uncertainty as to their future pension, health and education
expenditures) and the limited provision of health care, education and pensions by the Government
(see, for example, Modigliani and Cao, 2004; and Blanchard and Giavazzi, 2006).


These factors are undoubtedly important explanations for the increase in the savings rate of Chinese
households (see, e.g., McKinsey Global Institute, 2009). But it is far less likely that they played a
major role in the decline of the share of consumption in aggregate demand. Calculations based on
regression analysis suggest that the 5 percentage point increase in China’s household savings since the
early 1990s has been responsible for only one-ninth of the 9 percentage point decline in the share of
consumption in GDP that has occurred since then. The same calculations suggest that it is the decline
in the share of households’ disposable income in GDP that is largely responsible for the relative
decline in consumer demand (Aziz and Cui, 2007).


The share of labour income in national income reached a peak in the mid-1990s and has been
consistently declining since then.10 This decline has been closely mirrored by the decline in the share
of household consumption in GDP. At the same time, the share of corporate profits in national income
has been increasing (figure 5). To be sure, this evidence does not suggest that labour compensation in




10 For a detailed discussion of the data issues involved in these calculations, see also Aziz and Cui, 2007.




8


China has been falling, but only that household income and employee compensation have been
growing slower than GDP.11



Figure 5


HOUSEHOLD CONSUMPTION, EMPLOYEE COMPENSATION, CORPORATE PROFITS
AND DISPOSABLE INCOMES OF HOUSEHOLDS AND FIRMS IN CHINA, 1993–2007


(Per cent of GDP)


16
20
24
28
32
36
40
44
48
52
56
60
64
68


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


Household consumption
Employee compensation


Operating surplus of corporate sector
Disposable income of households


Disposable income of corporate sector




Source: Author’s calculations, based on National Bureau of Statistics of China database; and Bai and Qian, 2009a: table 4.


At first glance, this evidence would suggest that the low and declining share of household
consumption in GDP reflects an imbalance between employee compensation and corporate profits
(Hung, 2009). However, this evidence is likely to be the result of a greater number of potentially
overlapping factors whose relative quantitative importance is difficult to disentangle.




11 It should be noted that analyses of wage trends in China face “the lack of systematic, consistent aggregate data
that cover wages and labour compensation over a wide basis and an extended period of time” (Yang, Chen and
Monarch, 2009: 5). This is probably why headlines about double-digit growth rates of wages in China
(e.g., JPMorgan, 2010; EIU, 2010: 27) frequently cause confusion: they refer to the 13 per cent growth between
1998 and 2007 or to the 12 per cent rate of growth in real wages between 2003 and 2009 calculated on the basis
of data for urban wages and salaries. The problem with these data is not only that they exclude non-urban
manufacturing activities (such as in township and village enterprise (TVEs)), where wages are much lower, but
also that they mainly cover the urban workforce in State-owned enterprises, where wages tend to be higher than
in the private sector (Yang, Chen and Monarch, 2009: 9). Perhaps the most detailed study on labour cost
developments in China (Lett and Banister, 2009: 36), which takes into account both manufacturing urban units
and manufacturing TVEs, found that, between 2002 and 2006, employee compensation (including wages, social
welfare contributions, housing and other benefits) in urban manufacturing units grew by an average annual rate
of 12 per cent and in TVEs by 7 per cent; with two-thirds of manufacturing employees categorized as TVE
workers, “total manufacturing compensation in China more closely reflects the compensation costs of TVE
workers than it does urban unit compensation costs.” Another study provides supportive evidence: it also
indicates an average annual rate of real wage growth in urban manufacturing of about 11.4 per cent between
2002 and 2006, which significantly exceeds the increase of about 4.7 per cent for rural migrants during the
period 2003–2006 (Park, Cai and Du, 2010).




9


While statistical issues12 were key elements behind the one-off drop in the share of labour
compensation in GDP between 2003 and 2004, structural change has probably been a key determinant
of the tendency of this share to decline since the mid-1990s. A recent study decomposes the change in
the aggregate share of labour compensation in GDP into changes stemming from shifts in aggregate
output structure and those caused by differences in sectoral employment shares (Bai and Qian, 2009b).
On the basis of this analysis, the authors argue that the main cause of the falling share of household
disposable income and labour compensation in GDP since the mid-1990s has been the declining
importance in total value added of agriculture and the growing importance of industry and services,
with the employment share being much larger in the former than in the latter sectors. They also show
that the lower share of employment in the industrial sector itself has been an amplifying factor since
the mid-1990s. But other factors have probably also contributed. During the late 1990s and early
2000s, a sizeable part of the decline in the wage share in industry was most likely due to the reform of
State-owned enterprises. Moreover, for the entire 15-year period, the exceptionally high investment
rate, the substantial inflows of foreign direct investment and the resulting capital-intensive structure of
industrial production, combined with rapid technological progress and very high rates of labour
productivity in Chinese manufacturing, must have contributed significantly to the relatively slow pace
of employment growth in manufacturing, and hence in total labour compensation.13


A further factor that might have slowed down the growth rate of total employee compensation was the
continued abundant supply of very-low-cost workers – a factor that is often assumed to be a defining
characteristic of the Chinese economy. One way of estimating developments regarding surplus labour
is by looking at the age structure of a country’s labour force.14 While the size of China’s total labour
force (i.e. the population aged 15 years and older), is likely to peak only in the mid-2030s, its pre-
retirement labour force (the population aged between 15 and 64 years), can be expected to peak at
around 2015 (figure 6A). Perhaps more importantly, the size of the population entering the labour
force defined broadly (i.e. the 15–24 year age group) reached its peak of 224 million people in 2009,
and that of the population entering the labour force defined narrowly (i.e. the 15–19 year age group)
reached its peak of 125 million people in 2005 (figure 6B). Taken together this evidence is indicative
of an ageing labour force in China, which tends to be less mobile. Consequently, employers will need




12 According to international practice (such as followed in the United Nations System of National Accounts) the
proceeds from self-employed work are treated as operating surplus (i.e. capital income), unless the self-
employed receive wages from their own enterprises or unless individuals create their own enterprises. Given the
difficulty in distinguishing between capital income and labour income in the proceeds from self-employed work,
China’s National Statistics used to categorize both as labour income (Aziz and Cui, 2007). One rationale for this
might have been that in poor countries the self-employed tend almost entirely to provide labour services. This
changed in 2003–2004: since 2004, the income of self-employed individuals engaged in non-agricultural
activities has been counted as capital income (Bai and Qian, 2009a). As a result, more than half of the steep
decline in the share of employee compensation (the thick line shown in figure 5) for 2004 was most probably due
to this change in statistical reporting (Bai and Qian, 2009b).
13 According to standard economic theory, a high and increasing rate of investment and a growing capital
intensity of production reduce the return on capital. As a result, the total income accruing to capital would
decline and that accruing to labour would increase. This is the opposite of what happened in China. A possible
explanation is that rapid technological progress accompanied the intensive use of capital and prevented
additional investment from becoming less efficient.
14 One complementary measure relates to the unemployment trend. However, data available for China provide
conflicting evidence of this trend: while data from the 2000 census and from the 2005 mini census point to a
decline in unemployment, from 8.1 per cent to 5.2 per cent over this period of time, labour force survey data for
the same period suggest that in 2002 there was a reversal of the initial decline in unemployment, but that,
nonetheless, unemployment declined from 7.6 per cent in 2000 to 7 per cent in 2005 (Park, Cai and Du, 2010).
Another complementary measure relates to surveys of wage rates. According to Zhang, Yang and Wang (2010),
primary surveys of wage rates provide more reliable statistics than employment data and indicate an acceleration
of the trend increase in real wages that had begun in 2003.




10


to pay a higher wage premium to get and retain workers,15 so that real wages are likely to grow more
rapidly relative to productivity than in the past. Indeed, according to media reports, minimum wages
have been rising strongly in several provinces (Mitchell and Dyer, 2010). While this evidence suggests
a broad tendency towards rising wages, it must be interpreted with caution. Part of it could be a
reaction to more supportive agricultural policies, such as the abolition of the agricultural tax (Knight,
2007). But in any case, although not for demographic reasons, this would have increased the premium
for employers to induce workers to migrate from rural to urban areas. All of these factors combined
could be a powerful stimulus to domestic consumption.



Figure 6


CHINA’S LABOUR FORCE BY AGE STRUCTURE, 1990–2050
(Million)


50


100


150


200


250


300


1990 2000 2010 2020 2030 2040 2050


15 years –19 years


15 years – 24 years


B. Population entering the
labour force


700


800


900


1 000


1 100


1 200


1990 2000 2010 2020 2030 2040 2050


15 years and above


15 years – 64 years


A. Total labour force and pre-retirement
labour force




Source: Author’s calculations, based on the United States Census Bureau database.
Note: Data from 2010 are estimates.




Taken together, this evidence indicates that Chinese households’ disposable income, and hence their
consumption spending, is likely to increase in the near future due to demographic developments that
will exert upward pressure on wages. This tendency could be reinforced through policy measures.
Financial sector reform and government transfer payments could increase the non-wage elements of
household incomes, while an increase in government spending on social security (including pensions,
health and education) and public investment in housing could help reduce household precautionary
savings.




15 This evidence does not mean that China’s total labour supply is shrinking and that the country will be facing a
labour shortage any time soon. On the other hand, the radically altered age structure of the labour force means
that wages are almost certain to rise faster relative to productivity growth than they have over the past 20 years.




11


III. THE TRADE IMPACT OF CONSUMPTION SPENDING
IN THE UNITED STATES AND CHINA


Buoyant consumer demand in the United States was the main driver of global economic growth for
many years in the run-up to the current global economic crisis. A return of United States household
savings to about 4 per cent of disposable income – the average of the mid-1990s (i.e. before those
households went on a spending spree) – would translate into a fall in household consumption of about
3 per cent of United States GDP. Given that before the crisis United States household consumption
accounted for about 16 per cent of global demand and that a sizeable part of United States
consumption consists of imports, this would imply both a reduction in world demand and a decline in
other countries’ export opportunities. From 2000 to 2007, United States imports grew from an amount
equal to 15 per cent of United States GDP to 17 per cent, boosting aggregate demand in the rest of the
world by $937 billion, in nominal terms. Moreover, given global production sharing, United States
consumer spending boosts global economic activities also in many indirect ways, e.g. business
investment in countries such as Germany and Japan to produce machinery for export to China and its
use there for the manufacture of exports to the United States. In short, the future path of United States
consumption spending has macroeconomic implications not only for economic recovery in the United
States but also for global growth.16


The question arises as to which countries’ consumer demand could make up for the decline in United
States consumer demand. This raises at least three issues: (i) the importance of the absolute level of
United States household consumption at the global level; (ii) the composition of United States imports
of consumer goods; and (iii) the import content of United States household consumption. The first two
of these issues are discussed in the remainder of this section, while the latter one is addressed in the
following section.


Regarding the first question, United States consumer demand is by far the largest in the world in
absolute terms (figure 7). It should be noted that figure 7 gives a somewhat biased impression because
the underlying data relate to the period when highly leveraged, unsustainable debt-financed consumer
spending played a sizeable role in the United States. This is in strong contrast to China where
household debt to GDP is roughly 20 per cent (i.e. relatively low because, for example, the vast
majority of cars is sold for cash), compared to about 100 per cent in the United States (Lardy,
2009: 6). This means that in the United States consumer demand is likely to shrink, not just grow
slower, while in China it is likely to grow rapidly. Hence, the contribution of China to global
consumption in the future is likely to be significantly larger than extrapolations of the data represented
in the graph may indicate.


What would be the impact of a reduction in United States consumer demand on the country’s current-
account balance? The deterioration in the United States current account balance up to 2006 and its
recent improvement have been largely driven by changes in the trade account.17 Indeed, merchandise
trade is by far the most important component of the United States current account. With a deficit of
about $800 billion, which corresponds to 6 per cent of GDP, the trade deficit has been responsible for
an average of about 110 per cent of the current-account deficit in the past five years.18




16 The adverse demand effect on the rest of the world would also occur if household consumption was replaced
by government consumption. This is because much of government consumption relates to public sector service
activities which have a low import content.
17 The current account is the sum of the trade balance, the balance on labour income, the balance on international
investment income and unilateral transfers (foreign aid and remittances).
18 While the balance on unilateral current transfers is slightly negative, the balance on income and on trade in
services is positive, so that the trade deficit exceeds the size of the current-account deficit as a whole (numbers in
text calculated from the Bureau of Economic Analysis Aggregate Income and International Transactions
databases).




12






However, these aggregate data mask important features that are of particular importance for the link
between household consumption and current-account imbalances. While capital goods and industrial
supplies and materials (excluding energy) are the largest categories on both sides of the United States
trade account, a disaggregation of the United States trade deficit by main end-use categories shows
that consumer goods, including automotive products, accounted for over 85 per cent of the increase in
the non-energy trade deficit between 1997 and 2008 (figure 8). A loss in competitiveness may partly
explain the worsening balance of trade in consumer goods. But the rapidly expanding household
consumption has most likely been the major cause of the large and widening deficit in the
consumption categories of United States trade, and thus in its current account.




Figure 7
HOUSEHOLD CONSUMPTION IN SELECTED COUNTRIES AND COUNTRY GROUPS,


AVERAGE FOR 2007–2008
(Billions of dollars)


0


1 000


2 000


3 000


4 000


5 000


6 000


7 000


8 000


9 000


10 000


United States EU-15 Japan China India Major petroleum
exporters in
West Asiaa


Germany




Source: Author’s calculations, based on UNCTAD Handbook of Statistics database.
a Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Syrian Arab Republic and United Arab Emirates.




13


Figure 8
CURRENT-ACCOUNT BALANCE AND TRADE BALANCE


BY END-USE CATEGORY IN THE UNITED STATES, 1980–2009
(Billions of dollars)


- 900


- 800


- 700


- 600


- 500


- 400


- 300


- 200


- 100


0


100


Capital goods
Consumer goods (non-food), incl. autos Current-account balance


Foods, feeds, beverages; and exports and imports, nes Industrial supplies and materials, excl. energy
Energy


1980 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09




Source: Author’s calculations, based on the United States Bureau of Economic Analysis database.
Note: nes = not elsewhere specified.




It is unlikely that the sharp decline in United States imports of consumer goods could be compensated
by an increase in consumer spending and associated imports of consumer goods by China or any other
developing country. Given that China’s consumption was only about one eighth of United States
consumption and that its GDP at current exchange rates is only one third that of the United States,
there is little reason to believe that household consumption in China could supplant United States
household consumption as a driver of global growth any time soon.19 In order for Chinese
consumption to compensate for the decline of United States consumption back towards its average
long-term trend, the share of consumer spending in GDP in China would need to increase by about
10–15 percentage points (depending on the difference in the two countries’ rate of GDP-growth) – an
unlikely occurrence in the foreseeable future.20 Domestic demand could also expand in other relatively
large and rapidly growing developing countries, notably Brazil and India. However, compared to the
United States economy, the economies of these countries are still small, making it unlikely that they
could compensate fully for the decline in United States consumption. Rather, household consumption
in developed countries in the European Union, particularly Germany, as well as Japan, would be better
placed to achieve this.


Perhaps even more importantly, the composition of United States imports of consumer goods differs
greatly from that in many other countries. An import similarity index based on 428 different consumer
goods indicates that China’s basket of imported consumer goods overlaps that of the United States by




19 What is more, the import content of domestic consumption in China is significantly smaller than in the United
States (see section 4 below).
20 According to the Bank for International Settlements (2007: 56) “final consumption goods constitute only 4 per
cent of China’s total imports and calculations suggest that the elasticity of demand for its ordinary imports
(i.e. those not used for processing in the export sector) with respect to domestic spending is insignificant.”




14


only about 45 per cent (figure 9).21 This index also indicates that the composition of imports of
consumer goods by major developed countries with current-account surpluses, namely Germany and
Japan, is very similar to that of the United States. Combined with the evidence on the size of
household consumption shown in figure 7, this shows that these two developed countries would be in
a better position than China to compensate for the decline in United States consumer goods imports.




Figure 9
PERCENTAGE OF SIMILARITY IN THE COMPOSITION OF CONSUMER GOOD IMPORTS OF SELECTED


COUNTRIES WITH THE IMPORTS OF THE UNITED STATES, 1992–2008


China


Russian Federation


0


10


20


30


40


50


60


70


80


90


100


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Germany


Japan


Republic of Korea


India


Brazil




Source: Author’s calculations, based on United Nations, UN COMTRADE database.




21 For this analysis, consumer goods are identified on the basis of the United Nations Classification by Broad
Economic Categories (BEC), codes 61, 62 and 63, which cover durable, semi-durable and non-durable consumer
goods, respectively (United Nations, 1971). Using concordance tables, these codes were translated into 428
products at the 5-digit level of the Standard International Trade Classification, Revision 3. The import similarity


index between two economies j1,2 is: )),(),(/(),(),(100 2
2


1
2


21∑ ∑∑
i ii


jisjisjisjis where s(i,j) is the


share of good i in the imports of country j.




15


IV. THE ACCUMULATION OF GLOBAL IMBALANCES: INCOME, TRADE
AND EMPLOYMENT EFFECTS IN DEVELOPING COUNTRIES


The previous sections addressed issues in relation to consumption spending in China and the United
States. However, it is clear that developments in consumption spending in these two countries affect
the global economy as a whole. One reason for this is the large size of these two economies. More
important in the current context is the continued large difference in their levels of per capita income
combined with the fact that the level and structure of world trade is influenced by the relative
importance of rich and poor countries in global economic growth.22 As long as per capita income
growth in rich countries drive the rate of global economic growth, their demand pattern will have a
key effect for global trade patterns: given their already high levels of industrialization and per capita
income, their demand preferences will, in addition to often non-tradeable services, tend to emphasize
manufactured consumer goods, rather than industrial raw materials, energy and food products that will
feature more prominently in the demand patterns of rapidly industrializing poorer countries. But if
rapidly industrializing developing countries assume an increasingly more important role in global
demand growth, their demand pattern, and its relatively greater emphasis on industrial raw materials,
energy and food products, will play a greater role in global demand growth.


Whether per capita income growth is driven by investment, consumption or exports will also affect
global trade flows. There are sizeable differences in the import intensity of different components of
demand. Numerical evidence from developed countries indicates that import intensities vary over time
and that, in most countries, the import intensity of exports exceeds that in consumption which, in turn,
exceeds that in investment (see, e.g., Kranendonk and Verbruggen, 2008). The large import intensity
of exports is due to the internationalisation of production through global value chains. The import
intensity of household consumption is relatively low because of the importance of non-tradeable
services in consumer spending. The level of the import intensity of investment very much depends on
the maturity of the domestic capital-goods industry, as well as on the importance of foreign-direct
investment in gross capital formation. Though there is no readily available numerical evidence, the
import intensity of private consumption most likely exceeds that of government consumption, since
public servant wages are an important part of the latter. Similarly, the import intensity of private
investment is likely to exceed that of public investment, since the latter includes a lot of services.


While these differences in the relative importance of import intensities across different elements of
aggregate demand are likely to apply in most countries, there are important differences across
countries for specific elements. Evidence for developed countries indicates that the import intensity of
consumption in the United States is significantly lower than that in countries of the Euro-area, and that
the import intensity of United States exports is also very low. For the period 2003–2007, the import
intensity of United States consumption was only slightly more than half that of Germany, while the
import intensity of United States exports was less than one third of that of Germany (see, e.g.,
Kranendonk and Verbruggen, 2008). Assuming a given level of total aggregate demand, this implies
that demand rebalancing from exports to consumption in Germany combined with demand rebalancing
from consumption to exports in the United States would cause a decline in the imports of these two
countries combined.


Similar numerical evidence is not available for developing countries. However, estimates indicate that
the import intensity of China’s consumption is only about 8 per cent, i.e. about half that in the United
States (Akyüz, 2010). The same study estimates that the import intensity of China’s exports is
significantly higher than that of developed countries, but that it is even higher in the other developing




22 Differences in comparative advantage among developed countries, as well as among developing countries,
play of course also a role for the composition of global demand. As far as developed countries are concerned,
rapid economic growth in, for example, Japan will imply global imports of industrial raw materials, energy and
food products to grow more rapidly than similar growth rates in countries with a richer natural-resource
endowment, such as the United States.




16


countries participating in the East and South-East Asian production networks, such as Malaysia and
Thailand.


Differences in the import intensity of different elements of aggregate demand imply that changes in
the composition of a country’s aggregate demand will cause significant shifts in its imports. They also
imply that these changes in imports occur even if the level of national aggregate demand itself does
not change. On the other hand, these changes are reinforced by differences in the growth rates of the
different components in global aggregate demand. For example, in the lead-up to the current crisis,
global output growth was characterized by a relatively high import intensity, based on the combination
of three factors: (i) rapid growth in the United States based on consumption, rather than exports; (ii)
the export-oriented development strategy that many countries in East and South-East Asia have been
following over the past two or three decades, which was embedded in global production sharing and
an associated high import content of these countries’ exports; and (iii) the ensuing rapid
industrialization in Asian developing economies, especially China, which was one of the factors that
supported rapidly growing demand and booming prices for primary commodities between 2002 and
2008. The resulting boost to the exports of commodity-exporting countries is reflected in the fact that,
over the period 2002–2008, world exports of agricultural products and especially of mineral and fuels
grew more rapidly than total world exports of goods and services (figure 10). These developments
strongly mitigated, and temporarily reversed, the usually bleak demand prospects for primary
commodity production.




Figure 10
GROWTH RATES OF WORLD TRADE BY SECTOR, 1995–2002 AND 2002–2008


(Per cent)


0


5


10


15


20


25


30


World merchandise and
services exports


Services Manufactures Fuels and metals Agricultural products


1995–2002 2002–2008




Source: Author’s calculations, based on UNCTAD Handbook of Statistics database.


These level and compositional effects of global demand have price implications. For example, a
tendency towards a greater importance of manufactured consumer goods in global demand, driven by
rapid growth in industrialized economies, may result in a downward shift in the terms of trade for
primary-commodity exporters, while a tendency towards a greater importance of industrial raw
materials, energy and food products, driven by rapid growth in relatively less-industrialized countries,
may reverse this downward shift, at least temporarily. These price effects will, in turn, guide
investment decisions and lead to changes in the sectoral focus of investment, productivity, output and
employment growth.




17


The remainder of this section examines which sectors have driven per capita output growth and
employment generation in developing and transition economies during the period prior to the current
crisis. Four economic sectors are identified: agriculture (which also includes hunting, forestry and
fishing), mining (which also includes utilities), manufacturing and services.23 Two sub-periods are
distinguished: (i) from 1995 to 2002, when developed countries, notably the United States, were the
dominant drivers of global demand, while several emerging-market economies experienced slow
growth; and (ii) between 2002 and 2008, when economic growth accelerated in a number of emerging-
market economies, in particular the large and populated “BRIC” countries (i.e. Brazil, the Russian
Federation, India and China) that joined the United States as major drivers of global demand, which
boosted the demand for primary commodities. The distinction of these two sub-periods forms the
background for projections, in the following section, with regard to an emerging situation in which the
importance for global growth of United States consumer demand will tend to decline sharply, while
the role of the BRIC countries for global growth and global demand patterns is likely to remain
growing.


In the vast majority of developing and transition economies that have experienced rapid per capita
output growth, this has been associated with above-average growth of output in manufactures and/or
services (figure 11), particularly in China and India. In countries where aggregate growth rates have
been negative or low, so have been the growth rates of manufactured output. During the first sub-
period, in most regions per capita output growth was slow, without a clear sectoral pattern.


When overall output growth accelerated after 2002, growth rates in the manufacturing and services
sectors exceeded those in agricultural and mining sectors – a somewhat surprising development in a
context of rapidly rising primary commodity prices in global markets. Several factors could explain
this feature. First, it could indicate that policymakers managed well the inflow of windfall profits
resulting from the commodity price boom. Using these revenues for diversifying their economies such
that supplementary income obtained from primary activities could generate demand for the entire
domestic economy, policymakers may have avoided the adverse impact on non-resource sectors that
previously had often been associated with natural-resource booms.


A, second, complementary explanation may be that rapidly expanding household consumption in the
United States provided sufficiently high external demand for many developing countries such that, on
aggregate, developing and transition economies enjoyed buoyant external demand across all four
economic sectors.24 This could further explain, for example, the increase in the growth rates of
manufactured output between the first and the second sub-period in those countries that export
manufactures to the United States either directly (such as South America, Central America and the
Caribbean, as well as South Asia excluding India), or more indirectly as part of the vertically
integrated production chain that spans across South-East and East Asia and whose hub in most
instances is China (figure 11). To the extent that this is the case, a decline in United States household
consumption, and the potentially associated decline in United States imports of manufactured goods, is
likely to have serious adverse implications for the manufacturing sectors in a wide range of developing
countries. This issue is addressed in more detail in the following section.






23 Construction is not included in this analysis because developments in the real estate sector are often affected
by financial factors unrelated to productivity and employment, which would blur the analysis.
24 Rapid growth of the services sector was probably also due to strong expansion of retailing and other
consumption related services and, thus, more a reaction than a cause of the rapid expansion of aggregate output.




18


Figure 11
PER CAPITA OUTPUT BY SECTOR, SELECTED COUNTRIES AND COUNTRY GROUPS, 1995–2008


(Average annual growth rates)


1995–2002


-4 -2 0 2 4 6 8 10 12 14


Transition economies,
excl. Russian Federation


Sub-Saharan Africa


North Africa


South America


Central America
and the Caribbean


West Asia


South Asia, excl. India


South-East Asia


First-tier NIEs


Russian Federation


India


China


Brazil


Value addedAgricultureMiningManufacturingServices


2002–2008


-4 -2 0 2 4 6 8 10 12 14




Source: Author’s calculations, based on UNCTAD Handbook of Statistics database; and UNECE, Economic Statistics
database for the Russian Federation in 2002.


Note: South-East Asia excludes Singapore. West Asia comprises: Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab
Emirates. North Africa excludes Sudan. First-tier newly industrializing economies (NIEs) are: Hong Kong (China), the
Republic of Korea, Singapore and Taiwan Province of China. For China, mining is included in manufacturing due to
the lack of disaggregated output data for mining.



While figure 11 indicate percentages changes over the past 15 years, the absolute number of jobs that
these four sectors have provided depends on their relative weight in each economy. Agriculture
accounts for a significant share of total employment in several regions, particularly in Asia, North
Africa and the CIS countries, a share that is much larger than its relative contribution to total value
added (figure 12).25 This contrasts with manufacturing, where the contribution to total GDP is
generally higher than that to total employment, showing that labour productivity in manufacturing is
above the average for these economies. With regard to the mining sector, it appears that whatever it
may contribute to GDP, its direct contribution to employment is marginal. The services sector




25 Due to data limitations, sub-Saharan Africa is not included in figure 12.




19


accounts for the largest share of employment in many regions, with labour productivity close to the
economies’ average labour productivity. Taken together, this evidence indicates that the employment
impact of global rebalancing will most likely be closely related to the sectoral effects that rebalancing
will entail. The next session focuses on this issue.





Figure 12
AVERAGE SECTORAL SHARES IN TOTAL VALUE ADDED AND EMPLOYMENT,


SELECTED COUNTRIES AND COUNTRY GROUPS, 1995–2008


Agriculture


BRA
MEX


KOR
RUS


SAm


CE


WA


NA
SEA


CIS


CHN


SA IND


0


10


20


30


40


50


60


70


80


0 10 20 30 40 50 60 70 80


Sectoral share in total employment


S
ec


to
ra


l s
ha


re
in


to
ta


l v
al


ue
a


dd
ed


Manufacturing


RUS


MEX


BRA
SA


SAm


IND


NA CE


CIS


WA


KORSEA


0


10


20


30


40


50


60


70


80


0 10 20 30 40 50 60 70 80


Sectoral share in total employment


S
ec


to
ra


l s
ha


re
in


to
ta


l v
al


ue
a


dd
ed


Services


RUS
KOR


MEXCE


SAmNA
SA


IND CIS


SEA


CHN
WA


BRA


0


10


20


30


40


50


60


70


80


0 10 20 30 40 50 60 70 80


Sectoral share in total employment


S
ec


to
ra


l s
ha


re
in


to
ta


l v
al


ue
a


dd
ed


Mining


CIS


SAm


WA


RUS
CE


NA


SA


MEX


KOR


SEA
IND


BRA


0


10


20


30


40


50


60


70


80


0 10 20 30 40 50 60 70 80


Sectoral share in total employment


S
ec


to
ra


l s
ha


re
in


to
ta


l v
al


ue
a


dd
ed


CHN




Source: See figure 11.
Note: For mining in China see note to figure 11.
BRA: Brazil; CHN: China; IND: India; MEX: Mexico; KOR: Republic of Korea; RUS: Russian Federation; SEA (South-


East Asia): Indonesia, Malaysia, the Philippines and Thailand; SA (South Asia): Pakistan and Sri Lanka; WA (West
Asia): Qatar and Saudi Arabia; SAm (South America): Argentina, the Bolivarian Republic of Venezuela, Chile,
Colombia, Ecuador and Peru; NA (North Africa): Egypt and Morocco; CE (Central Europe): Czech Republic, Hungary
and Poland; CIS (Commonwealth of Independent States): Azerbaijan, Georgia, Kazakhstan and Kyrgyzstan.
Time periods vary: 1995–2007: China, Republic of Korea, South Asia and North Africa; 1995–2006: India; 1998–2007:
CIS.




20


V. THE POTENTIAL IMPACT OF A GLOBAL REBALANCING ON TRADE FLOWS
AND EMPLOYMENT IN DEVELOPING COUNTRIES


This section focuses on the implications of global rebalancing for trade flows and employment. These
implications are inferred from a simulation of the impact of reduced consumer spending in the United
States and increased consumer spending in China (both measured as a share in GDP) on changes in
sectoral trade flows and employment. Annex 1 to this paper provides details on how this simulation
was carried out, and presents some additional results. The results from the simulation may be
considered as reflecting the medium-term effects (i.e. spanning a period of 5–10 years) of rebalancing
confined to China and the United States. However, it should be borne in mind that the results of the
simulation are only partial; they are not intended to describe the overall impact of a global
rebalancing. In addition, they should be interpreted with considerable caution since they do not take
into account a number of factors, such as difficulties in moving labour across sectors, subsidies and
problems of market access. Nevertheless, simulations are useful for identifying the countries and
sectors that are vulnerable to global rebalancing and for forming an idea of the order of magnitudes
involved.


The simulation is based on the assumptions that adjustment in the United States would lead to a
slowdown in the rate of GDP growth there,26 and that in both China and the United States the share of
household consumption in GDP would be restored to historic levels. Taking account of differences in
the size of GDP in China and the United States, the latter assumption implies that the increase in
China’s consumption would compensate about half of the decline in United States consumption. To
anticipate the main result: the simulation indicates that this would remove much of the demand
stimulus, which, prior to the outbreak of the current crisis, the United States was providing to the
world economy, and that this would not be compensated by a stimulus of similar size from increased
consumption in China.


The results of the simulation are presented in terms of changes relative to 2008. With respect to global
imbalances as a whole, the results indicate that the assumed adjustments in China and the United
States would cause substantial changes in these two countries’ trade accounts: for China, the trade
surplus as a share of GDP would decline by more than eight percentage points, so that only a fairly
small surplus position would remain, while for the United States, the trade balance as a share of GDP
would improve by more than five percentage points and move the trade account into a slight surplus
(columns 2 and 3 in table 1). However, important trade imbalances would persist in other countries:
for example, trade surpluses would decline only a little in Germany and in the countries in the group
comprising West Asia and North Africa. In spite of sizeable reductions, the trade surplus would also
remain high in a number of developing countries in East and South-East Asia, such as Malaysia, the
Philippines, Thailand, and the countries comprising the group of other countries in East and South-
East Asia. These results are likely to be due to the fact, discussed in the two preceding sections, that
the absolute value of China’s household consumer spending is much smaller than that of United States
households, its import content is smaller, and the composition of China’s imports of consumer goods
differs greatly from that of the United States. The net effect of the two adjustments taken together
would be deflationary for the world economy, while they would not be sufficient to unwind the global
imbalances.




26 This assumption is consistent with the simulations by the United Nations (2010) which indicate that the ratio
of the United States current-account deficit to GDP would increase, rather than shrink, over the coming five
years if the United States economy were to grow at a rate similar to that prior to the current crisis. It is also in
line with earlier experiences of rebalancing in countries with an external deficit that is typically associated with a
slowdown in output growth, as noted by the IMF (2010). A main finding of this latter study is that policy-
induced reversals of external surpluses are not typically associated with lower growth, which is in line with the
assumptions made here with regard to China. However, to the extent that exporting allows for dynamic external
benefits (e.g., through learning-by-doing effects) that are not present in output production for the domestic
market, rebalancing from exports to domestic consumer demand may imply a slowdown in output growth.




21


Table 1
GTAP SIMULATION RESULTS OF THE IMPACT OF REBALANCING IN CHINA AND THE UNITED STATES


ON TRADE FLOWS AND FACTOR PRICES, SELECTED COUNTRIES AND COUNTRY GROUPS


Change in wagesc




Change
in trade
balance




Share
of trade
balance
in GDP


Change
in export
volume


Change
in import
volume


Change
in terms
of tradea


Appre-
ciationb



Unskilled


labour
Skilled
labour


(Percent-
age points) (Per cent)


(1) (2) (3) (4) (5) (6) (7) (8) (9)


China -8.2 1.8 -17.6 3.7 2.9 7.1 6.6 8.8


United States 5.2 0.6 41.9 -15.4 -7.2 -8.2 -8.1 -8.5


China, Hong Kong SAR -1.4 14.9 -1.2 0.6 -0.1 2.3 2.3 2.2
China, Taiwan Province of -1.0 14.3 -0.6 1.4 0.3 2.1 2.1 2.0
Indonesia -1.1 0.8 -2.8 1.0 0.3 2.7 2.7 2.7
Malaysia -1.6 42.4 -0.5 1.3 0.3 2.3 2.1 1.9
Philippines -1.3 3.6 -1.4 0.8 -0.1 2.1 2.1 2.0
Republic of Korea -1.6 1.5 -3.4 1.5 0.8 2.9 3.1 2.9
Singapore -1.7 -2.6 -0.3 1.3 0.5 2.7 2.7 2.7
Thailand -3.7 5.8 -3.7 1.9 0.4 2.9 2.9 2.9
Rest of East and South East
Asia -1.6 2.0 -2.2 0.1 -0.1 2.1 2.0 1.7


India -1.2 -7.7 -6.6 2.7 1.1 3.6 3.8 3.8
South Asia, excl. India -1.2 -17.1 -6.7 1.7 0.8 3.3 3.2 3.3


West Asia and North Africa -1.5 13.8 -1.7 2.6 0.7 2.8 2.9 2.6
Sub-Saharan Africa -1.7 1.2 -2.5 3.1 0.7 3.1 3.2 3.3


Argentina and Brazil -1.8 0.8 -7.7 5.2 2.1 4.1 4.0 4.1
Mexico -2.1 -2.1 -6.0 4.9 3.3 3.2 3.3 3.4
Rest of developing America -1.6 -1.8 -3.8 3.4 1.5 2.7 2.8 2.9


Canada -1.7 -2.7 -2.9 5.7 3.1 2.3 2.4 2.4


Germany -1.9 3.8 -3.8 2.3 0.6 3.2 3.1 3.1


Rest of EU-25 and EFTAd -1.6 -3.5 -3.6 2.0 0.7 3.2 3.2 3.2


Australia and New Zealand -1.5 -1.8 -5.5 3.8 1.5 3.6 3.7 3.6


Japan -2.0 -1.0 -12.7 5.7 2.3 4.3 4.3 4.4


CIS, excl. the Republic of
Moldova -0.8 6.6 -1.2 1.4 0.4 2.9 3.0 2.8


Rest of the world -1.8 -9.6 -2.3 1.7 0.3 2.9 2.9 2.6


Source: Author’s calculations.
Note: All changes are relative to 2008.


a An improvement in the terms of trade indicates that the price of exports increased more (or fell less) than the price
for imports.


b An appreciation indicates an increase in the price for primary factors, which may be likened to an appreciation of the
real exchange rate.


c The definition of skilled and unskilled labour and the wage ratio between skilled and unskilled labour is explained in
footnote 36.


d EFTA - European Free Trade Association.




22


Looking at developments in exports and imports separately (columns 4 and 5 in table 1), the results
indicate that for the United States a sharp decline in imports would be accompanied by an even
sharper increase in exports. Apart from China, whose trade balance would deteriorate mainly because
of its own adjustment efforts, the greatest decline would occur for Thailand, followed by Mexico,
Japan (which would experience the strongest percentage decline in exports), Germany and Singapore.
In most countries, particularly developing countries in Asia (notably China, India and Thailand), the
deterioration in the trade balance would be caused mainly by a decline in exports rather than by an
increase in imports, as indicated by the difference in the growth rates reported in columns four and
five of the table. The strong increase in United States exports (a large proportion of which consist of
machinery and electronic equipment, as well as services) and the strong decline in its imports would
be facilitated by the sharp depreciation of the dollar (column 7 in table 1).27 Additional results (not
shown here) indicate that the bulk of the increase in United States exports would be directed to
developed countries, namely Japan and members of the European Union, while the bulk of the decline
in United States imports would particularly affect the members of the European Union, as well as
China and Japan.


Turning to changes in the sectoral structure of trade, the percentage changes in the trade balance of the
United States would be largest for machinery and equipment and electronic equipment (table 2). This
improvement would be mirrored by a sizeable deterioration in the trade balance for these sectors in all
Asian economies included in the table, as well as Mexico and Germany. The strong improvement in
the United States trade balance for chemicals (which includes pharmaceuticals – the single most
important item in United States consumer goods imports) would be mirrored by a substantial
deterioration in the trade balance for these products in Germany and Singapore. The strong
improvement in the United States trade balance for motor vehicles and other transport equipment
would be mirrored by a sizeable deterioration in the trade balance for these products in Argentina,
Brazil, Mexico, Germany, Japan, the Republic of Korea, and Singapore (though most of these effects
for Singapore are likely to be due to trans-shipment, as witnessed by the strong deterioration in
Singapore’s trade balance for commercial services and trade and transport).


To determine how the changes in sectoral trade balances would affect employment, it is useful to
relate these changes to sectoral differences in labour intensity.28 Concentrating on the changes in world
exports of industrial products (shown in the last column of table 2) suggests that the simulated
adjustments in the economies of China and the United States would lead to sizeable adverse
employment impacts in the world economy as a whole. This is indicated by the fact that world exports




27 The set-up of the GTAP-model implies that external imbalances caused by an exogenous shock are removed
and the external balance is restored by changes in the prices of primary factors, downwards to spur exports and
reduce imports, or upwards to reduce exports and increase imports. The relationship between the price of
primary factors across different countries may be likened to an exchange rate. Real and nominal exchange-rate
changes coincide because GTAP, as most other computable general equilibrium models, deals with real
variables, with no money involved.
28 This analysis is based on the methodology proposed by Rajan and Subramanian (2006), who measure the
labour intensity of a sector by the unweighted average across countries of the share of wages and salaries in
value added for specific industrial sectors. The averages used here refer to the period 1995–2005 and cover all
countries for which data are available in the Industrial Statistics database CD-ROM, 2009 of the United Nations
Industrial Development Organization (UNIDO). The mapping of industrial sectors at the three-digit level of the
International Standard Industrial Classification (ISIC) Revision 3 into the sectors used for the GTAP-simulations
is based on the concordance table made available on the GTAP-website (https://www.gtap.agecon.purdue.edu/
databases/contribute/concordinfo.asp). The data-points shown in figure 13 are unweighted averages based on a
total of 10,210 country-sector observations, of which 5,227 refer to developed, 4,573 to developing and 410 to
transition economies, respectively. The distribution of the data-points along the horizontal axis in figure 13
changes only marginally if the period is limited to 2000–2005 or if averages are calculated only for developed or
developing countries. The sample period ends in 2005 because no comprehensive data are available for more
recent years.




23


would decline in the majority of industrial sectors (figure 13). Perhaps more importantly, the largest
declines would occur in the most labour-intensive industrial sectors.29



Table 2


GTAP SIMULATION RESULTS FOR CHANGES IN SECTORAL TRADE BALANCE,
SELECTED COUNTRIES AND COUNTRY GROUPS


(Per cent of GDP in base year 2008)


C
hi


na


U
ni


te
d


S
ta


te
s


A
rg


en
tin


a
an


d
B


ra
zi


l


C
IS


a


G
er


m
an


y


Ja
pa


n


M
al


ay
si


a


M
ex


ic
o


R
ep


ub
lic


o
f K


or
ea




S
in


ga
po


re


Th
ai


la
nd




S
ub


-S
ah


ar
an


A
fri


ca


M
em


o
ite


m
:


C
ha


ng
e


in
w


or
ld



ex


po
rts


re
la


tiv
e


to


ba
se


y
ea


r


Grains and crops -0.22 0.07 -0.06 -0.01 -0.01 -0.01 0.00 -0.10 -0.02 0.00 0.06 -0.09 1.46
Forestry and fishing -0.02 0.00 0.00 0.01 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.00 1.03
Mining -0.08 0.05 -0.01 -0.01 -0.01 -0.02 0.02 0.04 0.00 -0.09 -0.14 -0.08 -0.18
Livestock and meat products -0.13 0.05 -0.07 -0.02 0.00 0.00 0.01 -0.08 -0.01 0.00 -0.01 -0.01 0.34
Processed food -0.24 0.14 -0.11 -0.01 -0.02 -0.02 0.16 -0.19 -0.01 0.00 -0.16 -0.05 -0.93
Textiles -0.51 0.10 -0.03 0.00 -0.01 -0.01 0.05 -0.14 -0.02 0.05 -0.01 -0.02 -1.85
Wearing apparel -0.40 0.11 -0.01 0.00 0.00 0.00 -0.07 -0.11 -0.02 -0.02 -0.17 -0.06 -4.95
Leather products -0.42 0.05 -0.03 0.01 0.00 0.00 -0.01 0.02 0.01 0.01 0.01 0.00 -4.30
Wood products -0.31 0.11 -0.08 0.00 -0.02 -0.02 0.02 -0.13 -0.01 -0.01 -0.09 -0.01 -3.41
Paper products and publishing -0.11 0.11 -0.06 -0.01 -0.03 -0.02 -0.01 -0.08 -0.04 -0.04 -0.03 -0.02 0.09


Petroleum and coal products -0.02 0.01 -0.01 -0.01 0.00 0.01 0.00 0.00 0.01 0.07 0.00 -0.01 -0.29
Chemicals, rubber, plastic prod. -0.62 0.68 -0.21 -0.13 -0.34 -0.23 -0.33 -0.28 -0.22 -0.42 -0.37 -0.14 -0.72
Mineral products, nes -0.09 0.05 -0.04 0.00 -0.01 -0.01 0.03 -0.04 -0.01 -0.01 -0.03 -0.01 0.35
Ferrous metals -0.11 0.04 -0.06 0.02 0.00 -0.02 0.03 -0.02 0.01 0.01 -0.07 -0.04 0.46
Metals, nes -0.08 0.07 -0.05 -0.09 -0.02 -0.01 0.02 -0.06 0.00 -0.01 0.02 -0.12 0.27
Metal products -0.33 0.12 -0.04 0.00 -0.03 -0.03 0.00 -0.11 -0.02 -0.02 -0.08 -0.03 -0.52
Motor vehicles and parts -0.20 0.40 -0.15 -0.02 -0.18 -0.32 0.00 -0.41 -0.26 -0.04 -0.11 -0.11 -1.23
Transport equipment, nes -0.25 0.37 -0.20 -0.10 -0.17 -0.10 -0.24 -0.03 -0.20 -0.67 -0.15 -0.15 4.18
Electronic equipment -1.38 0.68 -0.13 -0.02 -0.18 -0.49 -0.77 -0.36 -0.33 -0.23 -0.72 -0.10 0.04
Machinery and equipment, nes -2.05 1.40 -0.45 -0.17 -0.66 -0.64 -0.54 -0.71 -0.38 -0.45 -1.10 -0.37 1.85


Manufactures, nes -0.58 0.20 -0.02 -0.01 -0.02 -0.03 0.01 -0.02 -0.02 0.01 -0.22 -0.04 -3.87
Utilities and construction -0.02 0.03 -0.02 -0.03 -0.01 -0.02 -0.01 0.00 0.00 -0.01 -0.01 -0.02 4.27
Trade and transport -0.47 0.34 -0.07 -0.11 -0.08 -0.09 -0.10 -0.11 -0.09 -0.15 -0.32 -0.15 -0.21
Commercial services -0.15 0.51 -0.12 -0.10 -0.13 -0.11 -0.11 -0.10 -0.22 -0.47 -0.19 -0.17 1.10
Other services -0.17 0.29 -0.08 -0.10 -0.10 -0.07 -0.16 -0.13 -0.13 -0.14 -0.14 -0.16 3.85


Source: Author’s calculations.
Note: Trade balance refers to volumes. Percentage shares of trade volumes and values in GDP in the base year are identical, as


prices are assumed to equal one.
nes = not elsewhere specified.


a Excluding the Republic of Moldova.




29 There are two exceptions to this: (i) the category “machinery and equipment not elsewhere classified”
includes, for example, machinery, domestic appliances, optical instruments, watches and clocks; (ii) the category
“transport equipment not elsewhere classified” includes railway vehicles, aircraft and associated equipment, and
ships and boats.




24


Figure 13
LABOUR INTENSITY AND GTAP SIMULATION RESULTS FOR CHANGES IN WORLD EXPORTS


BY INDUSTRIAL SECTOR CAUSED BY REBALANCING IN THE UNITED STATES AND CHINA
(Per cent)


-5


-4


-3


-2


-1


0


1


2


3


4


5


10 15 20 25 30 35


Labour intensity by industrial sector (wages and salaries as a percentage of value added)


S
im


ul
at


ed
p


er
ce


nt
ag


e
ch


an
ge


in
w


or
ld


e
xp


or
ts


b
y


in
du


st
ria


l s
ec


to
r (


pe
r c


en
t r


el
at


iv
e


to
2


00
8)


p_c
prf


lmt


crp


nfm
i_s


nmm ppp ele


ome


otn


fmp
mvh


tex


lum
omf


lea
wap




Source: Author’s calculations, based on GTAP simulations; and UNIDO, Industrial Statistics database, CD-ROM 2009.
Note: Labour intensity is measured as the unweighted world average of the share of wages and salaries in sectoral value


added during the period 1995–2005.


crp = Chemicals, rubber and plastic products nmm = Non-metallic mineral products
ele = Electronic equipment ome = Machinery and equipment not elsewhere classified
fmp = Metal products omf = Manufactures not elsewhere classified
i_s = Ferrous metals otn = Transport equipment not elsewhere classified
lea = Leather products p_c = Petroleum and coal products
lmt = Livestock and meat products ppp = Paper products, publishing
lum = Wood products prf = Processed food
mvh = Motor vehicles and parts tex = Textiles
nfm = Metals not elsewhere classified wap = Wearing apparel




The decline in world exports of labour-intensive industrial goods will have different implications for
different countries, depending on their sectoral production and trade structure. The simulation results
for changes in sectoral employment suggest that in China employment would decline in most
industrial sectors (but substantially increase in agriculture, utilities and services) (table 3). By contrast,
in the United States, employment would increase in most industrial sectors, as well as in agriculture,
but decline in all sectors in utilities and services. The United States is also the only country shown in
the table (except Singapore) which would experience an increase in employment in the two labour-
intensive sectors for which the estimations indicate an increase in world exports (see figure 13):
“machinery and equipment not elsewhere classified” and “transport equipment not elsewhere
classified”. This contrasts with the results for most countries, especially those in Asia, for which the
simulations indicate that adverse employment effects are likely to be concentrated in the most labour-
intensive sectors. For example, among the countries shown in table 3, Japan, Malaysia, the Republic of
Korea, and Thailand may experience a reduction (or only a very slight increase) in employment in
labour-intensive sectors such as apparel, transport equipment, textiles, and machinery and equipment
(which includes domestic appliances). However, these results should not be taken as quantitatively
precise predictions. In particular, it should be noted that the evidence shown in figure 13 is limited to
industrial sectors. Many of the countries that experience declining employment in (labour-intensive)
industrial sectors record increasing employment in primary and services sectors, as shown in the two
bottom panels of table 3. While data limitations do not allow making an assessment of the labour
intensity of these sectors, the evidence shown in figure 12 above indicates that, in most countries,




25


agricultural and services activities are considerably more labour intensive than manufacturing. Thus, it
is difficult to assess the impact of global rebalancing on total employment. In spite of these limitations
the reported results taken together provide useful qualitative information that indicates broad
directions of the possible employment effects of a global rebalancing resulting from adjustments only
in China and the United States.




Table 3
GTAP SIMULATION RESULTS FOR CHANGES IN SECTORAL EMPLOYMENT,


SELECTED COUNTRIES AND COUNTRY GROUPS
(Per cent)




C
hi


na


U
ni


te
d


S
ta


te
s


A
rg


en
tin


a
an


d
B


ra
zi


l


C
IS


a


G
er


m
an


y


Ja
pa


n


M
al


ay
si


a


M
ex


ic
o


R
ep


ub
lic


o
f K


or
ea




S
in


ga
po


re


Th
ai


la
nd




S
ub


-S
ah


ar
an


A
fri


ca


Industrial goods
Petroleum and coal products 1.1 -2.7 -0.4 -0.1 -0.3 0.2 0.1 0.6 -0.8 0.7 0.5 0.5
Processed food 4.8 -3.7 -0.9 0.0 0.2 -0.1 1.8 3.5 -0.2 0.6 -0.9 -0.2
Livestock and meat products 7.2 -1.3 -2.1 -0.3 0.3 -1.6 0.9 0.9 -1.2 0.2 -0.4 0.3
Metals, nes -11.7 30.4 -6.7 -2.4 -2.7 -4.1 1.1 -1.8 -1.7 1.0 -3.0 -4.4
Chemicals, rubber, plastic products -7.4 14.7 -4.3 -2.8 -3.3 -4.9 -2.0 1.7 -3.0 -1.9 -3.7 -1.6
Ferrous metals -5.7 21.2 -4.1 0.3 -0.7 -2.8 2.6 3.6 0.1 4.7 1.0 0.3
Non-metallic mineral products, nes -0.6 7.8 1.2 1.0 1.8 1.6 3.0 3.0 2.3 3.8 4.1 2.2
Paper products and publishing -3.1 3.3 -2.8 -0.6 -0.8 -0.9 -0.7 1.8 -1.9 -1.2 -1.8 -0.4
Electronic equipment -11.4 27.2 -1.8 0.1 -0.8 -4.7 0.1 -4.1 -1.6 0.5 -2.1 1.1
Metal products -7.4 12.2 -2.5 0.2 0.4 0.6 1.5 -2.4 0.2 1.3 0.0 1.8
Wood products -11.7 4.9 -4.5 0.4 1.2 2.0 0.6 -6.6 0.7 1.6 -3.5 0.5
Motor vehicles and parts -2.3 4.1 -0.6 0.9 -0.3 -5.4 1.1 0.4 -2.1 4.0 4.0 1.5
Manufactures, nes -9.5 17.3 0.8 -0.5 0.6 0.3 0.0 -1.0 -0.7 3.0 -3.2 -0.5
Machinery and equipment, nes -10.3 21.3 -5.2 -0.2 -2.3 -5.7 -2.2 -3.0 -1.7 1.3 -4.0 -0.8
Textiles -8.6 13.7 -2.2 0.2 0.3 -1.7 1.5 -4.1 -1.2 3.5 -1.3 -0.2
Leather products -12.9 29.6 -3.8 2.9 1.4 -0.4 -3.1 5.4 1.4 2.6 1.0 2.2
Wearing apparel -4.4 4.2 0.1 0.5 1.0 0.7 -6.3 -3.5 -1.4 -4.7 -2.6 -1.9
Transport equipment, nes -7.1 22.4 -10.3 -7.7 -8.3 -10.4 -12.5 -0.8 -8.8 -6.7 -9.9 -8.7


Memo items:


Agriculture and mining
Grains and crops 3.6 7.7 -1.6 -0.1 -0.5 -1.3 -0.1 -0.3 -0.5 -0.2 -0.9 -0.6
Forestry and fishing 3.9 3.7 -1.4 0.7 0.3 -0.1 1.1 0.3 0.4 0.3 -0.6 0.5
Mining -2.3 6.8 -1.3 0.0 0.3 -0.6 0.5 3.0 1.0 1.8 1.4 -0.3


Utilities and services
Utilities and construction 3.3 -2.4 5.8 1.3 5.4 5.7 4.2 1.5 3.8 4.4 8.8 5.2
Trade and transport 1.6 -1.5 0.3 -0.2 -0.6 0.4 -0.2 -0.8 -0.5 -0.1 0.3 0.1
Commercial services 1.6 -0.6 -0.2 -0.5 0.4 0.2 -0.5 -0.6 -0.3 -0.9 -0.8 -0.3
Other services 8.6 -5.7 0.4 -0.3 0.3 -0.2 -0.7 0.2 -0.4 0.0 -0.1 -0.1


Source: Author’s calculations, based on GTAP simulations; and UNIDO, Industrial Statistics database, CD-ROM 2009.
Note: The data in the table refer to percentage changes in the demand for unskilled labour relative to 2008. The percentage


changes in the demand for skilled labour are very similar, and thus are not shown. Industrial goods are listed by
increasing labour intensity, measured as the unweighted world average of the share of wages and salaries in sectoral
value added during the period 1995–2005.


nes = not elsewhere specified.
a Excluding the Republic of Moldova.




26


The adverse effects of global rebalancing for trade flows and employment generation in industrial
sectors reported above would be mitigated if other surplus economies, particularly Germany, were also
rebalancing. Ongoing stagnation of private consumption in Europe and the tendency to embark on
perhaps premature fiscal consolidation programmes strongly reduces the probability of such a scenario
to occur. Nevertheless, it may be useful to examine the trade and employment effects that would result
if in Germany the share of consumption in GDP increased by 10 percentage points and reached the
historic level in the United States of about 66 per cent. This increase in Germany’s consumption
would compensate the second half of the decline in United States consumption, i.e. the part of that
decline which would be left uncompensated by the increase in China’s consumption.30 Contrary to the
bilateral rebalancing scenario examined above, it may also be assumed that such a multilateral
rebalancing would not reduce the rate of GDP growth in the United States.31


On these assumptions, Germany’s trade balance would deteriorate by more than 10 percentage points
of GDP to reach a deficit of about 5 per cent of GDP.32 This outcome is unlikely to be acceptable for
Germany’s policymakers.33 Nonetheless, this scenario helps to illustrate the effects of global
rebalancing that occurs in a multilaterally coordinated way and involves both the major deficit
country, i.e. the United States, and major surplus countries, i.e. China and Germany. In this setting,
adjustment in Germany could be sizeably reduced, and the adjustment burden made more acceptable,
if other developed country surplus economies, such as Japan, also contributed to global rebalancing in
such a way that the decline in United States consumer demand would be fully compensated by an
increase in consumer demand in the surplus countries.


To highlight the differences between bilateral and multilateral rebalancing, it is useful to compare the
impact on trade flows and employment generation of such a multilateral rebalancing scenario, which
are shown in figure 14, with those resulting from rebalancing confined to China and the United States,
which was discussed above (figure 13). Multilaterally coordinated rebalancing would lead to a smaller
decline in world exports of industrial goods (as indicated by the fact that the data points in the bottom
half of figure 14 are closer to the horizontal axis than those in figure 13) and the most adversely
affected industrial sectors would not regard the traditional labour-intensive export sectors of
developing countries, such as apparel, leather and textiles. This means that a multilaterally coordinated
rebalancing would sizeably reduce the adverse effects on export opportunities and employment
creation in the industrial sectors of developing countries.






30 Given that Germany’s GDP is about one fourth that of the United States, this 10 percentage point increase in
Germany’s share of consumption in GDP is about half of what would be required to compensate for the
5 percentage decline in the United States’ share of consumption on GDP, assuming no change in the level of
GDP in either country. Regarding China, see footnote 38 below.
31 In any case, the effects of this assumption are small compared to those caused by changes in the shares of
consumption in GDP. The estimation results that support this finding are available from the author on request.
32 Overall, this scenario implies that countries’ trade balances deteriorate by about 0.7 percentage points of GDP
less than in the scenario that confines rebalancing to China and the United States. This smaller decline is the
combined effect of smaller increases in imports (about 1/3 of the total effect) and smaller reductions in exports
(about 1/3 of the total effect).
33 This shift also implies that the prices of primary factors in Germany would increase by about 7 percentage
points more than in the group “Rest of EU-25 and EFTA”. Given that this group includes all those countries that
in addition to Germany form the Euro-area, there is limited scope for exchange rate changes to bring about this
adjustment. Hence, wages would need to increase significantly faster in Germany than in the other countries of
the Euro-area.




27


Figure 14
LABOUR INTENSITY AND GTAP SIMULATION RESULTS FOR CHANGES IN WORLD EXPORTS


BY INDUSTRIAL SECTOR CAUSED BY REBALANCING IN THE UNITED STATES, CHINA AND GERMANY
(Per cent)


-5


-4


-3


-2


-1


0


1


2


3


4


5


10 15 20 25 30 35


Labour intensity by industrial sector (wages and salaries as a percentage of value added)


S
im


ul
at


ed
p


er
ce


nt
ag


e
ch


an
ge


in
w


or
ld


e
xp


or
ts


b
y


in
du


st
ria


l s
ec


to
r (


pe
r c


en
t r


el
at


iv
e


to
2


00
8)


p_c


prf


lmt


crpnfm
i_s


nmm


ppp


ele


ome


otn


fmp
mvh


tex


lum


omf
lea


wap




Source: See figure 13.
Note: See figure 13.




However, in spite of the assumed full compensation of the decline in United States consumption by an
opposite development in China and Germany, world exports of industrial goods would decline (as
indicated by the fact that the majority of data points in figure 14 are below the horizontal axis). Indeed,
as indicated above, the absolute level of consumer spending is only one element that determines
consumer good imports. Another one is the similarity of consumer good imports across countries.
While the basket of consumer good imports in Germany is fairly similar to that of the United States,
this is not the case for China (figure 9). The perhaps most important element in this context regards
differences in the import intensity of consumption and exports in different countries. As indicated
above, in China the import intensity of exports is much larger than that of consumption, as well as
much larger than that of United States exports. Hence, a rebalancing from exports to consumption in
China and from consumption to exports in the United States would cause an overall decline in imports.
The result of rebalancing in the United States and Germany would go in the same direction. The
import intensity of consumption in the United States is about one half that in Germany, while the same
proportion is about one third for exports, as already mentioned. This means that the combined effect of
a shift from exports to consumption in Germany and a shift from consumption to exports in the United
States would also be an overall reduction in imports.




28


VI. CONCLUSIONS


Cross-country differences in the rate of economic growth, as well as differences in the contribution of
domestic consumption and exports to these growth rates, have played a key role in the accumulation of
substantial current-account imbalances in the world economy. Such differences will also be of crucial
importance for the reduction in global imbalances.


Much of the debate on the causes of global imbalances, as well as on policies to be adopted for their
reduction, has emphasized a bilateral perspective, focusing on China and the United States. One
reason for this may have been that in these two countries important economic aggregates have
developed in opposite directions: household consumption of a share in GDP increased in the United
States but decreased in China, and trade accounts recorded sizeable deficits in the United States but
surpluses in China.


These developments, combined with the unprecedented boom of primary commodity prices between
2002 and mid-2008, were of an overall expansionary nature. They contributed to sustained output
growth in the world economy for several years in the lead-up to the current crisis. Equally important,
the favourable external economic environment in the years before 2008 allowed output growth in
developing countries to be relatively balanced in terms of sectoral contributions. In many of these
countries, output growth in agriculture, extractive industries and services recorded rates almost as high
as manufactured output.


A reduction in global imbalances will have sizeable effects for the path of economic development in
many developing countries. Simulations indicate that the net effect of a return to historic averages of
the share of household spending in GDP in China and the United States for the world economy would
be deflationary. This implies a deterioration of the external economic environment for developing
countries. At the same time, adjustments limited to China and the United States would be insufficient
for the unwinding of global imbalances. Adjustment will be necessary also in some other countries,
particularly those with large external surpluses. The evolution of the current-account surpluses of the
Russian Federation, Saudi Arabia and other oil exporters has been determined largely by oil-price
developments; besides, the size of these countries’ domestic demand is not large enough to influence
global trade flows and employment creation. The import potential of other, relatively large, developing
countries (such as Brazil, India, Indonesia and South Africa) is also relatively small, even when
combined. And, in any case, in none of these countries has the current account been in surplus in
recent years. Germany and Japan have been the two large developed countries that have recorded
large, and more long-lasting, current-account surpluses. The large size of these two economies, the
similarity between their basket of imported consumer goods and that of the United States, and the fact
that domestic demand has grown notoriously slowly in these economies, would place them well for
supporting the reduction in global imbalances. However, ongoing stagnation of private consumption in
Europe, exacerbated by the tendency to embark on perhaps premature fiscal consolidation
programmes, make it unlikely that any sizeable contribution in that direction will come from the
European surplus economies. Nevertheless, simulations indicate that multilaterally coordinated
rebalancing would reduce the adverse impact on trade flows and employment generation in industrial
sectors.


With regard to China’s increasingly important role as an engine of global growth, there is a risk that a
shift from an investment- and export-led growth path to a more consumption-led growth path might
imply sizeable adverse effects on the country’s rate of economic growth and employment creation. It
might even imply an experience of prolonged economic stagnation, such as that of Japan during the
1990s. Indeed, the current debate on global rebalancing and the associated trade- and currency-related
tensions between the United States and China often takes up arguments that in many respects are
reminiscent of similar tensions between the United States and Japan in the 1980s. These arguments
point to the alleged undervaluation of the exchange rate; inflated asset prices, which are feared to
eventually cause sharp declines in equity and real estate markets; overinvestment and excessive bank
lending, which may result in non-performing loans and disruptions of the financial system (The




29


Economist, 2010). After the appreciation of the Yen following the Plaza agreement in 1985, Japan
suffered deflation, stagnation, bank insolvency and excessive public deficits and debt that resulted in
severe unemployment and detracted foreign investment.


However, in spite of very rapid income growth over the past three decades, China today remains much
poorer than Japan was in the 1980s and probably still has tremendous scope for internal development
and a much higher long-term growth potential. This remaining greater room for catch-up growth,
combined with its strong fiscal and external positions, would make it easier to recover even if China
were to experience asset-price deflation and the ensuing economic problems that Japan has been
experiencing over the past two decades. There are also indications that points to a gradual slow-down
in the growth of China’s pool of surplus labour. This could cause real wage relative to productivity to
increase faster than in the past, with attendant positive effects on household consumption and
economic growth.


As long as China’s robust growth trajectory remains in tact and investment in the country’s large
infrastructure projects are pursued, its raw material imports are likely to remain strong as well. This
will support direct exports to China, as well as put a floor under prices of primary commodities,
especially energy and metals. Thus, countries for which buoyant exports of primary commodities were
supporting rapid economic growth prior to the crisis are likely to experience only marginal adverse
effects from global rebalancing.


By contrast, developing countries in East and South-East Asia are likely to experience the greatest
pressure for economic adjustment. An important pillar of their development strategies over the past
two or three decades has been participating in global value chains that produce goods for consumption
in developed-country markets, mainly the United States. Participation in these value chains by
developing countries in East and South-East Asia has increasingly implied producing intermediate
products for exports to China where they would be finished and shipped to the United States.
Rebalancing in China will severely reduce the role of China as the world’s workshop of globally
consumed goods, and rebalancing in the United States will severely reduce global demand for goods
produced in such global value chains. Evidence for 2008 and 2009 in fact indicate that buyer-led
global value chains, which are most prominent in consumer-good sectors, have undergone substantial
consolidation. More importantly, in an overall shrinking market, this consolidation has implied an
increase in China’s share in United States markets and a substantial loss in market share for East and
South-East Asian producers, such as Cambodia, Malaysia and Thailand (Milberg and Winkler, 2010).


It is unlikely that East and South-East Asian developing countries will be able to replace the United
States by other destination markets. The markets of other developing countries remain much smaller,
and Chinese producers probably can satisfy the large Chinese markets through domestic production.
European markets, which would be placed best to compensate falling imports from declining
household consumption in the United States, are serviced by other global value chains that extent to
Eastern Europe. Hence, developing countries in East and South-East Asia may need to follow
economic rebalancing in China and reorient their development strategy towards a greater role of
domestic demand as well. Successful policymaking in the aftermath of the Asian crisis in 1997 has
shown that these economies can manage sizeable adjustments. But it is less clear whether this would
allow them to maintain robust growth. Some of these economies are relatively small. And it has been
widely recognized that exporting manufactures may provide dynamic development benefits that are
difficult to attain through other activities (see, e.g. Korinek and Serven, 2010). Hence, global
rebalancing may well require a general rethinking of development strategies.





30


ANNEX 1


TECHNICAL NOTE ON THE SIMULATION OF THE TRADE AND
EMPLOYMENT EFFECTS OF GLOBAL REBALANCING


The simulation employs the standard model of the Global Trade Analysis Project (GTAP) – a
computable general equilibrium model of the global economy which emphasizes the role of
intersectoral factor mobility in determining sectoral output supply, and which assumes output to be
produced with constant returns to scale.34 The model also assumes product differentiation between
imported and domestic goods, and among imports from different regions. This assumption allows for
two-way trade in each product category, depending on the ease of substitution between products from
different regions. The model’s demand system allows for differential price and income responsiveness
across countries. It also includes differences in import intensities across spending by economic agents
(firms, households and governments) and across countries.35 An assumed ‘global’ bank mediates
world savings and investment. In addition to five production factors (land, capital, unskilled and
skilled labour,36 and natural resources), the GTAP database covers 113 countries (or regions) and
57 product sectors, which for this simulation have been aggregated to 25 regions and 25 sectors (see
tables 1 and 2).


The simulation assumes:37 (i) a 5 percentage point decline in United States consumption as a share of
GDP (i.e. equivalent to the difference in 2008 between the actual share and the long-term average
share as shown in figure 2 above); and (ii) a 7 percentage point increase in China’s household
consumption as a share of GDP (i.e. equivalent to the decline between 2005 and 2008 as shown in
figure 3 above).38 In technical terms, conducting simulations based on these assumptions requires, for
both the United States and China: (i) the variable ‘private consumption expenditure (yp)’ to become
exogenous and the ‘private consumption distribution parameter (dppriv)’ to become endogenous; and
(ii) the ‘savings distribution parameter (dpsave)’ to become exogenous and the ‘average distribution
parameter shift (dpav)’ to become endogenous. These two modifications ensure that any change in the
share of income used for private consumption will be reflected entirely in changes in the share of
savings in income.




34 For documentation of the model, see Hertel (1997), and for the GTAP-7 database, see Narayanan and
Walmsley, 2008.
35 Broadly in line with what is discussed in section 4, the model’s demand system implies, for example, that the
import intensity of government spending is lowest, followed by that of households, and then by that of firms, for
which the import intensity is particularly large in countries with a high share of exports in GDP, such as those in
East and South-East Asia. The model’s demand system also implies that the import intensity of consumption
spending in the United States is two to three times larger than that in China, yet only about half to one third that
in the member states of the European Union.
36 In the GTAP-model, the split between skilled and unskilled labour is based on occupational data. Skilled
labour refers to professional workers (managers and administrators, professionals and para-professionals), while
unskilled labour refers to production workers (tradespersons, clerks, salespersons and personal service workers,
plant and machine operators and drivers, labourers and related workers, and farm workers). The relationship
between the wages of skilled and unskilled workers in the GTAP-model is determined on the basis of an
econometric estimation, as explained in Dimaranan and Narayanan, 2008.
37 Similar assumptions underlie the simulation exercise in Zhang, Zhang and Han (2010) who, however, use a
different simulation model and focus on financial linkages rather than trade linkages which this chapter
emphasizes.
38 Given that China’s GDP is about one third that of the United States, this 7 percentage point increase in China’s
share of consumption in GDP is about half of what would be required to compensate for the 5 percentage decline
in the United States’ share of consumption on GDP, assuming no change in the level of GDP in either country.




31


The simulation further assumes: (iii) a reduction in the United States’ potential output by 1 percentage
point relative to 2008 (i.e. the starting point of the simulation). This reduction is implemented by
assuming a respective decline in output-augmenting technological change. The motivation for this
assumption is that the decline in household consumption leads to a reduction in aggregate domestic
demand in the United States. In the short term, this adverse demand impact may be limited by
expansionary government spending which, however, in the medium term is unsustainable for fiscal
reasons. Hence, over the medium term, the decline in household spending cannot be compensated in a
sustainable manner by an increase in another element of aggregate demand. This slowdown in United
States domestic demand, in turn, has spillover effects on other economies, since a greater emphasis on
consumption-led growth relative to export-led growth in China and a shift in the opposite direction in
the United States would reduce aggregate imports of these countries from the rest of the world. In
other words, global rebalancing confined to adjustment in the United States and China would remove
the demand stimulus that, prior to the outbreak of the current crisis, the United States was providing to
the world economy without replacing it with a stimulus of similar size from increased consumption in
China, as already mentioned in the main text.


The GTAP model’s most updated database refers to 2004. Given that both global current-account
imbalances and the share in GDP of consumption in China and the United States have changed
significantly since 2004, the ratios of trade balances to income were updated to 2008 (i.e. roughly the
onset of the current global economic and financial crisis). More precisely, each region’s current-
account balance as a share of income was updated on the basis of the respective growth rates between
2004 and 2008, calculated from the IMF’s World Economic Outlook database. This was done by
treating the change in the ratio of the trade balance on goods and services to regional income (dtbalr)
as an exogenous variable, and the slack variable that represents the risk premium on investment
(cgdslack) as an endogenous variable. These modifications cause investment to adjust such that it
compensates for the assumed changes in the trade balance, thus ensuring that the savings-investment
balance equals the trade balance. Given that the sum of all regions’ trade balances must be zero, so
that dtbalr cannot be treated as exogenous for all regions, the trade balances of two groups (West Asia
and North Africa and Rest of the World) were left to be determined endogenously. This methodology
may be considered broadly equivalent to simulating a shock to real exchange rates. The simulation
uses this updated database as the baseline scenario (i.e. the benchmark against which the impact of the
assumed changes is measured). To test the robustness of the results obtained in this way, the
simulation was run also on the original 2004 database with adjustment in United States consumption
assumed to be equivalent to 4 percentage points and that in China’s consumption equivalent to
5 percentage points. While the changes resulting from this alternative simulation are quantitatively
smaller, partly because the underlying current-account imbalances in 2004 were smaller than in 2008,
they are qualitatively identical.


Simulations were undertaken for a scenario that assumes adjustments in the United States and China
occur at the same time (the results of which are reported in the main text), as well as with a scenario
that assumes adjustments occur separately in China and the United States. Doing so gives some
indications as to the importance of adjustment in either of these two countries for global rebalancing.
The results for the scenario in which adjustment is confined to China (table A1) indicate that the
assumed increase in the share of China’s consumption in GDP would have a minor impact on trade
flows for individual countries, except for China itself. They also indicate that the countries in East and
South-East Asia taken together would benefit the most. This latter finding is probably due to the fact
that these countries and China are part of the same international production networks, so that the
simulated adjustments, helped by an appreciation of the renminbi by about 5 per cent, would imply a
relocation of the exit point of these networks from China to other developing countries in the region.
This finding also mirrors the results generally obtained from GTAP models that simulate an increase
in China’s exports, where adverse effects are usually concentrated in the other Asian developing
countries (UNCTAD, 2002: chapter V).




32



Table A1


GTAP SIMULATION RESULTS OF THE IMPACT OF REBALANCING IN CHINA ON TRADE FLOWS AND
FACTOR PRICES, SELECTED COUNTRIES AND COUNTRY GROUPS


Change in wagesc




Change
in trade
balance




Share
of trade
balance
in GDP


Change
in export
volume


Change
in import
volume


Change
in terms
of tradea


Appre-
ciationb



Unskilled


labour
Skilled
labour


(Percent-
age points) (Per cent)


(1) (2) (3) (4) (5) (6) (7) (8) (9)


China -6.7 3.4 -14.6 2.9 2.8 4.8 4.3 6.4


China, Hong Kong SAR 0.2 16.5 0.1 -0.3 -0.1 0.4 0.5 0.4
China, Taiwan Province of 0.2 15.5 0.1 -0.2 0.0 0.2 0.2 0.1
Indonesia 0.2 2.2 0.5 -0.2 -0.1 0.2 0.2 0.1
Malaysia 0.3 44.3 0.0 -0.3 -0.1 0.1 0.0 -0.1
Philippines 0.3 5.3 0.3 -0.3 -0.1 0.0 0.0 -0.1
Republic of Korea 0.3 3.5 0.6 -0.3 -0.2 -0.1 -0.2 -0.2
Singapore 0.3 -0.6 0.1 -0.2 -0.1 -0.2 -0.2 -0.2
Thailand 0.7 10.3 0.6 -0.5 0.0 0.0 0.0 -0.1
Rest of East and South East
Asia 0.4 4.0 0.4 -0.4 -0.2 0.1 0.0 -0.2


India 0.2 -6.3 1.1 -0.3 -0.1 0.0 0.0 -0.1
South Asia, excl. India 0.2 -15.6 0.9 -0.4 0.0 0.0 0.0 -0.1


West Asia and North Africa 0.2 15.6 0.3 -0.3 -0.1 -0.1 0.0 -0.1
Sub-Saharan Africa 0.3 3.3 0.4 -0.6 -0.2 -0.1 -0.1 -0.2


Argentina and Brazil 0.3 2.8 1.3 -0.5 -0.1 -0.2 -0.2 -0.3
Mexico 0.2 0.2 0.7 -0.1 0.0 -0.1 -0.1 -0.2
Rest of developing America 0.3 0.1 0.6 -0.4 -0.1 -0.1 -0.1 -0.2


Canada 0.2 -0.8 0.6 -0.2 -0.1 -0.1 -0.2 -0.2
United States 0.2 -4.4 1.4 -1.2 -0.4 -0.3 -0.3 -0.3


Germany 0.3 6.0 0.6 -0.5 -0.2 -0.2 -0.2 -0.2
Rest of EU-25 and EFTA 0.3 -1.6 0.6 -0.4 -0.1 -0.2 -0.2 -0.2


Australia and New Zealand 0.3 -0.1 0.9 -0.6 -0.2 -0.1 -0.1 -0.1
Japan 0.4 1.4 2.0 -1.7 -0.7 -0.4 -0.4 -0.4


CIS, excl. the Republic of
Moldova 0.1 7.5 0.3 -0.2 -0.1 -0.1 -0.1 -0.1


Rest of the world 0.3 -7.5 0.5 -0.2 0.0 -0.1 -0.1 -0.2


Source: Author’s calculations.
Note: All changes are relative to 2008.


a An improvement in the terms of trade indicates that the price of exports increased more (or fell less) than the price
for imports.


b An appreciation indicates an increase in the price for primary factors, which may be likened to an appreciation of the
real exchange rate.


c For the definition of skilled and unskilled labour and the wage ratio between skilled and unskilled labour, see
footnote 36.





33


Given the relatively small overall impact of adjustment when confined to China, it is no surprise that
the results for the scenario in which adjustment is confined to the United States (not shown) are
similar to those for the scenario that assumes simultaneous adjustments in China and the United States,
shown in table 1. The only major difference is that the impact on China’s trade balance in the scenario
where adjustment is confined to the United States is much smaller than in the scenario in which
adjustment occurs in both countries at the same time. The fact that the impact on China also is
significantly smaller than for the vast majority of the other regions shown in table 1 suggests that the
United States trade deficit is indeed multilateral in nature, rather than the result of bilateral trade flows
between the United States and China. In terms of employment, these results suggest that rebalancing
China’s growth trajectory will do little for other developing countries in terms of compensating for
adverse effects stemming from adjustment in the United States. This is because China imports mainly
intermediate goods (including parts and components), and primary commodities (primarily energy
products and metals), which are not very employment intensive.






34


ANNEX 2


ALTERNATIVE VIEWS ON THE CAUSES OF GLOBAL IMBALANCES
AND THEIR REMEDIES


The causes of global imbalances and policies to correct them have been the subject of numerous
studies (for surveys see Mann, 2002, and Yu, 2007). Alternative views differ in how they look at the
following accounting identity:


CA = X - M + NFI = SN - I = ΔNFA,


where CA is the current-account balance, X and M are exports and imports of goods and services, NFI
is the balance on income (net foreign incomes from abroad), SN is national saving, I is national
investment, and ΔNFA are changes in net foreign assets. The identity states that a country is running a
current-account surplus when the sum of its trade balance (X-M) and its net foreign incomes (NFI) is
positive. This implies an excess of national savings over national investment and an accumulation of
net foreign assets.


Three different perspectives on the current account may be distinguished on the basis of the above
identity (Mann, 2002): (i) an international perspective which emphasizes the flows and holdings of
financial assets and considers the current-account balance as being determined by the portfolio choices
of private financial investors and official reserve holders that drive international capital flows; (ii) an
international perspective which focuses on flows of trade in goods and services; and (iii) a national
perspective which examines national income and product accounts, focusing on savings and
investment, and sees the current account as driven by national savings-investment imbalances. Each of
these three perspectives provides different lenses for an analysis of the accounting identity where one
or the other perspective may be particularly useful under certain circumstances or time frames.


Over the past few years, the most popular expression of the first perspective has been the ‘savings
glut’ hypothesis (Bernanke, 2005). In this view, global imbalances are caused by savings decisions.
More precisely, they result from a combination of demographics (i.e. the problem of aging populations
in developed countries), rapid economic growth, high oil prices, and financial development which
encourage savings outside the United States (mainly in East Asia, particularly Japan and China; oil-
exporting countries, mainly those in West Asia, but also Nigeria, the Russian Federation, and
Venezuela; and some other countries, especially Germany). These savings flow to the United States
because of the great diversity of financial assets and instruments available on its financial markets, the
role of the dollar as an international currency, and the fact that United States financial assets represent
“claims on a robust, innovative economy offering good returns, liquidity security and relative
stability” (Cooper, 2008: 246). From this perspective, the large inflows of credit into the United States
sparked a consumption boom and subsequent large current-account deficits.


The second perspective emphasizes trade flow dynamics driven by United States and other countries’
income growth and changes in relative prices. Exchange rates play a key role in this perspective. The
most important strand of this viewpoint sees the origin of global imbalances in the misalignment of
real exchange rates, particularly between the dollar and East Asian currencies, resulting mainly from
alleged “currency manipulation” by China for maintaining an undervalued renminbi. This view
implies that the cause of the United States trade deficit is its bilateral deficit with China. However,
there is little evidence for this contention, because prior to the current crisis the United States trade
deficit had been increasing with every major region of the world. It may, therefore be described as a
multilateral rather than a bilateral (United States versus China) phenomenon. Moreover, the strong
divergence of per capita income levels between the two countries implies that the United States is no
longer producing the goods that it imports from China. As a result, if it reduced imports from China, it




35


would probably have to replace these by imports from other, possibly higher cost sources, which
would thus lead to an even higher trade deficit in the United States.


Another strand within this perspective points to shortcomings in global economic governance. The
absence of a global exchange-rate system, combined with widespread liberalization of capital flows,
enabled developing countries to maintain their exchange rates at competitive levels in order to pre-
empt speculative attacks on their currencies. The resulting interventions on foreign-exchange markets
resulted in the accumulation of vast foreign-exchange reserves, which were invested mainly in dollar-
denominated Treasury bills and which provided self-insurance against potential adverse effects from a
sudden stop or reversal of capital inflows. To the extent that this self-insurance strategy is adopted by
countries that are also pursuing an export-oriented development strategy, such as many countries in
Asia, it will result in trade surpluses (Dooley, Folkerts-Landau and Garber, 2004; Aizenman, 2007).
These outcomes may appear to stem from developing countries’ development strategies, but in reality
they are more likely due to shortcomings in global economic governance.


The third perspective highlights patterns of domestic savings and investment as reflected in countries’
trade and current-account balances. Contrary to the previous perspective, it sees trade flows as being
driven mainly by relative demand factors, rather than just by relative prices. In other words, it sees
international trade in goods and services as responding, in a comparatively passive fashion, to
domestic demand factors as reflected in national accounts. Cross-country differences in the rate of
economic growth play an important role in this perspective. The link between domestic demand
factors and international trade can be further examined considering that the above identity requires the
ex-post equality of the savings-investment balance of the United States – or any other individual
country – and the rest of the world (ROW), expressed as follows:



N
ROWROWUS


N
US SIIS −=−



This indicates that an excess of investment over savings in the United States (i.e. a current-account
deficit in the United States) must ex post be equal to the excess of savings over investment in the rest
of the world (i.e. a current-account surplus of the rest of the world). National savings are the sum of
government and private savings, where the latter can be further disaggregated in household and
corporate savings (i.e. retained profits).


A focus on the left-hand side of the equation designates a decline in national savings of the United
States as the major cause of global imbalances.39 Given that global imbalances have been perceived as
a major issue only since about 2002 and that this date coincides with the beginning of the
expansionary fiscal stance of the United States Government, the debate on global imbalances has
sometimes centred on “twin deficits” – the simultaneous occurrence of fiscal and current-account
deficits (Roubini and Setser, 2005).40


However, evidence of a statistically significant, long-term, positive co-movement of the budget and
the current-account balances in the United States is tenuous (Cooper, 2008). Moreover, there is wide
agreement that this relationship is weak in absolute terms. As noted by Bagnai (2009: 510), several
studies (e.g. Chinn and Ito, 2007) indicate that a reduction of the fiscal deficit by one percentage point




39 A focus on the right-hand sight would be similar to the “savings-glut” hypothesis, which suggests that buoyant
foreign demand for United States financial assets forces that country to live beyond its means.
40 This year also marks the beginning of the depreciation of the dollar against most other major currencies,
which, from the perspective of the “savings glut” hypothesis may be seen as a lower willingness of private and
official holders of dollar-denominated assets to continue financing the United States current-account deficits.
The associated risk that a diversification away from dollar-denominated assets occurring in a disorderly manner
and causing a sharp dollar depreciation is what prompted concerns about the sustainability of global imbalances.




36


of GDP leads to an improvement in the current account balance of only about one third of a percentage
point of GDP. Accordingly, even if the United States had drawn down its fiscal deficit of about 3 per
cent of GDP to zero prior to the current crisis, its current-account deficit of about 5.5 per cent of GDP
would have shrunk by a mere 1 percentage point of GDP (other things being equal). In other words, an
effective rebalancing of the United States savings-investment balance cannot occur without
considerable involvement of the private sector in terms of interrupting the secular decline in its saving
rate or, what is equivalent, interrupting the secular increase in its consumption rate. The opposite
would hold for surplus countries.




37


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39


UNCTAD DISCUSSION PAPERS


No. Date Author(s) Title


199 June 2010 Ugo Panizza
Federico Sturzenegger
Jeromin Zettelmeyer


International government debt


198 April 2010 Lee C. Buchheit
G. Mitu Gulati


Responsible sovereign lending and borrowing


197 March 2010 Christopher L. Gilbert Speculative influences on commodity futures prices
2006–2008


196 November 2009 Michael Herrmann Food security and agricultural development in times of
high commodity prices


195 October 2009 Jörg Mayer The growing interdependence between financial and
commodity markets


194 June 2009 Andrew Cornford Statistics for international trade in banking services:
Requirements, availability and prospects


193 January 2009 Sebastian Dullien Central banking, financial institutions and credit creation
in developing countries


192 November 2008 Enrique Cosio-Pascal The emerging of a multilateral forum for debt
restructuring: The Paris Club


191 October 2008 Jörg Mayer Policy space: What, for what, and where?


190 October 2008 Martin Knoll Budget support: A reformed approach or old wine in new
skins?


189 September 2008 Martina Metzger Regional cooperation and integration in sub-Saharan Africa


188 March 2008 Ugo Panizza Domestic and external public debt in developing
countries


187 February 2008 Michael Geiger Instruments of monetary policy in China and their
effectiveness: 1994–2006


186 January 2008 Marwan Elkhoury Credit rating agencies and their potential impact on
developing countries


185 July 2007 Robert Howse The concept of odious debt in public international law


184 May 2007 André Nassif National innovation system and macroeconomic policies:
Brazil and India in comparative perspective


183 April 2007 Irfan ul Haque Rethinking industrial policy


182 October 2006 Robert Rowthorn The renaissance of China and India: implications for the
advanced economies


181 October 2005 Michael Sakbani A re-examination of the architecture of the international
economic system in a global setting: Issues and proposals


180 October 2005 Jörg Mayer and
Pilar Fajarnes


Tripling Africa’s Primary Exports: What? How? Where?


179 April 2005 S.M. Shafaeddin Trade liberalization and economic reform in developing
countries: structural change or de-industrialization?




40


No. Date Author(s) Title


178 April 2005 Andrew Cornford Basel II: The revised framework of June 2004


177 April 2005 Benu Schneider Do global standards and codes prevent financial crises?
Some proposals on modifying the standards-based
approach


176 December 2004 Jörg Mayer Not totally naked: textiles and clothing trade in a quota
free environment


175 August 2004 S.M. Shafaeddin Who is the master? Who is the servant? Market or
Government?


174 August 2004 Jörg Mayer Industrialization in developing countries: some evidence
from a new economic geography perspective


173 June 2004 Irfan ul Haque Globalization, neoliberalism and labour


172 June 2004 Andrew J. Cornford The WTO negotiations on financial services: current
issues and future directions


171 May 2004 Andrew J. Cornford Variable geometry for the WTO: concepts and precedents


170 May 2004 Robert Rowthorn and
Ken Coutts


De-industrialization and the balance of payments in
advanced economies


169 April 2004 Shigehisa Kasahara The flying geese paradigm: a critical study of its
application to East Asian regional development


168 February 2004 Alberto Gabriele Policy alternatives in reforming power utilities in
developing countries: a critical survey


167 January 2004 Richard Kozul-Wright
and Paul Rayment


Globalization reloaded: an UNCTAD Perspective


166 February 2003 Jörg Mayer The fallacy of composition: a review of the literature


165 November 2002 Yuefen Li China’s accession to WTO: exaggerated fears?


164 November 2002 Lucas Assuncao and
ZhongXiang Zhang


Domestic climate change policies and the WTO


163 November 2002 A.S. Bhalla and S. Qiu China’s WTO accession. Its impact on Chinese
employment


162 July 2002 Peter Nolan and
Jin Zhang


The challenge of globalization for large Chinese firms


161 June 2002 Zheng Zhihai and
Zhao Yumin


China’s terms of trade in manufactures, 1993–2000


160 June 2002 S.M. Shafaeddin The impact of China’s accession to WTO on exports of
developing countries


159 May 2002 Jörg Mayer,
Arunas Butkevicius
and Ali Kadri


Dynamic products in world exports


158 April 2002 Yılmaz Akyüz and
Korkut Boratav


The making of the Turkish financial crisis


157 September 2001 Heiner Flassbeck The exchange rate: Economic policy tool or market
price?




41


No. Date Author(s) Title


156 August 2001 Andrew J. Cornford The Basel Committee’s proposals for revised capital
standards: Mark 2 and the state of play


155 August 2001 Alberto Gabriele Science and technology policies, industrial reform and
technical progress in China: Can socialist property rights
be compatible with technological catching up?


154 June 2001 Jörg Mayer Technology diffusion, human capital and economic
growth in developing countries


153 December 2000 Mehdi Shafaeddin Free trade or fair trade? Fallacies surrounding the theories
of trade liberalization and protection and contradictions in
international trade rules


152 December 2000 Dilip K. Das Asian crisis: distilling critical lessons


151 October 2000 Bernard Shull Financial modernization legislation in the United States –
Background and implications


150 August 2000 Jörg Mayer Globalization, technology transfer and skill accumulation
in low-income countries


149 July 2000 Mehdi Shafaeddin What did Frederick List actually say? Some clarifications
on the infant industry argument


148 April 2000 Yılmaz Akyüz The debate on the international financial architecture:
Reforming the reformers


146 February 2000 Manuel R. Agosin and
Ricardo Mayer


Foreign investment in developing countries: Does it
crowd in domestic investment?


145 January 2000 B. Andersen,
Z. Kozul-Wright and
R. Kozul-Wright


Copyrights, competition and development: The case of
the music industry



















Copies of UNCTAD Discussion Papers may be obtained from the Publications Assistant, Macroeconomic and
Development Policies Branch (MDPB), Division on Globalization and Development Strategies (DGDS),
United Nations Conference on Trade and Development (UNCTAD), Palais des Nations, CH-1211 Geneva 10,
Switzerland (Fax no: +41 (0)22 917 0274/Tel. no: +41 (0)22 917 5896). Discussion Papers are accessible on
the website at http://www.unctad.org.










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