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IMF Imbalances Report

IMF Plan for Action on Global Imbalances
Imbalances report hailed as "major advance"
By Laura Wallace, IMF Survey online, April 23, 2007, Photo by Thomas Dooley

In a report to the IMFC on April 14, participants in the talks—China, the euro area, Japan, Saudi Arabia, and the United States—provided detailed policy plans elaborating steps already taken and anticipated to support the IMFC's strategy, adopted in 2004, to reduce global imbalances. Europe and Japan said they would seek ways to boost productivity and growth, the United States pledged to rein in budget and trade deficits, Saudi Arabia promised more investment in its oil sector, and China pledged to boost domestic demand and make its currency more flexible (see Box 1).

Box 1
The five parties in the multilateral consultations outlined the following goals aimed at reducing global imbalances—which actually have shown signs of stabilizing and even improving slightly over the past year, in part thanks to past policies:
China: plans to reduce external imbalances; boost domestic demand, particularly consumer demand, and rebalance investment and consumption; further promote balanced external sector development; speed up financial reform; and further improve the exchange regime "in a gradual and controllable manner."
Euro area: plans to further reform the product, labor, and financial markets.
Japan: plans to reform the labor market, facilitate inward foreign direct investment, strengthen competition in key sectors, and further advance fiscal consolidation.
Saudi Arabia: plans to increase spending on social and infrastructure investments and on expanding oil sector capacity.
United States: plans to further fiscal consolidation over the medium term, reform the budget process to contain spending growth, reform entitlement programs to strengthen long-term fiscal sustainability, adopt tax incentives to support private saving, increase energy efficiency, promote pro-growth, open investment policies; and improve capital market competitiveness.

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Sir, Martin Wolf is right in calling for a multilateral forum to address the problem of global imbalances ("The right way to respond to China's exploding surpluses", May 30). Uncharacteristically, he neglects to mention that such a forum already exists: the "multilateral consultations" set up last year under the auspices of the International Monetary Fund.
By John Lipsky, FT Letter June 1 2007


The G7 should, instead, be replaced by a multilateral body that can address such issues more effectively.
Martin Wolf FT 30/5 2007

China’s current account surplus has exploded in recent years from a modest $46bn in 2003 to $250bn last year. (Japan $170bn)

So long as the counterpart trade deficits are concentrated in the US, there is a risk of protectionist action, particularly as the latter’s economy slows down.

More important, it is hard to believe that vast accumulations of low-yielding foreign assets, so vulnerable to the almost inevitable appreciation of the renminbi against the dollar, make sense for the Chinese themselves.

In a thought-provoking recent paper, Nicholas Lardy of the Peterson Institute for International Economics in Washington argues that the present development path has many evident disadvantages for China itself.
China: Rebalancing Economic Growth

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