Perception of global imbalances as a problem way off base

ONE of the perennial themes in reports from global economic institutions such as the International Monetary Fund and the Organisation for Economic Co-operation and Development is global imbalances perceived as surpluses and deficits on the current account among major economic powers.

Unhesitatingly and continually, the view is taken that imbalances are bad for the economy. It has become almost an obsession to offer policy options to reduce or remove imbalances characterised as a disrupting element in endeavours to get the global economy back on an even keel. China's surplus and the US deficit is constantly evoked and presented as a major risk. In Europe, the German surplus mirrored by deficits for some other members of the eurozone falls in the same category, albeit the turnaround from deficit to surplus for the weak eurozone countries has taken the wind out of this sail.

There are two major weaknesses embedded in this obsession. The first one is that no explanation has been offered telling why imbalances are bad or troublesome. It reminds of classic economic theory prescribing general equilibrium as ideal - the ultimate objective - connoting that economic policies should bring this state of affairs about. It sounds good, but the reason why it is good has never been spelt out. The second one is that reality refuses to bow to theory. Despite the analyses and prescriptions, the imbalances are still there. They may be larger or smaller depending on the business cycle and other economic determinants, but they are there.