2) World Economy & Policy Issues after Financial Crisis
2010 Jul/Aug
COVER STORY: White Paper on International Economy & Trade 2010
By Shin-ichi FUKUDA (Prof., Graduate School of Economics, Univ. of Tokyo)
1. Once-in-a-Century Crisis Since last year, the world economy has finally managed to start rebounding from turmoil caused by what was dubbed a "once-in-a-century financial tsunami," accompanied by a serious global recession. It is now generally acknowledged that the world economy has extricated itself out of the worst state although various unstable factors still persist. Nevertheless, we still find ourselves in a trial-and-error stage as to how to transform the structural paradigm of the post-crisis world economy and what should be followed from now on in order to achieve sustainable economic growth. The direct cause of the great shock that hit the world economy from the summer of 2007 was a precipitate fall in asset prices, especially in the United States, and the consequent instability of the financial system. In the background, however, were such grave developments as excessively limited savings and extravagant consumption in the United States, and the global imbalance in capital flows. As shown in Chart 1, the US current account, though continuously in deficit from the first half of the 1980s, registered an average 2% of gross domestic product (GDP) until the mid-1990s and could be barely covered by surpluses in other developed countries like Japan and Germany. However, from the late 1990s, the US current account deficit swelled fast, surpassing 6% of its GDP in 2006. On the other hand, current account surpluses expanded in many emerging economies and oil-producing countries. Especially outstanding was the expansion of China's current account surplus with the advent of the 2000s. The current account deficit means a net increase in overseas liabilities. Prior to the financial crisis, capital flows from emerging economies and oil-producing countries to the United States assumed enormous proportions. It may be said that the global imbalance in capital flows led to the excessive boom of the US economy and the consequent occurrence of a financial bubble. 2. Rebalancing of Capital Flows The financial crisis has brought about a dramatic change in the above-mentioned global imbalance in capital flows. First, the excessively limited savings and extravagant consumption in the United States have undergone adjustment and the US current account deficit is shrinking rapidly. The US current account deficit, which exceeded 6% of GDP in 2006, fell short of 3% in 2009. A decline in the current account deficit also signifies a drop in the... <<BACK

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