In the late 2000s, the World suffered from a big global economic crisis which caused “the largest and sharpest drop in global economic activity of the modern era”, in which “most major developed economies find themselves in a deep recession”, according to McKibbin and Stoeckel (1). Because its consequences have a very big impact to the whole world, many economists and scientist have tried to find the causes of the crisis; and some major causes have been emphasized are greed, the defection of the free market system, and the lack of prudent regulation and supervision. This essay will focus on the global imbalances, one of the most important causes of the current economic crisis.
Many researchers have pointed out that the global imbalances are the root of the recent financial crisis. Portes claims that “the underlying problem in international finance over the past decade has been global imbalances, not greed, poor incentive structures, or weak financial regulation, however egregious and important these may be.” (2). According to him, the global imbalances lead to “the increasing in dispersion of current account”, which “puts a burden on financial systems to intermediate.”
In 1996, the US current account and emerging market plus developing country current account were each about zero. In 2008, US current account was in deficit by $ 600 bn, the emerging market/developing country current account in surplus by $ 900 bn. (sect. 1.1)
Moreover, the global imbalances also make capital flowing incorrectly, from developing countries to advanced countries, from advanced countries to other advanced countries. This makes developing countries with fast productivity growth show capital outflows and vice versa, leads to the surplus of developing countries, and increases the rate of deficit of developed countries. For example, China, a developing country, has been considered as one of the countries with biggest surplus for a long time, while the US, on the other hand, the developed country with highest rate of deficit. In general, the developing and developed countries together make a financial ecosystem that when a member problem, the whole system will be collapsed rapidly. McKibbin and Cagliarini gave a good example here:
Rising demands from China (and, to some extent, India), plus a booming world economy saw commodity prices rise across oil, minerals and food from late 2004 to late 2007. The shock to the global economy from this commodity price boom was as big as the first oil shock in the 1970s. (qtd. in McKibbin and Stoeckel 5).
As a consequence, the global imbalances contribute...