2 Global Imbalances and Emerging Markets

he massive current account imbalance between the United States on the one hand and Asia and Latin America on the other is the most prominent feature of the contemporary international monetary and financial landscape. This pattern is not without its merits. Since the turn of the century, the United States has been the source of the majority of the growth of global demand. It has provided a buoyant market for the exports of the rest of the world. It has facilitated the efforts of countries in Asia and Latin America to accumulate foreign reserves in order to insulate their economies from financial shocks. By enabling the more heavily indebted emerging markets to limit addi-tional borrowing, it has permitted them to pre-fund their external financing needs and lengthen the maturity structure of their obliga-tions. These are not new insights: the idea that the imbalance has benefits not just for the United States but also for the surplus countries is at the heart of the so-called “global co-dependence ” and “New Bretton Woods ” views of the current global setting (Mann, 2004; Dooley et al., 2003). The issue is whether these benefits dominate the costs. The current account surpluses and massive reserve accumulation of emerging markets come at the expense of consumption and investment. For Asia excluding China and Japan, investment rates fell by nearly 9 percent of GDP between 1996 and 2004 (see Macfarlane, 2005; Rajan, 2005). In Latin America, the comparable fall was a more modest but still signifi-cant 3 percent of GDP. Thus, one alternative to financing the US current account deficit would have been for emerging markets to us