5 Rebalancing Savings-Investment Gaps

oshitomi, Liu and Thorbecke address three issues in their chapter: the magnitude of global imbalances, their sustainability and what the United States and East Asian countries can do to resolve them. The chapter concludes that these imbalances are already too large (the US current account deficit is 6.5 percent of GDP in 2006), and cannot be sustained. The East Asian current account surpluses as well as reserve accumulations are not sustainable and East Asia can no longer finance US debt. Yoshitomi et al. explain that the optimal policy mix for the United States would involve recessionary fiscal policies with dollar depre-ciation. For East Asian countries, the authors propose a policy mix of a simultaneous currency appreciation and absorption-increasing policies. The chapter was written primarily from an East Asian perspective, as the authors ’ policy focus is on East Asia. The recent appreciation of some East Asian currencies and the slowing pace of reserve accumulations of East Asian economies could be seen as signs toward a balance. However, East Asia’s still-increasing trade balance with the United States and the high savings surplus relative to investment in most East Asian countries certainly point to the fact that the magnitude of imbalances is not diminishing. Yoshitomi et al. argue that a simultaneous currency appreciation by East Asian economies would be the most effective way to resolve the imbalances. However, Figure 1 and 2 indicate that the trade balances of the US with Asia do not show any signs of improvement despite currency appreciation. In addition, those currencies that have sharply appreciated – the Thai baht and the Korean won – are recovering, while