Global imbalances and policy failures

Imbalances reflect international differences in aggregate savings and investment behaviour. In the absence of market imperfections and distortions, they allow a more efficient allocation of savings globally. However, some of the identified causes of the imbalances leading up to the crisis appeared to mirror imperfections and distortions that had built up in both surplus and deficit countries. These include financial repression and poorly regulated financial markets; weak social safety nets; inflexible product, services and factor markets; large fiscal deficits; and exchange rate misalignment.
These imbalances created systemic risk in the global economy by leading to low interest rates and to large capital inflows into US and European banks, which in turn contributed to a search for yield, higher leverage, and the creation of riskier assets. Should the financial flows associated with current account imbalances suddenly reverse course, economies with large deficits will suffer disorderly currency depreciations, and financial sectors might also struggle to efficiently absorb the financial inflows that are the counterpart to the current account imbalance.
The WTO's market opening efforts in services, especially in the area of financial services, and in government procurement can contribute to rebalance the global economy by reducing policy-related distortions and market imperfections in surplus countries and by providing better market access to deficit countries.
To conclude, there exists a first-best policy response to the hazards posed by large and persistent trade imbalances. This first-best response consists of expanding and deepening (multilateral) institutional mechanisms that allow governments to correctly internalise the costs of existing distortions and the benefits from rebalancing. The WTO has a clear-cut role in this international effort, reducing the build-up of surpluses by contributing to making financial markets and government procurement more efficient and by deterring countries from either free-riding or defecting from the cooperative outcome.