G20 2-Step to Tackle Global Imbalances

http://www.reuters.com/article/2011/02/13/us-g20-eu-idUSTRE71C1JR20110213

The above-linked article appeared on Reuters yesterday.  The G20 nations claim to be serious about tackling global economic imbalances.  That much, at least, is encouraging.

Such imbalances, reflected in the current account balance, private and public savings, debt and capital flows, can trigger or augment crises, destabilizing the world economy.

So give them credit for seeing through all the superficial reasons for the global economic collapse – subprime mortgages and Wall Street greed – to the heart of the matter:  global imbalances – most notably the trade (or “current account”) imbalance.  They plan a two-step approach to the issue:

The first step would be to identify the imbalances using an agreed set of economic indicators and benchmark values.

The second step would be to analyze the causes of the imbalances and possibly make policy recommendations on how to deal with them.

The second step gives us reason for hope, but for fear as well.  What are the chances that they’ll arrive at the real cause of the imbalances – the disparity in population density from one nation to the next – when economics doesn’t even recognize the relationship between population density and per capita consumption?  And if they can’t arrive at the real cause, what are the chances that they’ll implement policy changes based on a false conclusion, making matters worse?

If they’re truly interested in the real cause, here are some simple facts about trade results just among the G20 nations.  (By the way, there are only 19 nations on the G20.  The 20th seat is held by the EU, giving Germany, Italy and France double representation.  Hardly seems fair, does it?)

  • Of the six nations less densely populated than the U.S. (Argentina, Australia, Brazil, Canada, Russia and Saudi Arabia), every single one of them has a trade deficit in manufactured goods with the U.S.
  • Of the twelve nations more densely populated than the U.S. (China, Japan, South Korea, France, Germany, India, Indonesia, Italy,  Mexico, South Africa, Turkey and the U.K.), all but two have trade surpluses in manufactured goods with the U.S. – South Africa and Turkey.  South Africa is only very slightly more densely populated than the U.S.  And, at $2.2 billion, Turkey’s trade deficit in manufactured goods with the U.S. is smaller than that of any of the six nations listed in the previous point. 
  • In terms of Purchasing Power Parity (PPP, essentially per capita GDP), Germany’s (seven times as densely populated as the U.S.) is the most enhanced by a trade surplus.  12% of their puchasing power is derived from their surplus of trade in manufactured goods.  Next is South Korea (15 times as densely populated as the U.S.) at 7% of PPP.  Next is China (over four times as densely populated as the U.S.) at 6% of PPP.  Next is Japan (ten times as densely populated as the U.S.) at 5% of PPP.  And so on. 
  • Of the ten nations with a trade surplus in manufactured goods with the rest of the world, the average population density is 413 people per square mile (almost three times the world median), and their cumulative trade surplus in manufactured goods is $1.318 trillion.
  • Of the nine nations with a trade deficit in manufactured goods with the rest of the world, the average population density is 272 people per square mile.  But, take away India (whose small trade deficit landed them in this category) and the average population density falls to 190 people per square mile.  The total trade deficit in manufactured goods of these nine nations is $951 billion. 

Sadly, this relationship between global trade imbalances and population density is sure to escape the leaders of the G20.  They’ll almost surely arrive at the wrong answer, but at least they’ve taken the first step by asking the question.

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