Dealing with Global Economic Imbalances: The Political Economy of Policy Coordination

Global economic imbalances are not a new phenomenon. However, in the aftermath of the global financial and economic crisis in 2008/2009, they have become a matter of increased concern to the international community as reflected by the IMF and G20. They are seen as having contributed to causing the crisis. What can be done to reduce the imbalances? Attention has focused on the idea of internationally coordinating macroeconomic policy. This article assesses policy coordination from both a technical, but more particularly, a political economy angle. It concludes that the scope for formal and detailed policy coordination is strictly limited because of the underlying political constraints. The article examines alternative ways of dealing with global imbalances and offers a prognosis based on political economy considerations.