For example, if the United States had adopted different policies, it might have shifted the composition of growth toward more business investment and less consumption and housing. But in a disinflationary global environment amid chronic EME trade surpluses, the United States could not achieve a high level of employment with a high level of national saving. Looked at from the lens of the emerging world, sustained consumption demand in developed nations induced the EMEs to continue to emphasize investment and exports. This meant that still poor populations did not reap the full benefit of their labors in the form of increases in real income and consumption commensurate with the gains achieved in productivity and output. Also, this system led, in many cases, to poor returns to EME savers. This resulted, in part, from the cost of sterilizing reserves accumulated in the process of managing exchange rates and the use of the banking system as a tool of industrial policy. While it is tempting to draw a line of causation from actions in one part of the global system to the other, this is overly simplistic. Rather, we have to think of the global economy as a single system, with outcomes based simultaneously on all the choices and preferences throughout the system. What is new is that the so-called periphery is now weighty enough to have a large impact on the pattern of economic activity in the core, as well as vice versa.
If these two sectors cannot take up all the slack created by necessary fiscal retrenchment in the years ahead – as seems likely – then the U.S. trade balance will need to improve as well. This implies that EMEs will no longer be able to rely on expanding U.S. demand as a key driver of their own economic growth. Of course, this is not just an issue of U.S. and EME adjustment. Adjustments will be required in other industrialized countries, too – and not just the deficit countries. There has to be recognition on all sides that global rebalancing in terms of the composition of activity and growth and in terms of global capital flows is necessary. Fortunately, this is not a zero-sum game: it is in the interests of all sides. However, it is still very difficult to accomplish because it is not in the short-term interests of some interest groups in many nations. This means that there are likely to be considerable political obstacles to adjustment in many parts of the global economy. In this process, the United States needs to show leadership in contributing to a smooth adjustment. In this regard, I think there are a number of actions that the United States can take – unilaterally and in its own interest – that will make this rebalancing process easier and less prone to disruption.