Whatever happened to the debate on global payments imbalances? Talk of an elegant policy solution, involving co-ordination and “shared responsibility”, has given way to the realities of an ad hoc process involving considerable risk of economic and financial instability.

At its roots, the policy solution called for simultaneous implementation of three sets of measures. First, a reduction in US domestic aggregate demand to contain imports and encourage a shift to exports. Second, an increase in consumption in Asia and the Middle East, including having China adopt a higher and flexible exchange rate. Third, structural reforms in western Europe to enhance the growth potential of the global economy.