Publication

This paper examines external imbalances as one of the contributing factors to the global financial crisis. It points out that historically reversals of capital flows have often been associated with setting off crises, running contrary to standard economic theory, which sees imbalances and capital flows as part of the advantage of globalization. Also contrary to standard economic thinking, the author argues that capital is flowing 'uphill' from emerging contries with high growth potential (China), to the mature countries (the US), into low-return investments such as housing over-building. The paper makes a case for a need to put in place better financial infrastructure to link countries with surplus savings with the countries that have the best opportunities to use these savings.