has been made towards correcting imbalances, further efforts are desirable - with every country doing its part - to help reduce medium - term risks associated with the imbalances. the us will have to try to curb household and government borrowings and strengthen national savings, without hurting recovery and excessive dollar depreciation. the focus of fiscal consolidation in the us has to remain on the expenditure side, though revenue measures aimed at broadening the revenue base and tax system with greater emphasis on consumption tax rather than income tax cannot be ruled out ( weo, september 2006 ). with the housing market slowing down in the us, some increase in private savings is expected. this will be further helped by policy initiatives such as introduction of health savings accounts that would raise incentives for household savings and passing of pension legislation. the euro area needs to pursue structural reforms, especially product and labour market policies, to boost domestic demand and broad base the recovery. japan has started recovering finally. its current account surplus has begun to narrow down from 3. 8 per cent of gdp in 2004 to 3. 6 per cent of gdp in 2005 and the trend is continuing in 2006 with domestic demand strengthening. it is widely agreed that japan should further strengthen its financial system and carry out other structured reforms to provide further flexibility in the economy. further flexibility in exchange rate policies is desirable for the emerging market economies. any attempt by emes to intervene excessively and sterilize their forex reserves to maintain their competitiveness will further delay the adjustment process. however, as indicated earlier that unless there are substantial changes in exchange rates, it seems that one cannot expect corrections to global imbalances. studies have shown that with unchanged growth rates in the us and the rest of the world, the us dollar would need to depreciate by nearly 33 per cent - equivalently, the non - us currencies would have to appreciate, on average, by 50 per cent - to balance the us trade account ( obstfeld and rogoff, 2004, 2005 ). another study has pointed out that dollar should depreciate by 30 per cent in real terms to bring us cad within 2 per cent ( mussa, 2004 ). promoting efficient absorption of higher oil revenues in oil - exporting countries with strong macroeconomic policies should also be a key element of this correction mechanism. it is suggested that these countries could boost expenditures to some extent in areas where social returns are high like education, health, infrastructure and social security.

the global concerns are not about the existence of current account deficits or surpluses per se, but the persistence of large deficits and surpluses, particularly in large and systemically important economies. in reality, global imbalances in the international economic system today refers to the large and increasing current account deficits ( cad ) of the us and correspondingly large surpluses in other regions, particularly in asia. the extent of these imbalances has become large, particularly in the aftermath of the asian crisis and has generated issues of unsustainability of such global imbalances and chances of disorderly adjustment hampering the global economy, in general. the contributing factors ( i ) twin deficits in the united states the current global imbalance is largely attributed to the large and increasing cad of the us that has been financed by surpluses elsewhere, especially in emerging asia, oil exporters and japan. the us has been experiencing a current account deficit in each year since 1982. the us deficit remained below 3 per cent of gdp till the mid - 1990s. since then, however, it has risen substantially. the period following the bursting of the information technology bubble in the us was marked by highly accommodative monetary policy along with expansionary fiscal policies. on the one hand, the decline in the rate of interest led to the housing boom and increase in housing and other asset prices while, on the other hand, fiscal stimulation led to increase in consumption. while real activity in the us did provide a stimulus to activity in the rest of the world, it has been accompanied by large and growing twin deficits - fiscal as well as current account deficits. in absolute terms, the cad of the us has seen a seven fold increase from us $ 114 billion in 1995 to us $ 791 billion in 2005. as a percentage of gdp, the cad of the us almost doubled itself every 5 years since the early 1990s. during 2005, the cad to gdp ratio was close to 6. 4 per cent of gdp, the highest ever cad for the us ( table 1 ). it is widely agreed that wealth effects arising from increasing asset prices, particularly of housing, have also contributed significantly to lower savings rates and higher consumption rates in the u. s. the large current account and fiscal imbalances in the us also find its reflection in the savings - investment mismatches that have risen substantially in the present decade. the private net savings in the us has declined from 8 per cent of