Issies in Economic Policy – the Brookings Institution
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I S S U E S I N
Economic
Polic y The Brookings Institution
The Blind Men and
the Elephant
Barry Eichengreen
his paper reviews competing explanations for the
pattern of global imbalances and the magnitude
of the U.S. external deficit. It argues that, far from
being incompatible, existing explanations are all parts of
the larger story. The decline in savings rates in the
United States has played an important role in the emergence of global and U.S. imbalances. At the same time,
favorable productivity trends have made the U.S. a more
appealing place to invest, attracting foreign savings that
help to underwrite U.S. investment and finance the current account. The so-called global savings glut is a factor in the global imbalance insofar as it supports capital
flows to and investment in the United States. Finally,
the Sino-American co-dependency view emphasizes
how Asian countries, owing to a combination of heightened risk aversion following the 1997-8 crisis and their
continued commitment to export-led growth, are happy
with a situation where export demand is disproportionately important relative to domestic demand, a position
that is sustained by undervalued exchange rates and
reflected in rapid U.S. import growth.
Number 1, January 2006T
he problem of global imbalances and the
persistence of the U.S. deficit have been the
subject of wildly differing interpretations. Among
the most prominent are the deficient U.S. savings
view, the new economy view, the global savings
glut view, and the Sino-American codependency
view. These four interpretations have different
policy implications and suggest different scenarios
for the future of the world economy.
Nouriel Roubini has a paper where he likens the
existence of different perspectives to the Kurosawa
film Rashomon, in which a series of observers give
varying accounts of the same set of events.
analogy is suggestive, which is why I cite it here.
But the interpretations that I distinguish are not
the same as Roubinis. More importantly, I draw
different conclusions from the existence of these
different perspectives. In Kurosawas film the competing accounts are all self-serving, a pattern that
Roubini suggests carries over to the discussion of
global imbalances. Moreover, in Roubinis interpretation there is only one consistent, empirically
defensible characterization of the facts. Here, in
contrast, I argue that the exponents of different
interpretations have all got their fingers on important aspects of the larger reality. Their accounts are
not incompatible. But they are partial. Grasping
the nature of the problem requires acknowledging
that there is some validity to all four views. The
right analogy is not Rashomon, therefore, but the
blind men and the elephant.
In the following section, I build a discussion of this
point on the platform of the conventional current
account identities. But simply saying that there is
some validity to all four views is not very helpful
for those concerned with the future. I therefore
next address the question of what these scenarios
imply for future prospects. The paper concludes
by drawing out the implications for policy.
Accounting Identities with Analytical
Implications
The simplest way of seeing the compatibility of
the different views is to recall that the current
account is the difference between savings and
investment (S-I) and that the deficit of the United
States must equal the surplus of the rest of the
I S S U E S I N E C O N O M I C P O L I C Y N U M B E R 1 , J A N U A R Y 2 0 0 6
The Blind Men and
the Elephant
Barry Eichengreen
University of California, Berkeley
November 2005world (S-I = I*-S*, where asterisks denote rest-ofworld variables).
In general equilibrium, shocks to
any of these four variables can have implications
for all of them. The deficient U.S. savings view that
the most important factor in the current situation
is low national savings rates in the United States
focuses on a negative