ABSTRACT
This chapter explains that the real cause of global imbalances rests in the long-term economic factors that have shaped the new international division of labour that started immediately after the Second World War and accelerated after the fall of the Berlin Wall. It discusses how global imbalances are linked with countries' comparative advantages and provides evidence for it using data of 40 countries for the period 1991-2006 and explains how global imbalances could lead to financial crisis. The solution for international organizations is to create non-country-specific financial assets and make them sufficiently profitable for the surplus countries to invest in. The special drawing rights of the international monetary fund (IMF) can be such an asset. Most of the world is still very poor and desperately needs investment. The chapter concludes that the theory and empirical evidence explained have strong implications for the literature on global imbalances and the policies applied to correct them.
