THE INTERNATIONAL ADJUSTMENT MECHANISM UNDER RESTRAINT

International imbalances, featuring as large current account deficits and surpluses in different countries are closely related but the adjustment mechanism that should restore equilibrium appears to be under restraint. These imbalances cannot be sustained without severe negative effects on the world economy. The different elements of the adjustment mechanism are complementary and it appears that the current state of economic policy and the absence of incentives to market participants in favour of portfolio switching inhibit an effective adjustment process. Institutional reform in the financial markets of the emerging economies, particularly Asia, appears to be an important prerequisite for the adjustment process to be effective.