Current Account Surpluses And The Correction Of Global Imbalances

Large current account surpluses exhibit very little persistence over time, and ... very few large countries have persistently large surplus-to-GDP ratios... This is significant because many economists believe that sudden reductions in foreign countries' surpluses could have a major and unsettling impact on the value of the dollar.

A decline in growth relative to a long-term trend of 1 percentage point results in an improvement in the current account balance... of one quarter of a percentage point of GDP... A realignment of global growth - with Japan and the Euro Zone growing faster and the United States moderating its growth - would have only a modest impact on the current global imbalances. This, in sum, suggests that, even if there is a realignment of global growth, the world is likely to need significant exchange rate movements to eliminate global imbalances.

Not all economists believe that the U.S. international deficit is a bad thing, arguing that it signifies Americans' preference for investment and growth over merely savings. Yet many worry that the current account deficit, which is nearing one trillion dollars, or 7 percent of GDP, is unsustainable. These observers speak of a "savings glut" among America's trading partners. Accordingly, these economists maintain that accelerated growth among those trading partners is the most desirable way to correct the imbalances. Still, the impact of such growth, and in particular its degree and rapidity, remains conjectural.

In On Current Account Surpluses and the Correction of Global Imbalances (NBER Working Paper No. 12904), NBER Research Associate Sebastian Edwards examines the historical evidence on current account adjustments in surplus countries, with particular attention to whether large surpluses are persistent. He also analyzes and evaluates the process and speed through which large surplus countries have reduced their imbalances.

By studying World Bank data collected over 35 years and covering some 160 advanced, transitional, and emerging countries, Edwards finds first what he calls an important asymmetry between current account deficits and surpluses. That is to say, many more countries have deficits than have surpluses. Moreover, while over the past 35 years, on average, only 28 percent of all countries ran surpluses during a given year, that figure has grown significantly in the last few years. During 2003-4, for example, almost 40 percent of countries enjoyed surpluses. The most marked changes have been in Asia, which has seen a current account reversal of more than 5 percent of GDP between 1997 and 2003-4. Of course the most notable nation with positive foreign savings is China - but in recent years fully 70 percent of all Asian nations have been showing surpluses. Indeed, the growing U.S. deficit has been financed by an ever-greater number of countries.

Edwards also determines that large current account surpluses exhibit very little persistence over time, and that very few large countries have persistently large surplus-to-GDP ratios. He notes that surpluses are more persistent in the Middle East and North Africa, mainly reflecting the recent jump in the price of oil. But even so, Edwards notes that the only truly long-term high surplus nations of any importance are Singapore and Switzerland. The fact that large countries don't seem to run high surpluses persistently, Edwards says, is consistent with the notion that, in order to finance the increasingly large U.S. deficit, a growing number of small and medium-sized countries must run surpluses. In addition, the lack of persistence suggests that the majority of countries that do run large surpluses do so only for limited periods.

Moreover, the data show that large surpluses are slightly more persistent than large deficits. However, the degree of persistence of both types of imbalances is low. At the same time, large and abrupt reductions in surpluses are relatively rare, with their incidence fluctuating between 3.0 percent and 6.6 percent of all country years. This is significant because many economists believe that sudden reductions in foreign countries' surpluses could have a major and unsettling impact on the value of the dollar.

Edwards finds that the incidence of surplus adjustments has been largest in the Middle East and smallest in the most advanced countries. Furthermore, surplus adjustments have been associated with mild real exchange rate appreciation and with deterioration in the terms of trade. At the same time, the behavior of interest rates, inflation, and economic growth is unclear in the periods surrounding major surplus adjustments.

Current account balances meanwhile have been associated with business cycles, real exchange rates, fiscal imbalances, and a country's net external position. All of these variables, Edwards observes, enter into the current account equation with the expected sign, and their coefficients are significant. He uses panel data to investigate the relationship between the business cycle and the current account in various countries, paying special attention to how sensitive current account balances have been to expansion in real GDP growth relative to its long-term trend. His analysis suggests that a decline in growth relative to a long-term trend of 1 percentage point results in an improvement in the current account balance - either higher surplus or lower deficit - of one quarter of a percentage point of GDP. These results indicate that a realignment of global growth - with Japan and the Euro Zone growing faster and the United States moderating its growth - would have only a modest impact on the current global imbalances. This, in sum, suggests that, even if there is a realignment of global growth, the world is likely to need significant exchange rate movements to eliminate global imbalances.

-- Matt Nesvisky