Global imbalances as constraints to
the economic recovery in developed
economies.
Jesus Ferreiro, Patricia Peinado and Felipe Serrano
Department of Applied Economics V
University of the Basque Country UPV/EHU
Conference “International Economic Policies, Governance and the New
Economics”
The Cambridge Trust for New Thinking in Economics
Cambridge, Thursday 12 April 2012
Do Current Account Imbalances (CAIs) matter?
• CAIs involve financial flows. High CAIs involve high net
financial (in/out)flows, and the latter may be a source of
problems (via interest rates, exchange rates…)
• CA deficits may be generated by fiscal deficits, leading
to the possibility of twin crises (BoP and fiscal crisis)
• Permanent CA deficits lead to the accumulation of
external debt. Problems in case of sudden stops
• CA imbalances involves:
– a trade deficit that constrains the economic activity
– a trade surplus that involves an export-led growth
strategy, whose long-term sustainability depends on
the economic activity in foreign partners
2
Can CA Imbalances be a problem for the World
economy?
Current Account imbalances can be a source of systemic
risks depending on the:
•
•
•
•
Size of the imbalances
Trend (conjunctural or structural nature)
Concentration in a low/high number of countries
Extension of the phenomenon: number of countries with
high CA imbalances
3
Size of Current Account Imbalances
Current Account Balances (billions US dollars)
2000
1500
1000
500
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
-500
-1000
-1500
-2000
Deficit CAB
Surplus CAB
4
Current Account Imbalance as % World GDP
3,0
2,5
2,0
1,5
1,0
0,5
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0,0
The size of the CAI is measured as the average of the sums of the absolute values of the
CA deficits and surpluses as percentage of the World GDP
5
The evolution of the current account imbalances shows a
clear rising trend:
• 1980-1999: 1.26 per cent World GDP
• 2000-2011: 2.21 per cent World GDP
Is this evolution the result of a cyclical pattern, a long-term
smooth trend, or the result of a structural break in the
framework of foreign trade relations?
6
Trend of Current Account Imbalances
To test this hypothesis we have applied a structural time series analysis to the
behaviour of the size of current account imbalances in the world economy.
The model tested is:
where μ is the level, ψ is the cycle, and ω an intervention (dummy variable)
The stochastic trend (level+slope) component is specified as:
We include 3 interventions variables : years 2001 and 2009 (outliers taking the
value 1 for that years , and 0 for the others) and an intervention adopting the
form of a break in the level in year 2000 (taking the value 1 since 2000)
7
Summary statistics
Var1
T
32.000
p
5.0000
std.error
0.14639
Normality
4.9227
H(8)
0.51530
DW
2.2448
r(1)
-0.23878
q
9.0000
r(q)
-0.038520
Q(q,q-p)
12.007
Rd^2
0.69100
Variances of disturbances:
Value
(q-ratio)
Level
0.000000 ( 0.0000)
Slope
7.81691e-006 ( 0.007854)
Cycle
0.00446176 (
4.483)
Irregular
0.000995301 (
1.000)
Cycle other parameters:
Variance
0.04744
Period
7.44442
Frequency
0.84401
Damping factor
0.95182
Order
1.00000
State vector analysis at period 2011
Value
Prob
Level
2.17949 [0.00000]
Slope
-0.21398 [0.02726]
Cycle 1 amplitude
0.33856 [ .NaN]
Regression effects in final state at time 2011
Coefficient
RMSE
t-value
Prob
Outlier 2001(1)
-0.22155
0.07511
-2.94954 [0.00681]
Outlier 2009(1)
-0.48065
0.07495
-6.41261 [0.00000]
Level break 2000(1)
0.22388
0.11973
1.86994 [0.07325]
The model shows a
significant
structural break
(equivalent to 0.22
p.p. world GDP) in
the size of CA
imbalances that
took place in 2000
8
9
The models shows that since 2000 the size of current
account imbalances has a rising trend.
This involves that the problems (directly and/or indirectly)
generated by these imbalances are more intense than in
the past
10
Concentration of world disequilibria in the current account balance
Year
1980
Accumulated
percentage of
the disequilibria
25%
50%
75%
1990
25%
50%
75%
1995
25%
50%
75%
2000
25%
50%
75%
2007
25%
50%
75%
2011
25%
50%
75%
Surplus countries
Deficit countries
Saudi Arabia
Saudi Arabia, Kuwait
Italy, Germany, Brazil
Italy, Germany, Brazil, Japan, Mexico, Poland, Canada,
Korea, Spain
Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Libia, Italy, Germany, Brazil, Japan, Mexico, Poland, Canada,
Nigeria
Korea, Spain, Belgium, Australia, Sweden, France,
Austria, Iran, Turkey, Ivory Coast, Argentina,
Philippines, Romania, Ireland
Germany, Japan
USA
Germany, Japan, China
USA, United Kingdom, Italy, Canada
Germany, Japan, China, Taiwan, Switzerland, Venezuela, USA, United Kingdom, Italy, Canada, Spain, Australia,
Netherlands, United Arab Emirates
France, India, Mexico, Thailand
Japan
USA
Japan, Netherlands, Italy
USA, Germany, Australia, Brazil
Japan, Netherlands, Italy, Switzerland, Belgium, Singapur, USA, Germany, Australia, Brazil, United Kingdom,
France
Thailand, Hong Kong, Korea, Malaysia, Austria,
Indonesia, India, Turkey
Japan, Russia
USA
Japan, Russia, Switzerland, Norway, France, China
USA
Japan, Russia, Switzerland, Norway, France, China,
USA, United Kingdom, Germany, Brazil
Canada, Kuwait, Saudi Arabia, Iran, Korea, United Arab
Emirates, Venezuela, Libia, Singapur
China, Germany
USA
China, Germany, Japan, Saudi Arabia
USA, Spain
China, Germany, Japan, Saudi Arabia, Norway,
USA, Spain, Australia, Italy
Netherlands, Singapore, Sweden, Kuwait, Switzerland,
Taiwan
China, Germany
USA
China, Germany, Japan, Saudi Arabia, Russia
USA, Turkey, Italy, France
China, Germany, Japan, Saudi Arabia, Russia,
USA, Turkey, Italy, France, United Kingdom, Canada,
Switzerland, Norway, Netherlands, Kuwait, Qatar,
Brazil, Spain, India
Taiwan, Singapore, Sweden
11
Current account imbalances (billions US dollars)
1800
1600
1400
1200
1000
800
600
400
200
-200
-400
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
-600
-800
-1000
-1200
-1400
-1600
3 higher deficits
3 higher surpluses
Cumulated deficits
Cumulated surpluses
12
3 higher deficits
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Three highest CA imbalances as a percentage of total imbalances
80
75
70
65
60
55
50
45
40
35
30
25
20
3 higher surpluses
13
Extension of CA imbalances: number of countries with
high imbalances
Number of countries
CA deficit ≥ 4% GDP
CA surplus ≥ 4% GDP
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
110
105
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
other countries
14
CA deficit ≥ 4% GDP
CA surplus ≥ 4% GDP
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Percentage out of total number of countries (%)
60
55
50
45
40
35
30
25
20
15
10
5
0
other countries
15
Reasons of Current Account Imbalances
1. Real versus financial causes:
• Based on current account (CA) balance: disequilibria in
BC lead to disequilibria in BK
– (S-I)  (X-M)
– (X-M)  (S-I)
• Based on capital account balance (Bracke et al, 2008):
disequilibria in BK lead to disequilibria in BC:
– Asian crisis
– Underdeveloped financial sectors in Emerging Market
Economies
16
2. U.S. versus rest of the world (EMEs) origins:
• USA:
– Rise of US productivity growth (Hunt and Rebucci, 2005;
Engel and Rogers, 2006; Bracke et al, 2008; Kroszner,
2008)
– Increases in private consumption and declines in saving
rate (Bernanke, 2005; Kroszner, 2008)
– Attractiveness of US financial system (Bernanke, 2005)
– Dollar liquidity and low US policy rates since
2001(Bibow, 2008-9)
– Special international status of US dollar (Bernanke,
2005)
– Rise of US household consumption not offset by
declines in the spending of other sectors (Gruber and
Kamin, 2009)
17
• Rest of the world (EMEs, aged developed economies, oil
exporters)
– Global savings glut - investment draught (Bernanke, 2005,
2007; Rajan, 2006)
– Rise in Chinese saving rate
– Chinese public savings glut (Hermann and Winkler, 2009)
– Weakness of financial systems in developing economies
(Bracke et al, 2008, Kroszner, 2008, Hermann and Winkler,
2009)
– Financial crises in EMEs lead to build up foreign exchange
reserves as a buffer against capital outflows (Aizenmann and
Lee, 2007; Aizenmann and Sun, 2009; Bernanke, 2005;
Gruber and Kamin, 2009; Hermann and Winkler, 2009; Lee,
2009; Cova et al, 2009)
– Sharp in oil prices (Gruber and Kamin, 2009)
– Domestic demand stagnation in some developed countries
(Bibow, 2008-9)
– Ageing in developed economies
18
– China’s policies (Corden, 2009): exchange rate
policy, build-up of foreign exchange reserves as a
form of self-protection (parking theory), high
household and corporations savings
– Massive excess supply of labor in Asia (Dooley et al,
2009)
– Financial liberalization in Emerging Asian Countries
(Dooley et al, 2004; Chadha, 2006; Caballero et al,
2006)
– Financial liberalization plus higher productivity growth
in the rest of the world (Chakraborty and Dekle, 2009)
– Productivity slowdown in the nontradeable sector of
emerging Asia (Cova et al, 2009)
19
3. Mixed Origin:
• Bretton Woods II (Dooley et al, 2003): symbiosis of interest
among US and surplus developing countries: Developing
countries base their development in exporting to US; the US
finance its CA deficit by selling safe financial assets, which
provide the collateral for inward FDI in developing countries
• Differences in financial development: spending in the US is
more responsive to lower costs and higher availability of credit
stemming from the global saving glut than other advanced
economies (“spending response” hypothesis: Gruber and
Kamin, 2009)
• Differences in the productivity growth: higher TFP growth in
the US nontradable sector and higher TFP growth in the
tradable sector of the rest of the world (Obstfeld and Rogoff,
2007; Cova et al 2008)
20
All these hypothesis have problems:
• The assumption of a direct relationship between financial
and current account flows
• They can not explain why the desire/objective of some
countries to generate a surplus in their current accounts
(accumulation of foreign reserves) can effectively be
materialized
• They can not explain why during the last decade, the
generation and the rising size of current account
imbalance is a generalized (and long-lasting)
phenomenon, and why the increase in the number of
deficit countries is higher than that of surplus economies
21
The size and the evolution of these imbalances (and that of
EU with China) is explained by a process of worldwide
relocation of production of tradeable goods: a change in
the global value added chain.
This process has been fuelled by FDI inflows from
developed economies to emerging economies
Consequently, it is a structural-nature process that cannot
be solved with short-term measures like exchange rate
adjustments or macroeconomic (fiscal-monetary) policies
22
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Current Account Imbalances and FDI (% World GDP)
4,5
35
4,0
30
3,5
3,0
25
2,5
20
2,0
15
1,5
10
1,0
0,5
5
0,0
0
FDI flows
CAI
FDI stock
23
Structural break in the series of FDI flows
We have applied a structural time series analysis to the behaviour of
the FDI flows in the world economy.
The model tested is:
We include 3 interventions variables : years 1999 and 2000 (outliers
taking the value 1 for that years , and 0 for the others) and an
intervention adopting the form of a break in the level in year 1998
(taking the value 1 since then)
24
Log-Likelihood is 29.3507 (-2 LogL = -58.7014).
Prediction error variance is 0.051874
Summary statistics
FDI flows
T
31.000
p
5.0000
std.error
0.22776
Normality
2.3426
H(8)
19.134
DW
2.1309
r(1)
-0.089814
q
9.0000
r(q)
0.10100
Q(q,q-p)
13.531
Rd^2
0.84615
Variances of disturbances:
Value (q-ratio)
Level
0.000000 ( 0.0000)
Slope
0.000000 ( 0.0000)
Cycle
0.0397524 ( 1.000)
Irregular
0.000000 ( 0.0000)
Cycle other parameters:
Variance
0.15859
Period
7.12684
Frequency
0.88162
Damping factor
0.86564
Order
1.00000
State vector analysis at period 2010
Value
Prob
Level
2.14618 [0.00000]
Slope
0.06201 [0.00001]
Cycle 1 amplitude
0.60289 [ .NaN]
The results show a
rising trend in the FDI
flows and a structural
break in 1998,
equivalent to a
permanent increase
of 0.6 per cent of the
world GDP
Regression effects in final state at time 2010
Coefficient
RMSE
t-value
Prob
Outlier 1999(1)
1.03042
0.23280
4.42611 [0.00015]
Outlier 2000(1)
1.50617
0.23185
6.49630 [0.00000]
Level break 1998(1)
0.58385
0.20102
2.90439 [0.00741]
25
26
Structural break in the series of FDI flows
We have applied a structural time series analysis to the behaviour of
the FDI flows in the world economy.
The model tested is:
We include 4 interventions variables : years 2002, 2005 and 2008
(outliers taking the value 1 for that years , and 0 for the others) and
an intervention adopting the form of a break in the slope in year
1997 (taking the value 1 since then)
27
Log-Likelihood is -5.86179 (-2 LogL = 11.7236).
Prediction error variance is 0.955449
Summary statistics
Stock FDI
T
31.000
p
2.0000
std.error
0.97747
Normality
5.9052
H(8)
19.651
DW
1.4250
r(1)
0.18574
q
6.0000
r(q)
-0.077398
Q(q,q-p)
2.0861
Rd^2
0.83958
Variances of disturbances:
Value (q-ratio)
Level
1.18448 ( 1.000)
Slope
0.000000 ( 0.0000)
Irregular
0.000000 ( 0.0000)
State vector analysis at period 2010
Value
Prob
Level 19.80295 [0.00155]
Slope
0.48508 [0.08676]
The results show a
rising trend in the FDI
stock and a structural
break in 1997,
equivalent to a
permanent increase
of 0.9 per cent of the
world GDP
Regression effects in final state at time 2010
Coefficient
RMSE t-value
Prob
Outlier 2008(1)
-6.99891 0.76957 -9.09458 [0.00000]
Slope break 1997(1) 0.82523 0.39829 2.07193 [0.04874]
Outlier 2002(1)
-1.79850 0.76957 -2.33702 [0.02775]
Outlier 2005(1)
-2.12150 0.76957 -2.75674 [0.01074]
28
29
How to solve current account imbalances
Traditional solutions to solve a current account imbalance
are:
• Demand-side policies: (T+G) + (S-I)=(X-M)
– Current account deficits: restrictive fiscal-monetary policies
– Current account surpluses: expansionary fiscal-monetary
policies
• Exchange rate policy:
– Current account deficits: depreciation
– Current account surpluses: appreciation
30
In the case of demand-side policies:
• the reduction of CA deficits involves a negative impact on economic
activity
• the reduction of CA surpluses assumes:
– that surplus country will increase the demand of goods-services
produced abroad,
– that domestic agents absorb some of the production formerly
exported
– that foreign partners will be able to generate the (higher) supply of
these goods
– that there is a foreign supply of these goods
Option b may lead to higher prices of goods exported by the surplus
country. If foreign partners do not increase the production of these
goods (substituting imports by domestic production) and the demand of
imports is highly inelastic, import prices in these deficit countries will
rise, increasing the CA deficit
31
In the case of exchange rate policy:
• The impact of changes in the exchange rate depends on the
elasticity of the demands of imports and exports
• Highly inelastic demand of imported goods lead to a deterioration of
CA balances if the currency depreciates
• A low sustituibility between domestic goods and imported goods
involves very high depreciation of the domestic currency
• The impact on trade balances of changes in the real exchange rate
depends on the level of intra-industrial trade: in countries with low
intra-industrial trade, the depreciation of the RER can deteriorate the
trade balance (Kharroubi, 2011)
• A change in the exchange rate of a single currency might not affect
the CA balance of a thirs partner, if the exports of the first country
compete with other countries whose currencies do not change
• Empirical analyses (Altuzarra, Ferreiro and Serrano, 2010), using
cointegration and VCM, show that a depreciation of the euro
improves the trade balance with China, but a depreciation of the
dollar deteriorates the USA trade balance with China
32
Conclusions
•
•
•
•
Current Account Imbalances are a source of potential (systemic) risks:
– Problems coming from the related financial flows
– Constraints to the economic activity in deficit countries
Current account imbalances have a structural nature:
– The size of CAI has increased in the last decade
– The number of countries with high CAI has increased
– CAI is concentrated in a low number of economies
Current Account Imbalances are explained by a process of worldwide
relocation of production of tradeable goods (fuelled by FDI flows from
developed economies): is a structural-nature process that cannot be solved
with short-term measures like exchange rate adjustments or
macroeconomic (fiscal-monetary) policies
Adjustment of CA deficit involves a change in the productive structure (size
and composition of aggregate supply) of the deficit country: need of supplyside policies (e.g., industrial policies, policies fostering FDI inflows...)
33