Rebalancing of the World Economy and Asia

Abstract

We examine the issue of global rebalancing with much focus on East Asia, particularly China. For that purpose, we reexamine the determinants of current account balances, applying updated data to the framework based on Chinn and Ito (2007a). Based on our estimates, changes in the budget balance appear to be an important factor affecting current account balances for advanced current account deficit countries such as the United States and the United Kingdom. We also find evidence for the effect of the “saving glut variables” on current account balances for emerging market countries. However, we also identify components of current account balances that cannot be explained by cross-country variation, but can be explained only by country-specific factors, suggesting that country-specific analysis is necessary to foresee the prospects of global rebalancing. For that purpose, we review the institutional aspects of China’s development that have led to high saving in the country, particularly the factors that have contributed to high saving rates in all three sectors: public, corporate, and household. We find that all these factors are the outcome of the country’s growth strategies and are intricately intertwined with each other. These findings suggest that unless countries implement substantial policy changes, the global imbalances are unlikely to disappear.