The Evolutionary Pattern of Global Imbalance: Evidence from Cross Country Data from 1970 to 2010

Abstract

In this article, we emphasize that net foreign asset (NFA) is an important indicator that can nicely reflect global imbalance and has not received enough attention. We use a representative data-set to examine how the NFA varies with the development stages of different countries. We also investigate the determinants of NFA and the composition of external asset and liability. We have obtained some important findings. First, the change of NFA follows an inverse U-shaped curve with the increase of gross domestic product (GDP) per capita. This means that the most-watched global imbalance may decrease with economic development in the future. Second, industrial structure, openness to international market, inflation, development of domestic financial market and public debt are important factors that affect the ratio of NFA/GDP and compositions of external asset and liability. Third, the NFA/GDP ratio in China is currently at the early stage of the inverse U-shaped curve and is expected to decrease in the future. As for the compositions of external asset and liability, China is holding too much asset in the form of foreign exchange reserves (FER) and too much liability in the form of foreign direct investment (FDI). In contrast to some existing views, we believe that the restrictions on capital mobility, rather than NFA, affect the composition of external asset and liability. This study sheds some light on the imbalance issue and the corresponding policy-making.