Persistent Current Account Surpluses Research Articles

The Global Financial Crisis and Asian Economies: Impacts and Trade Policy Responses

The global financial crisis, triggered by the bursting of a speculative bubble in the U.S. housing market in 2008 (the sub-prime crisis), has caused ruptures across many countries in the form of financial failure and trade contraction. From about late-2009 there have been some signs of the global economic contraction bottoming. Industrial production in the United States and other major developed countries has begun to recover. The downward spiral in global trade volumes has abated, and the most recent month shows a modest upturn. The latest Worm Economic Outlook Update (26 January 2010) of the International Monetary Fund (IMF) predicts the global economy to grow by 3.9 per cent this year, following an unprecedented contraction of 0.8 per cent in 2009. However, the IMF cautions that the economic forces unleashed by the crisis will probably run rampant for years; the recovery, driven largely by unprecedented monetary and fiscal stimulus, remains fragile in many parts of the world and massive policy efforts are needed to sustain the recovery. It is still hard, therefore, to paint a reasonable growth trajectory extending beyond few months: there could even be a lost decade for the U.S. economy (and even for a few countries in Europe) like that suffered by Mexico in the 1980s, or by Japan in the 1990s. After the recovery process sets in, the United States and other crisis-affected developed countries will have to save more and import less in order to wind down the massive accumulated debts. It was earlier expected that the emerging and developing economies in Southeast Asia would be able to ride the wave of the global economic downturn through growing domestic markets and less direct exposure to shocks emanating from the breakdown of the major financial institutions in the economic powerhouses, especially in the United States and the European Union. Some economies in the region were projected to maintain strong growth in 2009--7 per cent for Vietnam, 4.8 per cent for Cambodia, 4.5 per cent for Indonesia, and 3.7 per cent for the Philippines. These sanguine predictions are attributed mainly to limited direct exposure to crisis epicentres and their experience of the 1997 Asian financial crisis after which they have run relatively conservative economic measures, including persistent current account surpluses, tightened financial regulations, sound budget deficits and flexible exchange rate regimes. Nevertheless, the aftermath of the global economic breakdown in 2009 has proven that these upbeat forecasts have been unrealistic as the regional economies have entered the worst post-1997 recession, and the pernicious effects of the global economic bites have become increasingly discernible. Asian Development Bank (ADB), for instance, projected a momentous plummet in commodity exports--32 per cent in Vietnam, 25 per cent in Indonesia, 18 per cent in Thailand, and 13 per cent in Malaysia. Furthermore, the International Labour Organization (ILO) estimated the spiralling unemployment rates across Southeast Asia, propelling 7.2 million more people into unemployment due to the fallout from the global economic slump. The recent data released by International Monetary Fund (IMF) also pointed to drastic capital inflow reversals as a consequence of the deleveraging process in the advanced economies that slashed net capital flows to emerging markets by about 2 percentage points of GDP in comparison with 2007. The World Bank further warned that several downside risks remain, such as falling inflows of international remittances, deteriorating economic vulnerabilities and aggravated poverty reductions and rural development. While much work to restore global economic balances rests with the world's leading nations like the United States and the European Union, the Southeast Asian economies by and large have a pivotal role to play in ushering a robust economic recovery, putting in place macroeconomic stability, refurbishing business confidence and directing international financial system reforms. …

Comment on “American Economic Relations with Asia”

Comment on “American Economic Relations with Asia”

Why are Switzerland's Foreign Assets so Low? The Growing Financial Exposure of a Small Open Economy

Switzerland's international investment position shows a puzzling feature since 1999: Large and persistent current account surpluses have failed to boost the value of Swiss foreign assets. In this paper, we link this pattern to the substantial increase in the leveraging of Switzerland's international assets and liabilities over the last twenty years, which we document in detail. We estimate the impact of exchange rate and asset prices movements on Swiss net foreign assets, and show that they led to substantial valuations losses since 1999, accounting for between one-quarter and one-half of the gap between the net foreign assets and cumulated current account flows. We show how these adverse valuation effects have erased Switzerland's advantage in terms of the yield on its net foreign asset position.

Long-Term Trends in the Saving-Investment Balance and Persistent Current Account Surpluses in a Small Open Economy: The Case of the Netherlands

This paper explores, from an investment-saving perspective, the factors underlying the persistent widening of the current account surplus in the Netherlands since the early 1980s. Standard intertemporal models, even appropriately extended to incorporate specific features of the Dutch economy, do not appear to fully account for this development. Accordingly, the paper focusses attention on the production side of the economy to gain further insight into the trends of the current account. Empirical evidence suggests that changes in relative factor prices and a relative demand shift toward non-tradable goods account for the bulk of the observed widening of the current account surplus. In turn, the impact of these factors on the current account appears to reflect both changes in factor proportions and deviations from perfect competition in the Dutch sheltered sector.

Long-Term Trends in the Saving-Investment Balance and Persistent Current Account Surpluses in a Small Open Economy: The Case of the Netherlands

This paper explores, from an investment-saving perspective, the factors underlying the persistent widening of the current account surplus in the Netherlands since the early 1980s. Standard intertemporal models, even appropriately extended to incorporate specific features of the Dutch economy, do not appear to fully account for this development. Accordingly, the paper focusses attention on the production side of the economy to gain further insight into the trends of the current account. Empirical evidence suggests that changes in relative factor prices and a relative demand shift toward non-tradable goods account for the bulk of the observed widening of the current account surplus. In turn, the impact of these factors on the current account appears to reflect both changes in factor proportions and deviations from perfect competition in the Dutch sheltered sector.

Current Account Surpluses and the Interest Rate Island in Switzerland

This paper describes some long-run aspects of the Swiss balance of payments, highlighting two macroeconomic phenomena that make Switzerland stand out among other countries: first, it has had a persistent current account surplus and the largest ratio of net foreign assets to GDP in the world; second, its real rates have been significantly lower than those of most other industrialized countries, earning it the label interest rate island. These two distinctive features may be related, and ultimately both may result from an excess of national savings over investment for many years. The real differential may largely be attributed to a foreign exchange rate risk premium, which compensates Swiss residents for holding net assets in foreign currency and foreign residents for bearing net liabilities in Swiss francs.

Current Account Surpluses and the Interest Rate Island in Switzerland

This paper describes some long-run aspects of the Swiss balance of payments, highlighting two macroeconomic phenomena that make Switzerland stand out among other countries: first, it has had a persistent current account surplus and the largest ratio of net foreign assets to GDP in the world; second, its real interest rates have been significantly lower than those of most other industrialized countries, earning it the label “interest rate island”. These two distinctive features may be related, and ultimately both may result from an excess of national savings over investment for many years. The real interest differential may largely be attributed to a foreign exchange rate risk premium, which compensates Swiss residents for holding net assets in foreign currency and foreign residents for bearing net liabilities in Swiss francs.

International trade in oil: Effects on the balance of payments and exchange rates

Oil price increases and the persistent OPEC current account surpluses were considered the main problems of economic development in many industrial and developing countries long after the first oil crisis. Since 1983, however, the OPEC surpluses have been completely absorbed and the official base price of petroleum has fallen for the first time in twenty years, although admittedly in terms of a “strong” dollar. Has the serious damage suffered by oil-importing countries in the two oil shocks been completely neutralised, or are the economies of many countries still strongly influenced by the actions and decisions of the OPEC countries?