April 14, 2010
IMF WEO: "Transitioning out of Sustained CA Surpluses"
[Corrections made 11am Pacific]
"Getting the Balance Right: Transitioning Out of Sustained Current Account Surpluses" by Abdul Abiad, Daniel Leigh and Marco Terrones:
This chapter examines the experiences of economies that ended large, sustained current account surpluses through policy actions such as exchange rate appreciation or macroeconomic stimulus. It subjects these historical episodes to statistical analysis and provides a narrative account of five specific transitions, examining economic performance and identifying key factors that explain various growth outcomes.
[text edited at 11am to correct a mistake due to the blogger's inability to cut and paste from a PDF correctly...MDC]
The chapter continues:
The following findings stand out. First, the current account surplus narrowed significantly in response to policy changes. Although exchange rate appreciation often played a role, other policies also facilitated the reversals, including macroeconomic policies that stimulated domestic demand and, in some cases, structural reforms. Second, policy-induced current account surplus reversals were not typically associated with lower growth. Real appreciation seems to have slowed growth, but other factors tended to offset this adverse effect. Specifically, demand frequently shifted from external to domestic sources, and rising consumption and investment offset the fall in net exports. At the same time, supply rebalanced, with resources shifting from the tradables to the nontradables sector. In some cases, real appreciation was followed by a shift in export composition toward higher-value-added goodsâ€”that is, by a move up the export quality ladder.3 Third, total employment rose slightly during reversals, as gains in nontradables employment more than offset employment losses in the tradables sector. Finally, there were some policy mistakes made during the rebalancing phase. Specifically, in some cases macroeconomic policy stimulus undertaken to offset the contractionary impact of appreciation was excessive, resulting in overheating and asset price booms.
Posted by Menzie Chinn at April 14, 2010 07:13 AMdigg this | reddit
Interesting study, but it seems to stand on one leg only of the linear programing,that is Minimization of a current account surplus, it could have been more educative if driven with a constraint Maximization of employment in the same country.
It does not cover the needs which arose from the structural changes required by the increased cost of labour (exchange rates) and the shift which ensued towards more capital intensive and more R&D industries.(Japan,Korea.Taiwan).
Hong Kong in the 90s had already shifted production in the pearl delta.
An alternative program could be minimization of a current account deficit and maximization of employment in the same country in CA deficit.
Posted by: ppcm at April 14, 2010 10:15 AM
Every dollar of a trade surplus requires a dollar of a trade deficit somewhere. "Trade tensions" is their variable expressing a role for trade deficit countries.
The new world into which we are moving is, I hope and finally, one in which the U.S. refuses to continue to sustain a trade deficit. If I am right, the causation will flow from trade deficit countries to trade surplus countries. That is not the situation described in this study.
Of course, my expectations of future U.S. action is problematic, not at all certain. The slow growth in employment in the U.S. is the reason for my expectation of a reversal of U.S. trade policy.
Posted by: ReformerRay at April 14, 2010 11:06 AM
Agree somewhat with ReformerRay about the source of the adjustments to sustained surpluses. China's domestic stimulus may have erroded its trade surplus temporarily, but this does not look like a sustainable pattern yet, as local consumption is not growing sufficiently. We'll have to see if the exchange rate is allowed to adjust, but I will be very surprised to see a cessation of currency purchases.
Posted by: don at April 15, 2010 02:38 PM
Regimes of limited flexibility are dangerous both for the countries running them and for the international system. The Fund needs to push harder for the abandonment of crisis-prone regimes and of policies designed to sustain unsustainable rates. The elephant in this room is, of course, the Chinese renminbi. Voters hungry for growth will want to see higher levels of investment, and their demands for additional consumption will limit saving rates. There is no guarantee that the high commodity and energy prices that have supported the international accounts of emerging markets will be a permanent feature of the international economic landscape. All this is to say that they will not run current account surpluses forever. Foreign reserves will not rise indefinitely: governments will find it hard to ignore the opportunity costs of ever-larger reserves, and sooner or later market forces and political pressures will require them to allow undervalued currencies to rise.
Article IV consultations of the IMF are an opportunity to convey information about international best practice regarding the making of fiscal policy, the conduct of monetary policy and regulation of the banking and financial system. Countries learn from the experience of other countries through multiple channels, but Article IV consultations are one of these. The institution’s ability to apply pressure for pre-emptive policy adjustments would be enhanced by a decision to make obligatory the publication of staff reports and board discussions of Article IV reviews.
The economist Brad Setser has estimated that China's official dollar assets as of May 2009 were roughly eight times those of Russia. With some 60 percent of China's official reserves held in dollar-denominated assets, diversification by Beijing would be a very big deal. the Chinese government is aware that it is trapped by the magnitude of its current dollar holdings. Selling U.S. Treasury securities in the quantities needed to significantly alter the composition of China's reserve portfolio would make the prices of these securities tank. If the People's Bank of China moved significant amounts of money from dollars to other currencies, the dollar would depreciate, causing further losses on China's residual holdings.
UNDERSTANDABLY DISSATISFIED with existing alternatives, China and other countries have begun exploring other options. In March, the governor of China's central bank, Zhou Xiaochuan, made a splash by arguing that the dollar should be replaced as the world's reserve currency by Special Drawing Rights (SDRS), the accounting unit used by the IMF in transactions with its members and currently composed of a basket of four currencies (the dollar, the euro, the yen, and the pound).
If China is serious about elevating the SDR to reserve-currency status, it should take steps to create a liquid market in SDRS. Specifically, it could issue its own SDR-denominated bonds. This would be a much more meaningful step than buying SDR bonds from the IMF--which China, Brazil, and Russia have recently said they are prepared to do--because those bonds cannot be traded and thus would not foster market liquidity. The first governments issuing SDR bonds would pay a price for the novelty, but that price would be the cost of investing in a more stable international system.
Posted by: Onur Bayramoglu at April 25, 2010 05:00 PM
Would China ever contract its current account surplus with the US? It would be difficult for a country of China’s size to implement the structural and monetary policies the article suggest and expect these to have an effect on the US current account deficit in the near future. Chinese officials continue to be pressured to devalue the Chinese currency, but much consideration must be given to the effect this would have to an economy of China’s size. China has seen success with the gradual approach to economic transition. Therefore, if Chinese officials decide to use some of the reforms listed in the IMF article, they will have to introduce them gradually. We cannot expect to have a Chinese devaluation today followed by a decrease in the US current account deficit tomorrow.
The US should find ways to decrease its current account deficit too. Stimulating more savings and investment is a way to do so. Some Americans complain about our trade deficit with China and other countries, but rarely do they suggest that America’s over consumption is partly to blame.
Posted by: KV at May 1, 2010 06:32 PM