Current Account Sustainability - Selected East Asian and Latin American ExperiencesWP/96/110-EA Current Account Sustainability: Selected Asian and Latin American Experiences by Gian Maria Milesi-Ferretti and Assaf Razin A number of East Asian and Latin American countries have received a large portion of total international capital flows to developing countries in two periods in the late 1970s-early 1980s and in the early 1990s. These inflows have financed persistent current account imbalances, as well as the accumulation of foreign exchange reserves. The recent Mexican crisis has shown, however, that abrupt reversals in international capital flows can cause severe problems for economies with large external imbalances and has spurred renewed interest in the question of current account sustainability. In its theoretical part, this paper first discusses the related concepts of external solvency, current account sustainability and excessive current account deficits. It then presents a simple model of foreign borrowing when capital flows take the form of debt or foreign direct investment, analyzing asymmetric information, enforcement problems, and expropriation risk. In its empirical part the paper integrates current account and capital account factors and discusses the experience of three Latin American countries--Chile, Colombia Mexico--and three East Asian countries--Korea, Malaysia and Thailand. The discussion attempts to determine why some countries suffered external crises (an exchange rate collapse followed by a renegotiation of external debt or an international bailout) while others did not. Given the track record of the East Asian countries over the last 25 years, a natural question to ask is whether macroeconomic and structural features make them less likely to experience a reversal in international capital flows or less vulnerable to such a reversal. In the sample in this paper, East Asian countries are characterized by a higher degree of openness and by higher levels of savings and investment than Latin American ones. The analysis presents arguments as to why these macroeconomic structural features can help an economy to sustain protracted current account imbalances. |