Report analyzes countries’ policy-induced moves away from large, sustained current account surpluses (photo: David Warren/Philadelphia Inquirer)
WORLD ECONOMIC OUTLOOK
The study, released as part of the IMF’s flagship World Economic Outlook, examines how surplus countries can reduce their large positive current account balances.
“In economies with large external deficits before the crisis, most notably the United States, private demand is likely to remain below the precrisis trend as households repair their balance sheets, and a strong recovery will require an increase in net exports,” the study, released on April 14 as Chapter 4 of the WEO, says.
“For surplus economies facing weaker demand from deficit economies, the challenge is to rebalance growth from external sources to domestic sources and to run smaller surpluses in the future. Together, these two adjustments could promote a strong and balanced global recovery.”
Learning from past episodes
The chapter analyzes the experience of countries that made a policy-induced transition away from large, sustained current account surpluses. In particular, it looks at 28 surplus reversal episodes in advanced and emerging market economies over the past 50 years.
Using both statistical analysis and in-depth case studies, the study examines the implications of these shifts for economic growth and employment and identifies key factors that explain a large variation in growth outcomes.
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. The narrowing of the current account surplus during policy-induced surplus reversals reflected both a significant fall in saving and a sharp rise in investment. And although exchange rate appreciation was a common feature in many surplus reversals, overshooting rarely occurred.
On average, surplus reversals were not associated with lower growth in output or employment. Output growth in the three years following the start of a reversal was, on average, higher than in the preceding three years by 0.4 percentage point, although the change was not statistically distinguishable from zero. Demand frequently shifted from external to domestic sources, with rising consumption and investment offsetting a fall in net exports. Moreover, the level of employment increased slightly as the increase in employment in the nontradables sector more than offset the decline in employment in the tradables sector.
Behind this insignificant change in average growth, however, was a wide range of growth outcomes that can be explained by a host of factors. Other things being equal, a real exchange rate appreciation was associated with lower growth. But other factors frequently offset the effects of an appreciation, including improving global demand, strengthening terms of trade, macroeconomic stimulus, and structural reforms such as trade liberalization.
Important implications
The analysis has important implications for economies considering an exit from large current account surpluses.
• Reducing the surplus need not undermine growth: the average effect on output growth and employment is small, and the quality of growth improves—there is a better balance between external and domestic demand, and between growth in the tradables and nontradables sectors.
• Although exchange rate appreciation played a key role in many surplus reversals, the best results were achieved when appreciation was complemented with macroeconomic policies that supported domestic demand and, in some cases, structural reforms that addressed distortions that gave rise to the large current account surpluses.
• There is also a cautionary lesson from past reversal episodes: macroeconomic policies, if overly expansionary and kept in place too long to counter the effect of currency appreciation, can stoke inflation and asset price booms.
