Academic journal article Asian Development Review

Asia's Current Account Surplus: Savings Glut or Investment Drought?

Academic journal article Asian Development Review

Asia's Current Account Surplus: Savings Glut or Investment Drought?

Article excerpt

Over the last few years economists have started referring to the existence of "global payments imbalances", reflected in the growing current account surpluses and deficits among different regions of the world (surpluses mostly, but not only, by a number of Asian countries; deficits mainly by the US), together with a substantial accumulation of international reserves (also by a number of Asian countries). This paper examines Asia's current account surplus from the perspective of the savings-investment gap in order to determine whether the surplus is a result of an increase in savings rates (i.e., a savings glut) or a decline in investment rates (i.e., an investment drought). The analysis indicates that Asian current account surpluses are mostly associated with significant investment declines after the Asian financial crisis. Using data from 1986 to 2003 for a group of Southeast Asian countries, we find that the decrease and stagnation of domestic credit, the creation of excess capacity, and the relative decline of profit rates have contributed to the fall of investment rates across Asia, indicating a return to export-led growth.


The term "global payments imbalances", as it is being used of late, refers to the growing current account surpluses and substantial accumulation of international reserves by a number of Asian countries in the face of a growing current account deficit in the United States (US). The trends seen during the last few years have raised a number of concerns.

Figure 1 shows the current account balances of the different regions of the world for 1990-2005. The figure provides essential information to understand the concerns about the imbalances. Until the mid-1990s the surpluses/deficits were relatively small. Starting in 1998, however, they began increasing very fast and show no tendency to stabilize.1 When current account surpluses/deficits are normalized by world gross domestic product (GDP), as shown in Figure 2, a similar pattern is detected, that is, the imbalances present no tendency to stabilize.

The US has had a current account deficit every year during this 16-year period, except in 1991. In 2004-2005, it represented more than 1.5% of world GDP. Since the mid-1990s, the deficit has more than doubled, and in 2005 it represented 6.4% of US GDP (up from about 1.6% in 1996) or 1.80% of world GDP. On the other hand, Japan has consistently been in surplus. Between 1990 and 1997, except for the People's Republic of China (PRC), which had a small surplus, developing Asia (comprising Central Asia, the newly industrialized economies [NIEs], the Pacific, South Asia, and Southeast Asia) was in deficit. Since 1997 the PRC's surplus has increased significantly. In 2002, the PRC had a current account surplus of $35 billion, but by 2005 this had soared to $159 billion, equivalent to 0.357% of world GDP (more than twice as much as in 2004). The rest of developing Asia turned into surplus, reaching $85 billion in 2005. Starting in 2003, the surpluses of the rest of the world (the combined surpluses of Africa, Eastern Europe, Latin America, Middle East, and Russia) also increased significantly to about $266 billion in 2005 (equivalent to 0.6% of world GDP), mostly due to significant oil revenues as a result of the run-up in oil prices over that period, surpassing that of total developing Asia ($244 billion). Today, the group of countries with the world's biggest current account surplus is not emerging Asia, but the oil exporters (almost $400 billion in 2005). In fact, the rise in oil prices explains half of the widening of the US current account deficit since 2003, a larger share than that accounted for by the PRC. These swings coincided with the increase in the US current account deficit.

The two key questions regarding the imbalances are, first, whether they are sustainable; and second, if they are not, how they are likely to be resolved and over what period of time. …

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