[OPE] More on current account deficits

In a lame duck article, the IMF writes:

While some countries (such as Australia and New Zealand) have been able to
maintain current account deficits averaging about 4½ to 5 percent of GDP for
several decades, others (such as Mexico in 1995 and Thailand in 1997)
experienced sharp reversals of their current account deficits after private
financing withdrew in the midst of financial crises. Such reversals can be
highly disruptive because private consumption, investment, and government
expenditure must be curtailed abruptly when foreign financing is no longer
available and, indeed, a country is forced to run large surpluses to repay
in short order its past borrowings. This suggests that-regardless of why the
country has a current account deficit (and even if the deficit reflects
desirable underlying trends)-caution is required in running large and
persistent deficits, lest the country experience an abrupt and painful
reversal of financing.
http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm

Naturally there is the obligatory reference to how bad protectionism is. The
IMF concludes equivocally:

If the deficit reflects an excess of imports over exports, it may be
indicative of competitiveness problems, but because the current account
deficit also implies an excess of investment over savings, it could equally
be pointing to a highly productive, growing economy. If the deficit reflects
low savings rather than high investment, it could be caused by reckless
fiscal policy or a consumption binge. Or it could reflect perfectly sensible
intertemporal trade, perhaps because of a temporary shock or shifting
demographics. Without knowing which of these is at play, it makes little
sense to talk of a deficit being "good" or "bad": deficits reflect
underlying economic trends, which may be desirable or undesirable for a
country at a particular point in time.
http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm

I canot go now into the theoretical or empirical aspects, but let's ask, why
does the IMF equivocate about all this? Basically, because it wants to argue
that in some countries a current deficit is a bad thing, and in other
countries it is a good thing. The question you then have to answer is, what
is "good" and what is "bad"?

Jurriaan

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
Received on Tue Dec 28 13:41:07 2010