VI. Causes of the recent widening of OECD current account imbalances

OECD Economic Outlook, June, 1999

Introduction

OECD current account imbalances have recently widened raising concerns about sustainability and protectionism

Over the past two years a number of countries in South East Asia have experienced massive switch's in current account positions, world trade growth has slowed substantially and current account imbalances for some of the major OECD countries have widened sharply. The current account deficit for the United States is expected to increase from 1 3/4 per cent of GDP in 1996 to 3 1/2 per cent of GDP this year, whereas the surplus for Japan is projected to widen from 1 1/2 to 3 per cent of GDP; the current account surplus of the European Union (EU) remains relatively stable (at just over 1 per cent of GDP). These movements reflect a number of partly inter-related factors: the counterpart to the adjustment of the financial crisis in South East Asia, differences in economic growth and cyclical positions, changes in competitiveness as well as underlying structural factors: Although as a percentage of GDP these current account positions are not as extreme as those reached in the mid-1980s, they have begun to raise policy concerns in some quarters about sustainability and pressures for increased protectionism. Concern may be underlined by the analysis presented previously in this Outlook and discussed further in this chapter which suggests that, at unchanged real exchange rates, these imbalances are likely to persist over the medium term.

This chapter addresses some of the issues involved by analysing the main factors underlying recent changes in trade and current account positions to show to what extent the imbalances are due to cyclical or other temporary factors, in particular those associated with the crisis in South East Asia, rather than more deep-rooted trends or structural factors. The issue of protectionist pressures is addressed in the next chapter.

The main points to emerge from the analysis are:

Import contraction in the Asia-5 economies had a major impact on OECD exports

-- The brunt of the current account adjustment of the Asian crisis countries has so far come about through import contraction with the corollary that the main impact on the OECD regions has been through a fall in exports; the largest adverse impact has been on Japan given its greater exposure to the markets of the Asian-crisis countries.

Widening external imbalances are largely due to relative demand and cyclical positions ...

-- Recent increases in the current account imbalances of both the United States and Japan can be largely explained by movements in their relative growth and cyclical positions. OECD Secretariat calculations, comparing the change in exports which can be attributed to export market growth and the change in imports attributed to the growth in total final expenditures, suggest that this can more than account for the change in the trade balances of both the United States and Japan since 1996. The greater stability of the EU current account position is a reflection of its more central relative cyclical position.

... and in United States and Japan, they reflect private sector saving investment imbalances

-- The widening of current account balances in both the United States and Japan is a reflection of private sector saving-investment imbalances, offset only partially by the change in the public-sector position. Conversely, for the European Union any, modest improvement in the current-account surplus is to be explained by an improvement in government sector saving-investment balances.

Recent trends in selected current accounts

A growing current account surplus in Asia has been offset by a widening deficits for the American continents and major oil producers

Between 1996 and 1998 the combined current account balance of Korea and the four non-OECD Asian crisis countries -- Indonesia, Malaysia, the Philippines and Thailand -- (hereafter referred to as the "Asia-5") increased by more than $125 billion, rising from a combined deficit ors 60 billion to a combined surplus of $65 billion.(1) With the surplus in Japan increasing by about $ 55 billion over the same period and that in the European Union remaining broadly stable, the main offsetting change was a further widening of the current-account deficit in the United States by about $ 100 billion (Figure VII.1). Offsets are also found among major oil-producing countries (reflecting weakening oil prices) as well as other members of North America Free Trade Agreement (NAFTA) and countries in Latin America.

[Figure VII.1 ILLUSTRATION OMITTED]

Most of the increase in the trade balance of the Asia-5 has been through import contraction

Looking at trade balances, that of the Asia-5 increased by $ 120 billion between 1996 and 1998 and is expected to decline only marginally this year. Over $80 billion of the increase can be accounted for by a deterioration in the bilateral trade balances of OECD countries, and about $ 70 billion by those of the three main OECD regions (Table VII.1, top panel).(2) Up until now, the adjustment to Asia-5 trade balances has come about almost entirely from a massive reduction in the dollar value of imports, mostly occurring in 1998.(3) Indeed, the decline in Asia-5 imports directly accounts for a fall in world trade growth of 1 1/2 percentage points in 1998. Although the evidence is patchy, available official data and other estimates suggest that there has been strong growth in export volumes from the Asia-5, despite supply constraints arising from difficulties in obtaining export credits or imported inputs for certain export Categories.(4) However, there have also been substantial declines in dollar export prices to the extent that there has been little positive effect on overall Asia-5 export values in dollar terms.