The recent strong growth of the world economy is accompanied by a striking fact. This reality is the continuation of international financial imbalances. Thus, the US balance of payments deficit deteriorated almost continuously between 1998 and 2006, falling from 2.1% to 6% of gross domestic product.
At the same time, some developing countries have become net creditors to the rest of the world. Thus, schematically, it created a paradoxical situation in which the savings surplus of a group of developing countries was heavily invested first in the industrialized countries.
From a theoretical point of view, opening up economies, investment at the global level must necessarily equal the savings of all units in each period. Accordingly, it makes it possible to remove the restriction that exists in a closed economy.
In an open economy, there are more equilibrium configurations. A country can take advantage of additional opportunities as a net lender or borrower compared to the rest of the world.
However, it is clear that the current situation is not sustainable in the long run. In particular, the United States cannot continue to accumulate deficits in its balance of payments indefinitely.
The mechanisms for resolving international financial imbalances are known from a theoretical point of view. But the corrections to be made involve some degree of uncertainty. Macroeconomic consequences could be significant for the world economy as a whole.
Macroeconomic Impacts of Opening Economies
Two complementary analyzes make it possible to understand the effects of opening economies to trade in goods and services and capital flows. The first reading focuses on international trade in goods and services.
In open economies, agents have the ability to buy and sell goods and services to agents residing in other countries. This results in a trade surplus or deficit.
The second reading focuses on the analysis of international capital flows based on saving and investment variables at the national level. Analysis using this approach is based on two national accounting identities.
First, GDP can be decomposed as the sum of final sales. This final accounting identity thus makes it possible to understand the link between a country's external situation and its levels of savings and investment.
Therefore, the private sector as a whole generates positive net savings if private sector representatives save more than they invest. Similarly, the public sector can have positive or negative net savings.
At the global level, the external situation of a country depends on the level of savings associated with the investments of all its units. The current account balance reflects this external position.
If the current account balance is positive, saving is greater than investment at the macroeconomic level. The country is then a creditor to the rest of the world.
In the opposite case, where the current account balance gives a deficit, total savings are lower than investment. The country is in net debt relative to the rest of the world.
Analyzes that can be made on this accounting identity thus shed light on international capital movements. According to this view, capital flows reflect imbalances between saving and investment at the country level.
It is also possible to understand the constraints introduced in the theory case of a closed economy. In each period, investment must be equal to the savings of all actors.
In the case of open economies, a country can invest more than it saves globally by borrowing from the rest of the world. It applies to the extent that other countries accumulate more than they invest.
Current Global Imbalances
The analysis that can be done using the accounting IDs presented above is a useful tool for understanding the current state of global financial imbalances.
It saw the United States' current account worsen significantly. The United States was therefore a net debtor to the rest of the world. Every year, Americans as a whole invest more than they accumulate and resort to capital flows from other countries.
In 2000, the American current account deficit represented about 4% of GDP and particularly reflected the dynamism of investment by national agents.
For a number of years, American companies have been making large investments in the context of stock market enthusiasm and rising productivity, leading to an increase in expected return on capital.
With the stock market crash in 2000, all agents' investments dropped significantly, falling from 9% to 5% between early 2000 and late 2001.
It provides a deeper understanding of the dynamics of the US current account based on the financing capacities of the various national account representatives.
American households went from positive net savings (savings minus residential investment) (financial capacity) to negative net savings. The American current account deficit was therefore mainly driven by households and businesses.
The widening of the current account deficit is due to the significant decline in public sector savings, particularly in the context of the continuing deterioration in the financing capacity of American households.
At the same time, the situation of American companies was reversed as they built up financing capacity. While the financing needs of the American public sector decreased, that of households continued to increase.