Notes

Corliss Online Group Financial magazine - The real role models of the global economy

Other countries have grown rapidly in recent decades without relying on external surpluses. But most have suffered from the opposite syndrome: excessive reliance on capital inflows, which, by spurring domestic credit and consumption, generate temporary growth. But recipient economies are vulnerable to financial-market sentiment and sudden capital flight – as happened recently when investors anticipated monetary-policy tightening in the United States.

Consider India, until recently another much-celebrated success story. India's growth during the past decade had much to do with loose macroeconomic policies and a deteriorating current account – which recorded a deficit of more than 5 per cent of GDP in 2012, having been in surplus in the early 2000's. Turkey, another country whose star has faded, also relied on large annual current-account deficits, reaching 10 per cent of GDP in 2011. Elsewhere, small, formerly socialist economies – Armenia, Belarus, Moldova, Georgia, Lithuania, and Kosovo – have grown very rapidly since the early 2000's.

But look at their average current-account deficits from 2000 to 2013 – which range from a low of 5.5 per cent of GDP in Lithuania to a high of 13.4 per cent in Kosovo – and it becomes evident that these are not countries to emulate. The story is similar in Africa. The continent's fastest-growing economies are those that have been willing and able to allow yawning external gaps from 2000 to 2013: 26 per cent of GDP, on average, in Liberia, 17 per cent in Mozambique, 14 per cent in Chad, 11 per cent in Sierra Leone, and 7 per cent in Ghana. Rwanda's current account has deteriorated steadily, with the deficit now exceeding 10 per cent of GDP.

The world's current-account balances must ultimately sum up to zero. In an optimal world, the surpluses of countries pursuing export-led growth would be willingly matched by the deficits of those pursuing debt-led growth. In the real world, there is no mechanism to ensure such an equilibrium on a continuous basis; national economic policies can be (and often are) mutually incompatible.

Source: http://www.dailystrength.org/people/3070146/journal/8295711