We've looked at three current account surplus countries.
Now, let's turn to a couple of current account deficit countries.
We're going to start with India.
India has a chronic current account deficit.
It is a saving country in the private sector.
Remember, we've got private savings and public savings.
So, Indians do tend to save,
but the government is a chronic net borrower,
and this pushes overall net borrowing in the economy into
negative numbers which causes India to be a current account deficit country.
Its current account deficit has been declining.
What we need to remember about India,
the fact that it has this current account deficit means that it can drive its own growth.
Once again, C plus I plus G is bigger than GDP.
So, India consumes all that it produces and then sum.
It doesn't need the rest of the world to make it grow.
India did actually because of this chronic balance of payment deficit,
it had a current account deficit,
not a balance of payments deficit.
Because of this chronic current account deficit,
it had a balance of payments crisis in 1991.
If you think about that t, our balance of payments,
and we talked about just a short while ago,
remember we've got the current account on the left,
the financial account on the right they need to balance.
So, if I have a negative on the left,
I must have a positive on the right.
If I import more than I export,
I have to have somebody willing to put money into my country in investments or loans,
as we talked about earlier.
So, India in 1991,
reached a point where the negative on the left-hand side on
the current account could not be matched by a positive on the right-hand side.
In other words, foreigners were not putting money into the country in
large enough volumes that it could finance its current account deficit.
Therefore, it had to go and get loans and and
actually went to Switzerland to the United Kingdom,
took them its gold and asked for loans in exchange.
So, this can happen,
it's rare but India is one of
the large countries that has had a balance of payments crisis,
because the financial account surplus was not
big enough to cover the current account deficit.
India now has been able to maintain that current account deficit year after year.
We have to remember that it is constantly
borrowing and that doesn't mean necessarily the government,
it means the whole economy corporations, households,
and/or government are borrowing to finance this current account deficit.
At the same time, India is much less vulnerable to changes in demand in the rest of
the world or changes in the value of its currency than a country like say China or Japan.
So, the India is one of the countries with the chronic current account deficit.
The country with the largest current account deficit in
the world in absolute terms you see United States.
The United States has had a current account deficit almost every year since 1980.
Now, before that it was a current account surplus country
but now it is a chronic current account deficit country.
Where does that come from?
Well, it's easy for you to imagine
knowing the determinants of the current account deficit,
it has a low savings rate,
it's a country whose currency people want
to hold and it has an attractive investment environment,
so there are lots of inflows,
it has strong growth rates compared to
many other developed countries which keep consumption going,
and it is the world's reserve currency.
So, all of these things tend to drive the United States' current account deficit.
Now, remember that GDP is C plus I plus G plus X minus M. We
subtract off the M and if imports are very big that actually reduces US GDP,
so remember US GDP would be larger without this deficit.
The United States is a net international debtor,
because every year that it has a current account deficit,
a negative on the left-hand side.
It has to have a financial account surplus,
a positive on the right-hand side,
which means it has to be borrowing from the rest of
the world or selling its assets to the rest of the world.
So, this happens year after year.
You're accumulating debt year after year eventually what
you owe the rest of the world becomes larger than the size of your assets.
However, the cost of this debt is low,
foreigners are always willing to lend money to the United States.
The reason they want to lend money to the United States,
is so that will continue spending.
The United States is the world's great hungry consuming machine,
and everybody wants that machine to help them to grow through
their own current account surpluses if they
have them through their exports if they have deficits.
So, what we find is the US is an important driver of global growth,
because of this large and chronic current account deficit.
Gayle AllardProfessor
