Global Journal of Commerce & Management Perspective
Open Access

Exploring the Causes of a Current Account Imbalance

Lunardi Lerch^{* *}Correspondence: Lunardi Lerch, Department of Economics and Finance, Xi'an Jiaotong University, Shaanxi, China, Email:

Author info »

Description

A current account imbalance refers to a situation where a country’s current account balance, which is the difference between the value of its imports and exports of goods and services, is significantly positive or negative. A persistent deficit in the current account balance means that a country is importing more than it is exporting, while a persistent surplus means that a country is exporting more than it is importing. Current account imbalances have been a topic of concern among policymakers and economists for decades. Some argue that persistent surpluses or deficits can be harmful to global economic stability, while others argue that these imbalances are a natural consequence of differences in national savings rates, consumption patterns, and economic structures.

On one hand, current account imbalances can be seen as a symptom of underlying macroeconomic imbalances. In the case of a persistent current account deficit, a country may be consuming beyond its means, financing its consumption through borrowing from abroad. This can lead to a buildup of debt, which may become unsustainable if foreign investors lose confidence in the country’s ability to repay its debts. On the other hand, current account imbalances can also reflect differences in economic structures and patterns of trade. For example, countries with abundant natural resources may have persistent current account surpluses, as they export these resources to other countries. Similarly, countries with highly developed service sectors may have persistent current account deficits, as they import more goods than they export but earn significant income from the export of services such as financial services, tourism, and consulting. Despite, there is a growing consensus among economists that persistent current account imbalances can be harmful to global economic stability. One concern is that imbalances can create a vicious cycle of debt and financial instability. When a country has a persistent current account deficit, it must borrow from abroad to finance its consumption. This creates a debt overhang, which can make the country vulnerable to sudden changes in investor sentiment. If investors lose confidence in the country’s ability to repay its debts, they may demand higher interest rates or stop lending altogether, triggering a financial crisis.

Another concern is that current account imbalances can exacerbate global economic imbalances. When one country runs a persistent current account surplus, it effectively exports savings to the rest of the world. These savings may be used to finance investments in other countries, leading to asset price bubbles and financial instability. In addition, surplus countries may use their foreign exchange reserves to manipulate their currencies, which can create trade tensions and lead to protectionist policies. To address these concerns, policymakers have implemented a variety of measures to reduce current account imbalances.

One approach is to promote fiscal discipline and structural reforms to boost national savings rates. By reducing the reliance on foreign borrowing, countries can reduce their vulnerability to sudden changes in investor sentiment. Another approach is to encourage greater exchange rate flexibility, which can help to reduce trade imbalances by making imports more expensive and exports more competitive. International cooperation can also play a role in addressing current account imbalances. For example, the International Monetary Fund (IMF) provides financing and policy advice to countries experiencing balance of payments difficulties. In addition, the G20 has established a framework for strong, sustainable, and balanced growth, which includes commitments to address current account imbalances.

Despite these efforts, current account imbalances continue to persist, and some argue that they are a natural consequence of differences in national economic structures and patterns of trade. While it is true that not all current account imbalances are harmful, policymakers must remain vigilant to the risks associated with persistent imbalances, particularly in a global economy that is becoming increasingly interconnected. Current account imbalances remain a topic of concern among policymakers and economists. While some argue that these imbalances are a natural consequence of differences in national economic structures and patterns of trade.