Tuesday, June 8, 2010


The current account balance of a country is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow ). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.
In economics terms,  the current account, is one of the two primary components of the balance of payments the other being the capital account. It is the sum of the balance of trade  (exports minus imports of goods and services), net factor income  (such as interest and dividends) and net transfer payments (such as foreign aid).
current account = balance of trade + net factor income from abroad + net unilateral transfers from abroad
In the list of 181 countries, based on the International Monetary Fund data for 2007, obtained from the October 2008 World Economic Outlook database , Malaysia ranking is 15 ( + US$29 billion ). Our neighbours Singapore ( rank 10 with +US$39 billion ), Thailand ( rank 21 with +US$ 15 billion ) and the number 1 country is China with a surplus of US$ 283 billion. Guess which country ranks the lowest at a negative -US$ 417 billion ? - just look at the bottom of this article before continue reading.
The following article is attributed to  Professor  Dr. Jagdish Bhagwati   ( Economics Professor at University Columbia ) . He talks about how a country's economy is being built up by borrowings and the consequence is a negative balance in its current account.

Saving is sin, and spending is virtue… Interesting article written by an Indian Economist…

Japanese save a lot. They do not spend much. Also Japan exports far more than it imports. Has an annual trade surplus of over 100 billions. Yet Japanese economy is considered weak, even collapsing. Americans spend, save little. Also US imports more than it exports. Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger. But where from do Americans get money to spend? They borrow from Japan, China and even India. Virtually others save for the US to spend. Global savings are mostly invested in US, in dollars. India itself keeps its foreign currency assets of over $50 billions in US securities. China has sunk over $160 billion in US securities. Japan’s stakes in US securities is in trillions.
Result: The US has taken over $5 trillion from the world. So, as the world saves for the US, Americans spend freely. Today, to keep the US consumption going, that is for the US economy to work, other countries have to remit $180 billion every quarter, which is $2 billion a day, to the US! A Chinese economist asked a neat question. Who has invested more, US in China, or China in US? The US has invested in China less than half of what China has invested in US. The same is the case with India. We have invested in US over $50 billion. But the US has invested less than $20 billion in India. Why the world is after US? The secret lies in the American spending, that they hardly save. In fact they use their credit cards to spend their future income. That the US spends is what makes it attractive to export to the US. So US imports more than what it exports year after year.
The result: The world is dependent on US consumption for its growth. By its deepening culture of consumption, the US has habituated the world to feed on US consumption. But as the US needs money to finance its consumption, the world provides the money. It’s like a shopkeeper providing the money to a customer so that the customer keeps buying from the shop. If the customer will not buy, the shop won’t have business, unless the shopkeeper funds him. The US is like the lucky customer. And the world is like the helpless shopkeeper financier. Who is America’s biggest shopkeeper financier? Japan of course. Yet it’s Japan which is regarded as weak. Modern economists complain that Japanese do not spend, so they do not grow. To force the Japanese to spend, the Japanese government exerted itself, reduced the savings rates, even charged the savers. Even then the Japanese did not spend (habits don’t change, even with taxes, do they?).. Their traditional postal savings alone is over $1.2 trillions, about three times the Indian GDP. Thus, savings, far from being the strength of Japan, has become its pain.
Hence, what is the lesson? That is, a nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend. Dr. Jagdish Bhagwati, an Indian-born economist in the US, told Manmohan Singh that Indians wastefully save.. Ask them to spend, on imported cars and, seriously, even on cosmetics! This will put India on a growth curve. This is one of the reason for MNC’s coming down to India, seeing the consumer spending.
‘Saving is sin, and spending is virtue.’
Before you follow this neo economics, get some fools to save so that you can borrow from them and spend.
This is what US has successfully done in last few decades.

Comments :
If the US continue to maintain their  large trade deficits with the rest of the world, it will end up losing more and more of its own assets to other countries. In the words of Friedrich August von Hayek, an Austrian-British economist and the winner of the 1974 Nobel Prize in Economics, an economy in its entirety will continue to decline as long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock.
An economy that consumes more than it produces will eventually need to pursue inflationary monetary policies in order to reduce the future value of its current liabilities. This is precisely what has happened in the US. Inflationary policies in the form of low real interest rates have led to a falling US dollar, which has just hit an all-time low against the Euro. If this continues, Americans will find their purchasing power being eroded more and more.
The concept of using excessive spending to generate growth has worked in recent years only because Asian economies have been willing to finance trade deficits with the US. But this cannot go on indefinitely. There will come a time when Asian economies mature and domestic consumption takes over as the main generator of economic activity in Asia. When that happens, the US will find itself unable to sustain its own trade deficits and will face a currency crisis.
In order to avoid this nasty outcome, the US must pursue restrictive monetary policies and gradually increase real interest rates even if it causes pain in the short run. But knowing the nature of the US Federal Reserve to avoid bitter pills, I would not pin hopes on this happening anytime soon. 
Japan is the second-largest economy in the world today. Its economy is just not growing as fast as those of its G8 counterparts. The country could not rely on domestic consumption to fuel its economic growth, and has to depend on external trade as its economic growth engine. These are some of the economic issues that Japan faces today.
The issue with China is that the country lacks the sound financial and legal institutions to circulate the capital generated back into the local economy. The local companies generating profits and capital have no avenues to reinvest within the country, which means they have to park the money outside the country. On the other hand, the companies seeking capital to finance their investments cannot get it domestically and have to seek foreign capital which come with higher risk premiums (read: higher interest rates).
The analogy of the shopkeeper providing credit to the customer so that the latter can buy from his shop is not quite correct. The Chinese, the Indians and the rest of the developing countries export their human capital (labour) as well as natural resources (for some) to the US and the rest of the world. That's their primary value-add to the world economy.
What's the lesson here? Surely it cannot be just 'to borrow and spend, not save'. That's not the route to growth and prosperity, but a route to inflation and eventual collapse of the economy. The fall of the Roman Empire is a good example, where inflation was one of the reasons that led to its demise. Let's not be distracted about 'saving' or 'spending', the issue is about efficient allocation of economic resources to sustain growth.
The lesson is to be able to continuously create value to grow and keep our place in the global economy. And we can continue to do this through the efficient use of our human capital (through education and training), our systems and our infrastructure that have been developed over these years.

This is a list of countries and territories by current account balance (CAB), based on the International Monetary Fund data for 2007, obtained from the October 2008 World Economic Outlook database.

Rank↓ Country↓ CAB (billion US dollars)↓
1  People's Republic of China 283.756
2  Germany 160.627
3  Japan 141.656
4  Saudi Arabia 95.762
5  Russia 76.163
6  Iran 70.797
7  Norway 59.983
8  Netherlands 52.522
9  Kuwait 48.039
10  Singapore 39.157
11  United Arab Emirates 39.113
12  Sweden 38.797
13  Republic of China (Taiwan) 32.979
14  Algeria 30.600
15  Malaysia 29.181
16  Switzerland 28.776
17  Hong Kong 28.038
18  Libya 23.786
19  Qatar 21.374
20  Venezuela 20.001
21  Thailand 15.765
22  Canada 12.726
23  Austria 12.012
24  Finland 11.268
25  Indonesia 11.010
26  Belgium 9.648
27  Azerbaijan 9.019
28  Chile 7.200
29  Angola 6.936
30  Philippines 6.351
31  Brunei 5.990
32  South Korea 5.954
33  Trinidad and Tobago 5.380
34  Israel 5.197
35  Luxembourg 4.893
36  Argentina 4.459
37  Uzbekistan 4.267
38  Turkmenistan 4.037
39  Denmark 3.512
40  Nigeria 3.466
41  Oman 3.222
42  Bahrain 2.906
43  Botswana 1.974
44  Egypt 1.862
45  Bolivia 1.741
46  Gabon 1.719
47  Brazil 1.712
48  Peru 1.515
49  Namibia 1.356
50  Timor-Leste 1.161
51  Ecuador 1.064
52  Myanmar 0.917
53  Bangladesh 0.780
54  Equatorial Guinea 0.541
55  Papua New Guinea 0.259
56  Paraguay 0.227
57  Bhutan 0.132
58  Chad 0.116
59  Mongolia 0.098
60  Afghanistan 0.081
61  Suriname 0.071
62  Lesotho 0.058
63  Nepal 0.050
64  Kyrgyzstan -0.006
65  Guinea-Bissau -0.008
66  Solomon Islands -0.010
67  Kiribati -0.021
68  Tonga -0.025
69  Samoa -0.029
70  Comoros -0.031
71  Swaziland -0.041
72  São Tomé and Príncipe -0.044
73  Eritrea -0.049
74  Vanuatu -0.049
75  Belize -0.054
76  Sierra Leone -0.063
77  Haiti -0.066
78  Malawi -0.074
79  Central African Republic -0.075
80  Dominica -0.079
81  Gambia -0.080
82  Guinea -0.083
83  Morocco -0.099
84  Cape Verde -0.132
85  Liberia -0.137
86  Côte d'Ivoire -0.146
87  Saint Vincent and the Grenadines -0.147
88  Saint Kitts and Nevis -0.150
89  Burundi -0.156
90  Togo -0.160
91  Zimbabwe -0.165
92  Rwanda -0.168
93  Uruguay -0.186
94  Democratic Republic of the Congo -0.191
95  Guyana -0.195
96  Grenada -0.197
97  Antigua and Barbuda -0.211
98  Djibouti -0.211
99  Macedonia -0.234
100  Barbados -0.245
101  Seychelles -0.263
102  Saint Lucia -0.280
103  Cambodia -0.313
104  Niger -0.321
105  Mauritania -0.321
106  Uganda -0.331
107  Benin -0.372
108  Cameroon -0.383
109  Malta -0.403
110  Tajikistan -0.414
111  Maldives -0.476
112  Mali -0.502
113  Fiji -0.515
114  Mauritius -0.553
115  Burkina Faso -0.560
116  Syria -0.561
117  Armenia -0.591
118  Laos -0.711
119  Moldova -0.747
120  Mozambique -0.768
121  Zambia -0.810
122  Kenya -0.825
123  Ethiopia -0.868
124  Tunisia -0.925
125  Albania -0.994
126  Nicaragua -1.047
127  Madagascar -1.070
128  El Salvador -1.119
129  Senegal -1.161
130  Honduras -1.228
131  Yemen -1.328
132  Sri Lanka -1.370
133  Montenegro -1.381
134  Bahamas -1.440
135  Republic of the Congo -1.479
136  Tanzania -1.496
137  Costa Rica -1.519
138  Panama -1.571
139  Ghana -1.652
140  Guatemala -1.685
141  Jamaica -1.850
142  Bosnia and Herzegovina -1.920
143  Georgia -2.045
144  Cyprus -2.063
145  Dominican Republic -2.231
146  Slovenia -2.250
147  Jordan -2.778
148  Iceland -2.952
149  Belarus -3.060
150  Czech Republic -3.085
151  Lebanon -3.129
152  Estonia -3.776
153  Slovakia -4.070
154  Croatia -4.410
155  Ukraine -5.272
156  Lithuania -5.692
157  Sudan -5.812
158  Mexico -5.813
159  Colombia -5.862
160  Latvia -6.231
161  Serbia -6.334
162  Ireland -6.705
163  Pakistan -6.878
164  Hungary -6.932
165  Vietnam -6.992
166  Kazakhstan -7.184
167  Bulgaria -8.464
168  New Zealand -10.557
169  India -15.494
170  Poland -15.905
171  South Africa -20.557
172  Portugal -21.987
173  Romania -23.234
174  France -30.588
175  Turkey -37.684
176  Greece -44.218
177  Italy -52.725
178  Australia -56.342
179  United Kingdom -105.224
180  Spain -145.141
181  United States -417.999

No comments:

Post a Comment