11. The Impact of Structural Reforms on Current Account Imbalance
- Author:
- The Organization for Economic Co-operation and Development
- Publication Date:
- 05-2010
- Content Type:
- Policy Brief
- Institution:
- The Organisation for Economic Co-operation and Development
- Abstract:
- Global current account imbalances widened markedly in the years preceding the global economic crisis. Although the crisis brought some reversal to this trend, imbalances remain large in many countries. New empirical analysis by the OECD has examined the potential contribution of structural reforms to reducing current account imbalances. The analysis shows that structural reforms aimed at boosting economic growth can have more or less persistent side effects on current accounts. These arise because structural policies influence saving and investment of households, firms and governments. In turn, the economy-wide gap between saving and investment equals the current account balance. Specifically, the following policy lessons emerge from the analysis: More developed social welfare systems would reduce the need for precautionary saving among households, which would moderate current account surpluses in external surplus countries. Pension reforms that increase the retirement age and thus the length of the working life would also reduce household saving and thereby reduce current account surpluses. Pension reforms that lead to cuts in replacement rates would have the opposite effect. Financial market reforms that raise the sophistication or depth of financial markets may relax borrowing constraints in emerging economies, thus contributing to a fall in the saving rate. The associated weakening of the current account position might be reinforced if the reforms also boost investment. Reforming competition-unfriendly product market regulation could encourage capital spending and thereby contribute to reduce imbalances in surplus countries. Some policy settings introduce distortions that encourage consumption, such as tax deductibility of interest payments on mortgages in the absence of taxation of imputed rent. Reform in this area might help increase household saving and thereby improve a country’s current account position. Overall, for the policies investigated, surplus countries appear to have more scope for structural reforms that would both enhance economic growth and reduce external imbalances. A scenario analysis indicates that if Japan, Germany and China were to liberalise their product markets and China also increased public health spending and continued to liberalise its financial markets, global imbalances could decline by around one-fifth relative to a baseline scenario. Moreover, since external deficit countries tend to have larger fiscal consolidation needs than surplus countries, fiscal tightening should also contribute to reduce external imbalances over the coming decade.
- Topic:
- Markets, Reform, Welfare, and Economic Crisis
- Political Geography:
- Global Focus