The English disease
One of the striking features of world trade is the fact that nearly all the English-speaking countries run big current account deficits. The United States, formerly a big net exporter, has been in deficit for twenty years or so. The deficit has now reached 5 per cent of GDP despite a continuing recession/slow recovery. The UK has mostly run deficits for the past twenty years or so, though it still has strongly positive net investment income, reflecting its century or more as the main source of world investment. Australia and New Zealand are consistent deficit countries. Although they occasionally reach balance on the goods and services account, they are large net debtors, and therefore have consistent deficits on the income account. The only exception (and a relatively recent one) is Canada. Conversely of course, the rest of the developed world, that is, in essence, the EU and Japan run fairly consistent surpluses.
Why is this? I’m not attracted to cultural explanations for a couple of reasons. First, both the UK and US were, for a very long time, the major surplus countries. Second, if you go back only 25 years, the “English disease” referred to rampant union demands, class conflict and rigidities that hampered productivity. At least in the sphere of popular factoid, all these disabilities are now presented as characterising the EU and Japan rather than the English-speakers.
Of course, the change in stereotypes about laziness etc reflects the greater impact of neoliberal policy reforms in the English-speaking countries. So my question is: does neoliberalism cause current account deficits? And if so, is this a good thing reflecting the greater attractiveness of investment in these countries (the ‘consenting adults’ view, put forward prominently, though in a slightly different context by John Pitchford). Or is it a bad thing, reflecting debts incurred because of excessive borrowing by households and debts pumped up in speculative investment booms. Readers won’t be surprised to learn that I hold the latter view.
At the moment the’consenting adults’ view is dominant, particularly among supporters of neoliberalism. But looking at the way this group changed their tune after the Asian and Argentine crises, it’s not hard to predict that, in the event that things go sour, they will switch to the latter view very quickly and, as far as they can manage it, retrospectively (search on ‘crony capitalism’ for examples).
Via Jack Strocchi, update billmon at Whiskey Bar has more detail on the US case, including a neat way of presenting the data I haven’t seen before. In recent years, imports have grown by 40 cents for every dollar of GDP growth. I need to think a bit more about this.
A number of commentators have defended the ‘consenting adults’ view and have asked for a ‘market failure’ reason why it isn’t right. The obvious candidate is the moral hazard produced when financial markets are deregulated but the central bank continues to act as a lender of last resort. Exhibit A is Australia in the 1980s, which is when we ran our foreign debt up to its current levels. I don’t suppose anyone is going to claim that the investments of Bond, Skase, Elliott and others were good ones. Most of the debt in this period was borrowed through the Big Four banks. In a regulated system, they would have been stopped. In a fully deregulated system they would have failed. As it was they were rescued (Westpac being the most notable case). The story of state-regulated institutions (building societies and State Banks) is more complex, but basically the same. I put this argument forward in a piece in 1992, Partial financial deregulation and the current account?, Economic Papers 11(1), 53?56, which I notice is not up on my website. Another job waiting to be done!