Below is a prepared speech by Federal Reserve Chairman Ben Bernanke on "Global Imbalances: Recent Development and their Implications" given in Berlin on September 11, 2007:
In a speech given in March 2005 (Bernanke, 2005), I discussed a number of important and interrelated developments in the global economy, including the substantial expansion of the current account deficit in the United States, the equally impressive rise in the current account surpluses of many emerging-market economies, and a worldwide decline in long-term real interest rates. I argued that these developments could be explained, in part, by the emergence of a global saving glut, driven by the transformation of many emerging-market economies--notably, rapidly growing East Asian economies and oil-producing countries--from net borrowers to large net lenders on international capital markets. Today I will review those developments and provide an update. I will also consider policy implications and prospects for the future.
A principal theme of my earlier remarks was that a satisfying explanation of the developments in the U.S. current account cannot focus on developments within the United States alone. Rather, understanding these developments and evaluating potential policy responses require a global perspective. I will continue to take that perspective in my remarks today and will emphasize in particular how changes in desired saving and investment in any given region, through their effects on global capital flows, may affect saving, investment, and the external balances of other countries around the world.
The Origins of the Global Saving Glut, 1996-2004
I will begin by reviewing the origins and development of the global saving glut over the period 1996-2004, as discussed in my earlier speech, and will then turn to more-recent developments.
As is well known, the U.S. current account deficit expanded sharply in the latter part of the 1990s and the first half of the present decade. In 1996, the U.S. deficit was $125 billion, or 1.6 percent of U.S. gross domestic product (GDP); by 2004, it had grown to $640 billion, or 5.5 percent of GDP.1 National income accounting identities imply that the current account deficit equals the excess of domestic investment in capital goods, including housing, over domestic saving, including the saving of households, firms, and governments. The proximate cause of the increase in the U.S. external deficit was a decline in U.S. saving; between 1996 and 2004, the investment rate in the United States remained almost unchanged at about 19 percent of GDP, whereas the saving rate declined from 16-1/2 percent to slightly less than 14 percent of GDP.2 Domestic investment not funded by domestic saving must be financed by capital flows from abroad, and, indeed, the large increase in the U.S. current account deficit was matched by a similar expansion of net capital inflows.
Globally, national current account deficits and surpluses must balance out, as deficit countries can raise funds in international capital markets only to the extent that other (surplus) countries provide those funds. Accordingly, it is not surprising that the widening of the U.S. current account deficit has been associated with increased current account surpluses in the rest of the world.
What is surprising, however, in light of historical patterns, is that much of the increase in current account surpluses during this period took place in developing countries rather than in the industrial countries. The table shows current account balances for various countries and regions in selected years. The aggregate current account balance of industrial countries other than the United States did increase between 1996 and 2004, by a bit less than $200 billion, much of that rise being accounted for by an increase in Japan's current account balance; the aggregate balance of the euro area rose only slightly.4 In comparison, the aggregate current account position of developing countries swung from a deficit of about $80 billion in 1996 to a surplus of roughly $300 billion in 2004, a net move toward surplus of $380 billion.
In the aggregate, the shift from deficit to surplus in the current account of the emerging-market world over this period largely reflected increased saving as a share of output rather than a decline in the rate of capital investment. However, changes in saving and investment patterns varied by countries and regions. For example, in the countries of developing Asia excluding China, most of the $150 billion swing toward external surplus between 1996 and 2004 was attributable to declines in domestic investment. In China, rates of both saving and investment rose, but saving rates rose more, leading to an increase in that country's current account surplus of about $60 billion.
Outside of developing Asia, oil exporters in the Middle East and the former Soviet Union were also important contributors to the large increase in emerging-market current account balances. The combined current accounts of the two regions increased from a surplus of $20 billion in 1996 to a surplus of $162 billion in 2004, an increase of about $140 billion. This rise largely reflected higher saving rates, as domestic consumption fell behind the surge in oil revenues. Among other emerging-market economies, higher saving also accounted for an increase in the aggregate current account balance of Latin America. Of course, as emerging-market countries switched from being net borrowers to being net lenders, they began to pay down their international debts and to acquire assets of industrial countries.