Re: [OPE] More on current account deficits

From: Patrick Bond <>
Date: Tue Dec 28 2010 - 14:24:23 EST

Thanks Jurriaan,

This is terribly important for South Africa where the current account
deficit is caused by something not mentioned here: the extreme shift in
profit/dividend repatriation. It used to be, before 2000, that SA
capital (Anglo American, DeBeers, Old Mutual, SABrewering,
Gencor/Billiton, Didata, Liberty Life, Mondli, etc etc) was 'patriotic'
insofar as profits were largely retained by owners living in Joburg and
Cape Town (and a bit in my hometown, Durban). With the dramatic capital
flight since then, and the outflow of profits/dividends/interest piling
up, it was only the big crash of 2009 (Anglo even had to pass on paying
a dividend) that prevented the current account deficit/GDP level from
exploding up to 10%. In early 2009 The Economist rated SA the world's
riskiest emerging market as a result of this structural problem.

The National Union of Metalworkers of SA advocate the return to exchange
controls as the only solution short of nationalisation of the SA assets
of these London/Melbourne corporations.

I say all this because the IMF knows the problem is severe (so the
Article IV statements hint) - but obviously would do nothing to
encourage solving it, aside from borrowing more and more and more abroad
so as to pay the corporations their profit outflow... even though SA's
foreign debt is also getting out of control.

So although the SA state has 'managed' a 7% budget deficit/GDP
pseudo-Keynesian splurge through the recent meltdown (even if 1.3
million workers lost their employment), this will only be possible to
maintain if matters improve dramatically. Without prospects of a big
trade surplus, we can anticipate SA joining the ranks of Iceland,
Greece, Ireland and others, unable to make payments when the portfolio
finance inflows dry up...


On 2010/12/28 10:39 AM, Jurriaan Bendien wrote:
> In a lame duck article, the IMF writes:
> While some countries (such as Australia and New Zealand) have been able to
> maintain current account deficits averaging about 4 to 5 percent of GDP for
> several decades, others (such as Mexico in 1995 and Thailand in 1997)
> experienced sharp reversals of their current account deficits after private
> financing withdrew in the midst of financial crises. Such reversals can be
> highly disruptive because private consumption, investment, and government
> expenditure must be curtailed abruptly when foreign financing is no longer
> available and, indeed, a country is forced to run large surpluses to repay
> in short order its past borrowings. This suggests that-regardless of why the
> country has a current account deficit (and even if the deficit reflects
> desirable underlying trends)-caution is required in running large and
> persistent deficits, lest the country experience an abrupt and painful
> reversal of financing.
> Naturally there is the obligatory reference to how bad protectionism is. The
> IMF concludes equivocally:
> If the deficit reflects an excess of imports over exports, it may be
> indicative of competitiveness problems, but because the current account
> deficit also implies an excess of investment over savings, it could equally
> be pointing to a highly productive, growing economy. If the deficit reflects
> low savings rather than high investment, it could be caused by reckless
> fiscal policy or a consumption binge. Or it could reflect perfectly sensible
> intertemporal trade, perhaps because of a temporary shock or shifting
> demographics. Without knowing which of these is at play, it makes little
> sense to talk of a deficit being "good" or "bad": deficits reflect
> underlying economic trends, which may be desirable or undesirable for a
> country at a particular point in time.
> I canot go now into the theoretical or empirical aspects, but let's ask, why
> does the IMF equivocate about all this? Basically, because it wants to argue
> that in some countries a current deficit is a bad thing, and in other
> countries it is a good thing. The question you then have to answer is, what
> is "good" and what is "bad"?
> Jurriaan
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Received on Tue Dec 28 14:26:18 2010

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