This article, which has been prepared mainly by P W Stanyer and Mrs J A Whitley of the Bank's International Division, describes the pattern of current account surpluses and deficits in the world economy and the changing importance of different types of capital flow in financing them.
- Since the first oil shock in 1973-74, the absolute sum of world current account surpluses and deficits (without regard to sign) has doubled from 1%-1½% of the GNP of market economies to 2%-3%.
- Before the early 1970s, surpluses and deficits were financed largely by flows of direct investment and concessionary capital; since then, the larger imbalances have been financed principally through the capital markets.
- The banks have played an important role, but their lending has not always grown fastest when financing needs appear to have been greatest.
- The changing pattern of financing and the increased size of surpluses and deficits have led to a rapid expansion in international financial assets and liabilities. Their real value has been substantially reduced by inflation; this has to some extent been offset by high interest rates, which in turn have altered the pattern of current account surpluses and deficits.
- The structural current account surplus of the oil exporters tends to be reduced by their rapidly expanding demand for imports and as their customers find ways of economising on relatively expensive oil.
- Although the pattern in which increased current account deficits have been financed has exerted certain contractionary pressures on the international economy, the extent to which those deficits have nevertheless increased reflects the ability of the international financial system to respond rapidly to increased financing needs: without such flexibility, further deflation would have been unavoidable.