Current-Account Imbalances and Economic Growth During the 2008-2009 Financial Crisis: An Empirical Analysis

This study examines the relationship between current-account imbalances and economic growth during the 2008-2009 financial and economic crisis for 179 countries (covered by IMF data) and within the EU-27 countries (covered by Eurostat data). The countries are divided into 4 groups by GDP per capita based on PPPs, namely, low income, lower middle-income, upper middle-income and high-income countries. Empirical analysis is applied, including descriptive statistics and regression estimates. Statistical data are used, including the average of the GDP growth rate in the years prior to the crisis (2003-2007), the average of the GDP growth rate for 2008 and 2009, current account as a percentage of GDP, and the level of average inflation. It is proved that, in general, the 2008-2009 crisis affected high- and upper middle-income countries more than poorer countries. Within the EU-27 countries, however, the crisis appears to have affected lower income countries more than higher income countries. A common tendency is observed for the two country samples: countries that experienced strong growth just prior to the crisis had an increased risk of suffering after the crisis. The boom prior to the crisis led to imbalances that rendered economies more vulnerable. Additionally, surpluses that existed prior to the crisis are an important risk factor for the two groups of countries.


Introduction
There is a growing literature on the various impacts of There were a few other developed economies besides the United States in the group of large-deficit countries (namely, Spain, the United Kingdom, Italy, Australia and Turkey), which had a combined share of 22.6% of deficits, and 75 small, mainly developing countries, which accounted for another 17.1% of deficits.
The main surplus countries were China, Japan, Germany and six other countries, four of which are oil exporters. The other two countries -the Netherlands and Switzerland -are not oil exporters, but they generated 75% of all surpluses before the crisis (Figure 2 (Priewe, 2010). The other three countries shown in Figure 3 (Russia, Germany and Japan) had current account surpluses over the first several years of the new century.
Among the countries with current account surpluses, the role of the big oil exporters and the European countries is evident, as is the sharply increasing role of China. The United States has the largest current account deficit, although this deficit declined slightly just prior to the crisis. Japan, whose deficit has remained nearly constant, clocks in at number 2, followed by the rest of the world and the European countries, whose deficits have increased, particularly in 2008.
Traditionally, the surplus countries mark higher GDP growth, as in the case of China, Russia, and others, in contrast to the deficit countries, such as the United States ( Figure 4).  1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 (Blanchard & Milesi-Ferretti, 2009 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008  However, beyond these regional features, the impact of the crisis has clearly varied with the state of development of the economies in question. Dullien uses an approach similar to the one in this study (Dullien, 2010  The inflation indicator is regarded as tightly connected with macroeconomic stability and economic growth. The data in Table 2

EU-27 179 countries GDP per capita -EUR in PPS Average inflation GDP per capita -USD Average inflation
Less than 15,000 (5) 6.20 Less than 976 8.4 Between 15,000 and 20,000 (6) 3.77 Between 977 and 3,855 6.8 Between 20,001 and 25,000 (3) 3.00 Between 3,856 and 11,905 6.3 More than 25,000 (13) 2.09 More than 11.905 3.3 tween the two variables -current account balance in 2007 and changes in GDP growth is 0.512. Moreover, when the absolute current account balance is used, the correlation coefficient is higher but negative (-0.588).
In general, this means that for a given country or group of countries, lower current account imbalances are associated with a better (positive) crisis experience.
We have further divided the EU-27 into four country groups according to their current-account positions prior to the crisis: (a) Countries with a current account surplus of: -more than 5% of GDP: Austria, Belgium, Denmark, and Finland.
-less than 5% of GDP: Germany, Luxembourg; Netherlands, and Sweden. A similar tendency is observed for the sample of EU-27 countries (Figure 9). Countries with large cur-List of the countries: 1. Belgium, 2. Bulgaria, 3. Czech Republic,4. Denmark,5 Geramny,6. Estonia,7. Ireland,8. Greece,9. Spain,10. France,11. Italy,12. Cyprus,13. Latvia,14. Lithuania,15. Luxembourg,16. Hungary,17. Malta,18. Netherlands,19. Austria,20. Poland,21. Portugal,22. Romania,23. Slovenia,24. Slovakia,25. Finland,26. Sweden,27. United Kingdom. Considering the relationship between the current account position and average inflation of the countries or groups of countries prior to the crisis, we arrive at the following finding: the higher current-account deficits or surpluses, the higher the inflation (Table 3) deficit of more than 5% of GDP deficit of less than 5% of GDP surplus of less than 5% of GDP surplus of more than 5% of GDP  (Dullien, 2010). Variables that were insignificant, at least at the 10% level, were eliminated. Where the impact was measured as a change in growth rate, the results indicated that only per capita GDP levels and current-account imbalances had a clearly negative influence on the way a country was affected by the crisis (both coefficients were significant at the 5% level).
In addition, both the current-account balance and the absolute value of the current-account balance were alternatively included to allow for the possibility that large surpluses also make a country vulnerable. Equations (1) and (1a) lead to the following findings: • For the sample of 179 countries, those with higher per capita incomes were hit significantly harder by the crisis than those with lower incomes. In the case of the EU-27, those countries with lower GDP per capita were hit harder, but their weight in the EU's average growth rate change is small.
• Interestingly, the current-account balance as percent of GDP was insignificant in explaining the change in GDP growth, whereas the absolute value of the current-account balance as a percent of GDP turned was highly significant (to varying degrees for the two groups of countries). This means that the magnitude of the current-account imbalances (regardless of whether they are surpluses or deficits) is the impor-

Current account deficit of:
Less than 5% of GDP 2.55 6.6 More than 5% of GDP 4.53 5.9 Table 3. Average inflation by current account position of countries in 2007, % Note: For EU countries, the author's calculations are based on Eurostat data. For the 179 countries, see (Dullien, 2010).  Using the relevant data for the EU-27 and including a dummy variable for the EU New Member Countries (nmc) instead of cb in equation (2), we obtain the fol- but also the larger value of the current account imbalances (whether deficits or surpluses).
In the 179-country regression, inflation prior to the crisis seems to have influenced the impact of the crisis, but not in the way that would be predicted by the standard theory. In the standard model, a higher rate of inflation prior to the crisis was correlated with a higher growth rate during the crisis. In the case of the EU-27, the lower rate of inflation prior to the crisis is correlated with a higher growth rate during the crisis.
The latter finding is in accordance with the prediction of the standard theory.

Conclusions
1. At a global scale, the crisis appears to have affected high-and upper middle-income countries more than poorer countries. There may have been greater suffering in lower income countries, because a drop in GDP growth might be more severe in an environment without social safety nets, and widespread poverty resulted from the crisis. This means that having a higher GDP per capita generally increases the risk of experienc ing a severe recession.
In the case of the EU-27 countries, the crisis appears to have affected lower income countries more than higher income countries.
2. The two sample regression analyses reveal the fol- 3. Large current-account imbalances -not only deficits but also surpluses -prior to the crisis are also an important risk factor for the two groups of countries. In the case of the EU-27, absolute current-account imbalances seem to be a more important risk factor for vulnerability to crisis transmission.
4. Inflation, long a prime concern for macroeconomic stability and an important factor in increasing a country's vulnerability to financial and currency crises, does not seem to be as significant a factor as previously believed.