I argued recently that John Snow should check out some economics before arguing that structural reforms in Europe and Japan would resolve the problem of global economic trade imbalances. Well……….

I was thumbing through the economics working papers section of the OECD yesterday, and I found this:

“It has been argued that one solution to global current account imbalances is for countries with
current account surpluses to undertake structural reforms. This would raise their potential growth, which is
assumed to put downward pressure on the current account position. This paper takes a closer look at how
such structural reforms in labour markets, product markets, and financial markets could be expected to
affect current accounts. It also tests empirically, using pooled time-series techniques (that control for the
influence of relative cyclical positions, government fiscal balances and the real exchange rate), whether or
not reforms in these areas would have any significant relationship with current accounts. The overall
finding is that indicators of structural reforms do have a significant relationship with the current account
but the contribution of these variables to explain current account positions is quite limited.”

Amongst other things they argue:

It is not obvious that in the very long term a negative relationship should exist between growth
and current account positions. The implication would be that large and/or rich countries should tend to
have a more negative net asset position than small and/or poor countries. This implication is not supported
by the evidence. As concerns the short to medium term, the US growth revival over the past decade has
illustrated that higher growth driven by a specific event ? the ICT breakthrough ? may have effects on the
current account that are highly country specific. US institutions and structural policy settings allowed
consumers to spend substantial capital gains, driven by increased future productivity gains and earnings.
However, it is not completely clear that consumers in continental Europe or Japan would be able to spend
out of future expected incomes in the same way as their US counterparts even if the respective economies
were to experience a similar ICT induced growth revival.