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A recent International Monetary Fund report revels that in emerging Asia, current accounts—the most important part of which is balance of trade—averaged a surplus of about 5 percent of GDP in 2007, while in emerging Europe current accounts reached on average a deficit of 10 percent of GDP in 2007.
The IMF attributes the divergent current account patterns to the connection between economic development and capital flows. Virtually all the emerging economies have achieved high growth during the past decade, with very different current account positions.
The fund explains that although different Asian economies added varied amounts to their current accounts at different times, under different circumstances in general, the region has seen their current account kitty bulging due to two main reasons.
First, high growth and the resulting profitable investment opportunities should make the country attractive to foreign capital. Second, if individuals want to smooth their consumption over time, prospects of continued high growth should lead to higher consumption today because income and consumption can be expected to rise further in the future, the IMF reported.
The fund continues to say that while high growth and foreign capital flows are the prime reason for Asia’s current account surpluses, they are not the only reason and that some emerging Asian countries have faced a deficit in the past years as well. The IMF attributes the surplus to structural factors, such as openness of the capital accounts and financial sectors, demographics (younger populations), undervaluation of exchange rates in several Asian economies and differences in the political structure as well.
