The Structural Current Account Deficits of Emerging Market Economies: Trade, Income and Transfers

Joyce, Joseph (2025): The Structural Current Account Deficits of Emerging Market Economies: Trade, Income and Transfers.

Abstract

The current accounts of most emerging economies include primary income deficits, which in turn largely consist of investment income payments on foreign direct investment earnings. For these countries, the persistent deficits have become a structural component of the current account. In addition, for some countries secondary income, which includes personal transfers from workers who are abroad, is also crucial. These surpluses partly offset the deficits in trade and primary income. We examine the response of the trade balance, primary income and secondary income balances to macroeconomic factors in a sample of 24 emerging markets economics over the period of 1990 – 2022. We use seemingly unrelated regressions models with random effects to account for correlated errors across the three equations and compare these results with the results of an estimate of the current account. The responses of the three sub-balances to policy and control variables varies widely, which can complicate efforts to lower a current account deficit. We examine the response of the three sub-balances to financial crises, which increase the current and trade accounts. We also discuss the use of retained earnings to finance new FDI.

• Item Type: MPRA Paper
• Language: English
• Keywords: trade account, primary account, investment income, secondary income, remittances
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

References

Alberola, A., Estrada, Á, and Viani, F. 2020. Global Imbalances from a Stock Perspective: The Asymmetry Between Creditors and Debtors. Journal of International Money and Finance, 107: 1-20.

Allen, A., Gautam, G. and Juvenal, L. 2023. Currencies of External Balance Sheets. IMF Working Paper no. 23/237. Washington, DC: IMF.

Avdjiev, S., Everett, M., Lane, Philip R. and Shin, H. S. 2018. Tracking the International Footprints of Global Firms. BIS Quarterly Review. March.

Beckmann, J., Belke, A. and Gros, D. 2022. Savings-Investment and the Current Account More Measurement Than Identity. Journal of International Money and Finance, 121.

Behar, A. 2025. Does the Income Balance Stabilize the Current Account During Crises? Review of International Economics, forthcoming.

Bellemere, M., Masaki, T. and Pepinsky, T. B. 2017. Lagged Explanatory Variables and the Estimation of Causal Effect. Journal of Politics, 79(3): 949-963.

Borga, M., Flores, P. I. and Sztajerowska, M. 2019. Drivers of Divestment Decisions of Multinational Enterprises--A Cross-Country Firm-level Perspective. OECD Working Papers on International Investment no. 2019/03. Paris: OECD.

Buch, C. M. and Kuckulenz. 2009. Worker Remittances and Capital Flows to Developing Countries. International Migration 48 (5): 89-117.

Bugamelli, M. and Paterno, F. 2009. Do Workers’ Remittances Reduce the Probability of Current Account Reversals? World Development, 37(12): 1821-1838.

Calderón, C. and Kubota, M. 2019. Ride the Wild Surf: An Investigation of the Drivers of Surges in Capital Inflows. Journal of International Money and Finance 92: 112-136.

Chakravarty, S. and Xiang, M. 2011. Determinants of Profit Reinvestment by Small Businesses in Emerging Economies. Financial Management, 40(3): 63-82.

Chinn, M. and Ito, H. 2022. A Requiem for ‘Blame It on Beijing’ Interpreting Rotating Global Current Account Surpluses. Journal of International Money and Finance, 121.

Chinn, M. D. and Ito, H. 2025. Current Account Dynamics and the Saving-Investment Nexus in a Changing and Uncertain World. Journal of International Money and Finance, 151.

Clemens, M. A., Radelet, S., Bhavnani, R. R., and Bazzi, S. 2012. Counting Chickens When They Hatch: Timing and the Effects of Aid on Growth. Economic Journal, 122(561): 590-617.

Colacelli, M., Gautam, D. and Rebillard, C. 2021. Japan’s Foreign Assets and Liabilities: Implications for the External Accounts. IMF Working Paper no. 2021/026. Washington, DC: IMF.

Coutinho, L., Turrini, A., and Zeugner, S. 2022. Assessing the Euro Area Current Account. Journal of International Money and Finance, 121.

Donato, G. and Tille, C. 2024. International Investment Income: Patterns, Drivers, and Heterogeneous Sensitivities. CEPR Discussion Paper No. 19251. Paris and London: CEPR Press. https://cepr.org/publications/dp19251

Duarte, P. and Schnabl, G. 2015. Macroeconomic Policy Making, Exchange Rate Adjustment and Current Account Imbalance in Emerging Markets. Review of Development Economics, 19(3): 531-544.

Eugster, J. and Donato, G. (2022). The Exchange Rate Elasticity of the Swiss Current Account. SNB Working Paper 14/2022. Zurich: Swiss National Bank.

Fischer, A. M., Groeger, H., Saure, P. and Yesin, P. 2019. Current Account Adjustment and Retained Earnings. Journal of International Money and Finance, 94: 246-259.

Forbes, K., Hjortse, I. and Nenova, T. 2017. Current Account Deficits During Heightened Risk: Menacing or Mitigating? The Economic Journal, 127(601): 571-627.

Garriga, A. C. and Rodriguez, C. M. 2023. Central Bank Independence and Inflation Volatility in Developing Countries. Economic Analysis and Policy, 78: 1320-1341.

Gervais, O., Schembri, L. and Suchanek, L. 2016. Current Account Dynamics, Real Exchange Rate Adjustment, and the Exchange Rate Regime in Emerging-Market Economies. Journal of Development Economics, 119: 86-89.

Hassan, G.M. and Holmes, M. J. 2016. Do Remittances Facilitate a Sustainable Current Account? World Economy, 39(11): 1934-1853.

Hebous, S., Klemm, A. and Wu, Y. 2021. How Does Profit Sharing Affect the Balance of Payments? IMF Working Paper n.21/41. Washington, DC: IMF.

Holinski, N., Kool, C. and Muysken, J. 2012. Persistent Macroeconomic Imbalances in the Euro Area: Causes and Consequences. Federal Reserve Bank of St. Louis REVIEW. January/February, 1-19.

Ilzetzki, E., Reinhart, C. M. and Rogoff, K.S. 2019. Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold? Quarterly Journal of Economics, 134(2): 599-646.

International Monetary Fund. 2023. World Economic Outlook. April. Washington, DC: IMF.

International Monetary Fund. 2024. External Sector Report. Washington, DC: IMF.

Ito, H. and McCauley, R.N. 2019. A Key Currency View of Global Imbalances. Journal of International Money and Finance, 94: 97-115.

Joyce, J. P. 2019. Partners, not Debtors: The External Liabilities of Emerging Market Economies. Journal of Economic Behavior & Organization, 157: 320-337.

Joyce, J.P. 2020. The Sources of International Investment Income in Emerging Market Economies. Review of International Economics, 29(3): 606-625.

Joyce, J. P. 2025. International Investment Income. Cambridge, UK and New York: Cambridge University Press.

Kang, J. S. and Shambaugh, J. C. 2016. The Rise and Fall of European Current Account Deficits. Economic Policy, issue 85, 153-199.

Lartey, E. K. K. 2019. The Effect of Remittances on the Current Account in Developing and Emerging Economies. Economic Notes, 48(3): 1-17.

Li, S., de Haan, J. and Scholtens, B. 2019. Sudden Stops of International Fund Flows: Occurrence and Magnitude. Review of International Economics, 27(1): 468-497.

Nguyen, M. C. 2008. XTSUR: Stata module to estimate seemingly unrelated regression model on unbalanced panel data. Statistical Software Component S456953, Boston College Department of Economics, revised 01 Oct 2010.

Nguyen, T. C., Castro, V. and Wood, J. 2022. A New Comprehensive Database of Financial Crises: Identification, Frequency, and Duration. Economic Modelling, 108.

Obstfeld, M., Ostry, J.D. and Qureshi, M. S.. 2019. A Tie That Binds: Revisting the Trilemma in Emerging Economies. Review of Economics and Statistics, 101(2): 279-293.

Oseghale, B. D. and O. C. Nwachukwu. (2010). Effect of the Quality of Host Country Institutions on Reinvestments by United States Multinationals: A Panel Data Analysis. International Journal of Management, 27(3): 497–510.

Polat, B. (2017). Determinants of Reinvested Earnings as a Component of Foreign Direct Investment. Journal of Economics and Management Research, 6(1): 24-45.

Tseng, F.-M. and Wu, J.-L. 2023. Exchange Rate Regimes and Current Account Persistence. World Economy, 46(5): 1423-1443.

UNCTAD. 2013. World Investment Report 2013. United Nations Conference on Trade and Development: New York and Geneva.

UNCTAD. 2022. World Investment Report 2022. United Nations Conference on Trade and Development: New York and Geneva.

Wacker, K. M. (2024). Investment Incomes vs. the Trade Balance: Is the Current Account Still a Meaningful Concept. Oesterreichische NationalBank Working Paper no. 256. Vienna: Oesterreichische NationalBank.

Zélity, B. 2024. The Determinants of FDI Reinvestment Rates. Open Economies Review, 36(2): 431-465. https://doi.org/10.1007/s11079-024-09763-8.