1 East Asia and Global Imbalances: Saving, Investment, and Financial Development

This paper is about financial development and current account balances. It looks at the effect of various aspects of financial development on current account (CA) balances and saving-investment determination. The paper is mainly motivated by Bernanke’s (2005) “global saving glut ” hypothesis. The hypothesis can be briefly stated as follows: 1. The US current account deficit is mainly determined by the low cost of borrowing made possible by the huge inflows of funds from emerging markets, such as China and the rest of East Asia 2. Investment demand in the US has been very strong (or the US is an attractive destination for investment) in the last ten years or so because of its political stability, strong property rights, good regulatory environment, and strong performance in the equity market and later the property market (following the dot com bubble burst) 3. The CA deficit has very little to do with the large budget deficit of the US 4. The US current account deficit is determined factors beyond the US borders Bernanke thinks that the solution to this “unnatural ” reversal of roles of the LDCs being lenders and DCs being borrowers is for emerging markets to improve their investment environments, macroeconomic stability, property rights, and financial liberalization Essentially, the main point of Bernanke’s (2005) speech was to explain the ballooning current account deficit o