The Origins of Persistent Current Account Imbalances in the Post-Bretton Woods Era

Abstract

Why do some countries run persistent current account surpluses? Why do others run deficits, often over decades, leading to enduring global imbalances? Such persistent imbalances are the root cause of many financial crises and a major source of international economic conflict. We propose that differences in wage-bargaining institutions explain a large share of imbalances through their effect on the trade balance. In countries with coordinated wage bargaining, wage growth in export industries can be restrained to ensure competitiveness, leading to persistent trade surpluses. We estimate the contribution of these institutions to trade balances in Organisation for Economic Co-operation and Development (OECD) member countries since 1977 and find ample support for our hypothesis. Contrary to much of the literature, the choice of fixed or floating exchange rate regimes has only a small effect on trade or current account balances. In other words, internal adjustment in surplus countries via wage-bargaining institutions trumps external adjustment by deficit countries.

Financial Liberalization and Current Account Developments in New EU Member States

“…When newly created deposits are spent on imports, the country is facing a current account deterioration. Manger et al (2019) observe that wage-bargaining institutions have the main impact on current account imbalances in OECD countries, due to their effect on the trade balance. Their result contradicts the empirical results obtained in many empirical studies where the choice of exchange rate regime has a prevailing effect.…”

Exports vs. investment: How political discourse shapes popular support for external imbalances

“…From a less normative point of view, scholars in the field of comparative political economy argue that trade plays a decisive role in shaping current account imbalances and stress the role of institutions in managing wage growth and maintaining competitiveness (Hancké, 2013;Johnston, Hancké and Pant, 2014;Johnston 2016;Manger and Sattler, 2020). Specifically, coordinated wage bargaining systems in combination with the broader institutional framework facilitate wage restraint and limit inflationary pressures (Hall and Franzese, 1998), which helps export-oriented industries to compete internationally.…”

“…The existing literature gives a partial answer to this question. It identifies wage bargaining institutions as a main determinant of the long-term external balance (Hall and Soskice, 2001;Hancké, 2013;Johnston, Hancké and Pant, 2014;Johnston, 2016;Manger and Sattler, 2020), which points to an important part of the mechanism. But it does not explain why this institutional setup receives broader societal support even though it is by no means obvious that a majority of the population benefits from it.…”

Does Central Bank Independence Increase Inequality?

“…Given that CBI tightens the room for fiscal maneuvering and requires to remove downward rigidities in wages (that emerge from generous social transfers), governments have often tampered with social policy reform to accommodate CBI. For example, in the case of Germany, generous social benefits were believed to hinder necessary wage adjustment to equilibrate the labor market, triggering the socalled Hartz Reforms in the early 2000s (Manger and Sattler, 2019). Social and welfare state reforms are often embedded in social pacts or social contracts, which include clauses that relate to pension, health, and social benefit reform (Hassel, 2003;Rhodes, 2005).…”