Current account reversals and structural change in developing and industrialized countries

Abstract

This paper examines the compositional changes that occur in economies experiencing current account reversals using sectoral-level data on output and employment growth around 55 reversal episodes. The experiences of developing and industrialized countries are compared, and the role of currency crises is also examined. Labor market adjustment following reversals in developing countries is shown to differ from that of industrialized economies. The possibility that this difference is related to labor market informality is briefly examined.

Keywords:

• current account
• structural change
• developing countries

JEL Classifications:

• F32
• F41

Acknowledgements

The authors are grateful to Lisa Lee for outstanding research assistance and to an anonymous referee, Abigail Hornstein and seminar participants at Vassar College and the Southern Economic Association meetings for helpful comments. Any mistakes are our own.

Notes

1. For most developing countries, the dataset reports sectors 9 (community, social and personal services) and 10 (government services) together. For the countries where they are reported separately, they are merged by adding (employment) or calculating an average (real value added), weighted by nominal value added.

2. The nominal value added data needed to construct the weights is not available for Brazil's 1975 and 1982 reversals or Peru's episodes in 1981 and 1988, so these are excluded from the sector group results.

3. These are all the countries covered by the GGDC 10-sector database, except Hong Kong, Taiwan and Germany, which are excluded due to data limitations.

4. Because the GGDC data ends in 2005, the Thailand (2005), US (2006) and Spain (2007) episodes were excluded from calculating the medians.

5. Excluding Argentina and Brazil, for which data was unavailable.

6. This could, in part, be due to different samples: Milesi-Feretti and Razin's study includes a large number of low-income countries, whereas the developing countries in this sample would be considered middle-income, and covers a different time period.

7. Although the regressions include sets of seven year dummies, for clarity, only coefficients for the reversal year and two subsequent years are reported in the tables. Full results are available from the authors on request.

8. However, this pattern may not be consistent. Fiess, Fugazza, and Maloney (2010) discuss circumstances in which informal employment may be procyclical.