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

Joseph Joyce

MPRA Paper from University Library of Munich, Germany

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.

Keywords: trade account; primary account; investment income; secondary income; remittances (search for similar items in EconPapers)
JEL-codes: F21 F23 F24 F32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:127327

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