An Inquiry Into The Relation Between Innovation And Current Account Imbalance

Current account imbalance has been an important topic of international economics for a long time, and now is a lively discussion because of the lasting and rapid growing accumulation of US's current account deficit and China's current account surplus. Although variety of theories is applied to explain this phenomenon, none of their conclusions is convincing. Prediction based on their analysis for the limits of the accumulation of current account imbalances was rejected by the facts again and again. In order to offer some different insight into this discussion, in this dissertation I devote my effort to construct a new framework by formulating basic facts based on innovation theory which was originated by Joseph A. Schumpeter.Innovation is the application of new combinations. Innovations can be diversified as technologic innovation and institutional innovation by their contents, and can also be diversified as domestic innovation and international innovation by their space scope. There is huge difference across countries in the nature of innovation, especially amongst advanced countries and less advanced countries, which is manifested in many aspects, such as innovation subject, innovation leading group, innovation incentive, and innovation speed.Driven by innovation, current account behaves differently across countries. Current account change can be structural or aggregate. The nature of its innovation determines a county's situation in global division of labor, and then the global division of labor and a country's situation determine the character and structure of its current account. Driven by innovation, current account evolves in character and structure. The mechanism through which innovation drives aggregate change of current account is: innovation causes uncertainties, the uncertainties impact the expectation of economic actors, and then the expectation determines the saving-investment balance and current account balance. The analysis of innovation will offer a new perspective for current account imbalance discussion. From this perspective, we can view the limit of current account imbalance as a point at which current account behavior change its trend because of innovation which comes from the evolution of the economy or is brought by government to avoid the damage of the current account imbalance. So the limit of current account imbalance appears very differently across counties and across periods because of the nature of innovation. As the trend changes, the reversal of current account imbalance comes out.Since current account behavior is driven by innovation, the situation and trend of innovation will be the key to understand current account imbalance. Without knowing the situation of innovation, one cannot get the law of current account behavior. To predict validly the trend of current account imbalance, one must grasp the trend of innovation. Since the limit of current account imbalance is relative and dynamic, one cannot find a limit applicable to every country in every period. The limit set according to experience is of little use. The appropriate way to change the current account imbalance is to change the situation of innovation. My framework is proved by the case study of Argentina, Brazil and Thailand and by an econometric analysis of six regions with different innovation characters. The framework can offer some new insights into current situation.Innovations carried out in China and US are distinct. So their current accounts behave differently. And the interaction of their innovations leads to close relation between their current accounts. The accumulation of US current account deficit reflects its strong innovation capability which helps US to take full advantage of foreign resources cheaply, and also reflects its reluctance to share IT achievements with other countries and its intention to shift economic adjustment cost to other countries. In contrast, the accumulation of China current account surplus reflects, on the one hand, strength of China's economic power, and reveals underlying problems and risks on the other hand. It shows that there exist some defections in China innovation system. If US economy cannot adjust smoothly through its further innovation, its current account imbalance will reverse abruptly. If China doesn't improve its innovation system promptly, it will be locked in adverse global division of labor, and then its current account surplus cannot be sustained and will reverse one day, probably abruptly. The reversals of their current account imbalances will exert great impact not only on their domestic economies but also on global economy.The main contribution of my dissertation is the framework based on innovation theory. This framework offers a new perspective for the inquiry into current account imbalance. The innovation analysis of current account imbalance has some important implications for researchers and policy makers. Tests on the validity of the framework have been made based on case study and econometric analysis. The framework is not rejected in the tests. The innovation analysis also gives some new insights into China and US current account imbalances, and reveals some implications for policy makers.