An empirical comparison of external indebtedness in East Asia and Southern Europe: reasons for Clearing Integrated Monetary Areas

Andrea Carrera ; Luís Cárdenas ; Alysson Mazoni

Complutense University of Madrid, Department of Applied Economics, Structure & History. Complutense Institute for International Studies (ICEI), Madrid, Spain andcar07@ucm.es
Complutense University of Madrid, Department of Applied Economics, Public Economics and Political Economy. Complutense Institute for International Studies (ICEI), Madrid, Spain luiscard@ucm.es
State University of Campinas, Department of Science and Technology Policy, Institute of Geoscience, Brazil afmazoni@unicamp

JEL Classification: F33; F34; F41

Abstract

We seek to study the evolution of the external indebtedness of Southern European Greece, Italy, Portugal and Spain, which were highly indebted and used to run current account deficits until the Great Crisis of 2008, and the indebtedness of those East Asian countries that ran current account deficits before the crisis of 1997, namely Indonesia, Korea, Malaysia, the Philippines and Thailand. We pore over foreign debt and balance-of-payments data to understand any potential statistical relationship between (i) external indebtedness and (ii) current account balances plus changes in foreign exchange reserves. Our introductory econometric approach to the issue suggests that indebtedness is often and on average about twice the level attributable to current account balances and reserve changes. In Southern Europe, debt should have increased, but it increased more than expected. In East Asia, particularly since 1997, debt should have decreased, but it followed and upward trend. We attribute this phenomenon to the incomplete structure of the international payment system and, as a general solution, we call for the implementation of a regional real-time gross settlement system.

Keywords:

External debt, Current account, Growth models, Comparative Political Economy, East Asia, Southern Europe

Acknowledgments

Andrea Carrera is grateful to the Complutense Institute for International Studies in Madrid, Spain, the Department of Science and Technology Policy at the University of Campinas, Brazil, and the Institute for Economic Research at Seoul National University, where this article has been developed under EU’s Marie Skłodowska-Curie CatChain project. A draft of this paper has also been presented by the same author at the 18th annual conference of the East Asian Economic Association at Seoul National University on October 21-22, 2023, from which the final version has benefited. Luís Cárdenas is grateful to “La Sapienza” University of Rome and Roma Tre University, Italy, where this paper was developed. Alysson Mazoni thanks the São Paulo Research Foundation (FAPESP) in the context of the grant 2021/05823-1. The authors thank Alvaro Cencini and two anonymous referees for useful suggestions.

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