countries ’ institutional investors ( obstfeld and rogoff ( 2000 ) and imf ( 2010 ) ). as liberalisation progresses, these biases would be expected to unwind, boosting gross external assets in relation to gdp in developed countries. for that reason, the calibration here can be thought of as a limiting case of the likely adjustments in the pattern of global capital flows. subject to that important caveat, the growth in the non - g7 economies ’ contribution to global capital markets is still striking. among the brics, external balance sheets as a fraction of gdp exceed g7 levels by around 2035. by 2050, they are around 2. 5 times nominal gdp. these patterns are even more striking when expressed as a share of global external assets. by 2050, over half of all g20 external assets are associated with the brics, up from around 9 % currently ( chart 18 ). among the non - g7, non - bric g20 countries, their share trebles from 5 % to around 15 %. within this, some countries ’ share of global assets sky - rocket. china ’ s share of global finance rises to around 30 % by 2050, roughly that of the entire g7. india rises to almost 20 %, from less than 0. 5 % currently ( chart 19 ). the us share falls from 28 % to around 12 %. the flow counterpart to these external stock positions is no less dramatic ( chart 20 ). by 2020, gross capital flows of the non - g7 countries are projected to exceed those of the g7 economies. by 2030, non - g7 flows are more than three times g7 flows. and by 2040, they are almost four times g7 flows. even if these calibrations represent an extreme case, they are indicative of a striking power shift in the pattern of global financial flows. if this path were to be even broadly followed, it would have implications for the scale of global imbalances, which will tend to rise as gross capital flows outpace gdp growth. it would have implications for financial stability, as the scale of gross capital surges ( fuelling bubbles ) and reversals ( fuelling crises ) increases. and it may also have implications for the dollar ’ s reserve currency status. differential savings behaviour. consider next the possible future path of savings behaviour across the world ’ s major economies. there are likely to be many factors affecting crosscount

twice levels during the bretton woods period ( chart 2 ). for some individual countries, these capital flows look larger still, both absolutely and relative to historical norms ( chart 3 ). it is not just the size of these global flows that is unusual. so too is their direction. contrary to theory, capital is flowing from developing countries with a low capital stock, towards developed countries with a high capital stock ( lucas ( 1990 ) ). in other words, capital is flowing “ uphill ”, away from countries where the marginal product of capital should be high and towards countries where it should be low. this makes the pattern of global capital flows doubly perplexing. blanchard and milesi - ferretti ( 2009 ) discuss the causes of “ good ” and “ bad ” imbalances. perplexing need not mean bad. current account imbalances are no more than the arithmetic difference between gross capital inflows and outflows. as these gross flows increase as a result of financial liberalisation, it is natural to expect the difference between them to become more volatile ( obstfeld ( 2010 ) ). as chart 4 shows, the growth of gross capital flows in the years preceding the crisis was dramatic. at the start of the 1980s, gross capital flows were around 5 % of world gdp. by 2007, they had risen to 7 times that. this growth in capital flows and imbalances has been mirrored in the path of the external balance sheets of the major economies. these, too, have adjusted rapidly. in 1985, the us was a net external creditor. by 2009, it had become a net external debtor to the tune of around 20 % of gdp. in 1999, china was a net external debtor. by 2008, it had become a net external creditor of around one third of gdp. an interesting perspective on the drivers of imbalances is provided by looking at the gross saving and investment behaviour of surplus and deficit countries over this period. chart 5 looks at these patterns. it suggests a couple of striking patterns. first, the correlation between saving and investment rates appears to have weakened significantly over the past two decades, for both surplus and deficit countries. this is consistent with increasing capital mobility. historically, there has been a high correlation between national saving and investment rates – the feldstein - horioka ( 1980 ) puzzle. chart 6 plots the felstein - horioka correlation coefficient alongside an index of financial liberalisation