the Rise of Creditor Nations

Major industrialization episodes—from nineteenth-century Britain to Germany, the United States, Japan, Korea, and China—were followed by persistent current account surpluses and large accumulations of external wealth, a pattern at odds with standard current-account models. We develop a model of the transition dynamics of an emerging economy that explains this behavior. Two financial frictions are central: a gold-in-advance constraint requiring hard-currency settlement of debt service and consumption imports, and a pledgeability constraint linking foreign borrowing to capital-goods imports. These frictions generate an endogenous transition from net debtor to persistent net creditor during industrialization. Doing so, the framework resolves the Lucas Paradox and reproduces the falling-then-rising external-wealth dynamics observed across industrialization episodes since 1845, which are key for understanding the observed global imbalances.