Imbalance of payments

Dependence on imbalance of payments
Balance of payments deficits

Nature

Fluctuations in export earnings and a variety of other factors, both external and internal, may lead a country into a state of payments imbalance on transactions with other countries, whether in the form of a deficit or a surplus. In the absence of an adequate balance of payments adjustment mechanism or an adequate mechanism for the generation of international liquidity, imbalance of payments is regarded as an indicator of a need for a change in economic policy, and as an indicator of an actual or potential threat to the existing exchange system.

Balance of payments deficits are not always a reflection of the pressure of demand on productive capacity; often the contrary is true. Countries which face balance of payments difficulties are naturally anxious not to accentuate them even though they have unutilized capacity, while those which do not have these difficulties are worried about the heavy pressure of demand on capacity and the possibility of inflation.

Background

The global significance of imbalance of payments emerged prominently during the interwar period, as persistent deficits and surpluses destabilized economies and contributed to the Great Depression. Post-World War II, the Bretton Woods system institutionalized monitoring of payment imbalances, highlighting their role in currency crises and international financial instability. Subsequent decades saw recurring concern, as chronic imbalances among major economies underscored vulnerabilities in global trade and finance, prompting ongoing debate and policy innovation.

Incidence

The imports of most regional groupings of countries contracted substantially in the 1980s. Between 1981 and 1985, the current value of imports decreased by between 30 and 40% in the Latin American Integration Association (ALADI), the Andean Group and the Caribbean Community (CARICOM) and by even more for the West African Economic Community (CEAO), the Economic Community of West African States (ECOWAS) and the Central African Customs Economic Union (UDEAC). Intra-group trade was by and large affected by similar drastic cuts in current values, with the notable exception of CEAO, where the share of intra-trade improved from 9 to 19%. At the same time export shares decreased in several groupings, by approximately 50% in the case of CARICOM and the Gulf Cooperation Council (GCC) (where mutual trade also dropped by one-third).

Claim

The competitive struggle between developed countries to avoid balance of payments deficits is not conducive to the reduction of protective or other barriers to trade, nor to the expansion of development assistance. Each developed country feels under pressure to keep down the amount of its development finance. This kind of restrictive pressure acts with particular force in a world economy in which the aggregate of the balance of payments positions of the developed countries amounts to little more than zero, so that some countries achieve balance of payments surpluses only at the expense of others suffering deficits. The balance of payments position is affected by foreign bond issues which could be used to finance projects in developing countries. The borrowing countries can of course be expected to spend the proceeds from bond issues on needed imports; but these expenditures will not necessarily be in the lending country, so a balance of payments effect remains. Countries in payment deficit may be tempted to lessen the impact of capital outflows on their payments position by requiring the proceeds of new lending to be spent domestically. This practice of aid-tying has become widespread, and is inherent in the system of export credits, the major forms of private credit to many developing countries.

Counter-claim

The so-called "imbalance of payments" is vastly overblown as a concern. In today’s globalized economy, countries routinely run deficits or surpluses without catastrophic consequences. Market forces, currency adjustments, and international investment flows naturally correct these imbalances over time. Obsessing over payment imbalances distracts from more pressing economic issues like innovation, employment, and productivity. Frankly, the imbalance of payments is a technicality, not a crisis, and should not dominate economic policy discussions.